Indemnification Letter for Officers and Directors

Indemnification Letter for Officers and Directors

November 21, 2017

In recent years there has been a trend of increase of liability of directors and officers of companies in respect of acts performed by the company. As a result, many directors find themselves at the center of legal proceedings. In some cases, even employees file personal claims against directors and even if the Courts finally dismiss such claims they do not order reimbursement of a director for his legal expenses or grant any compensation. Under such circumstances, how can a director defend himself?

Directors and officers insurance is a well known method for protecting directors from such situations, but often the insurance coverage is insufficient to cover all legal proceedings. For example, the insurance does not always cover all expenses and in many cases the insurance companies evade coverage and a legal process is required against the insurance company in order to receive the coverage. In such a situation, the director remains without an economic backing for running the legal proceedings and his chances of winning the proceedings are significantly reduced.

Therefore, it is recommended that in parallel to the insurance, directors will also have an indemnification letter that will ensure that the company will provide the economic backing to the extent required by the director for legal proceedings related to decisions made in the course of his activity as a director in the company. It is important to note, however, that a negligent or incomplete drafting of an indemnification letter may eventually exempt the company from providing coverage, especially if the relationship between the director and the shareholders in the company deteriorated or if control of the company has changed. It should be noted that in order for a company to grant an indemnification letter its articles of association need include a clause enabling it to do so.

When drafting an indemnification letter it is important to ensure that the letter will include reference to all the related companies (mother company and subsidiaries) of the company and to all the director's activities on the board of directors. It is also recommended to ensure that the indemnification letter includes reference to a situation in which the director has already ceased acting in such capacity at the time of filing of the claim, and also covers situations in which a claim has not yet been filed. It is also recommended that the indemnification letter will include a clause that will ensure the financing of the legal proceedings throughout the entire legal proceedings, regardless of the outcome of such proceedings. The company must remember that an undesirable result of a legal proceeding against the director will harm not only the director but also the company, hence the interest in providing proper protection.

Therefore, and as it is a material issue in the life of a director while serving in the company and is supposed to be an active partner in the decision-making process, it is recommended that prior to taking office, the director will request an indemnification letter from the company and that this indemnification letter will be drafted by a lawyer with expertise in the field. Proper drafting of the indemnification letter will ensure to the director, as much as possible, the peace of mind in the course of his activity as a member of the board of directors.