Changes in Delaware Corporate Law
Effective August 1, 2009, the Delaware General Corporation Law has been amended in two key aspects affecting directors. The amendments, approved by the Delaware legislature on April 10, 2009, concern the scope of indemnification provided to directors and the power of the courts to remove directors.
Judicial Removal of Directors
Under a new provision, the Court of Chancery may remove a director upon application of a corporation or a stockholder. The Court may remove a director if (1) the director has been convicted of a felony in connection with his or her duties to the corporation, or found by a court to have committed a breach of the duty of loyalty, (2) the Court determines that the director did not act in good faith in performing the acts underlying the conviction or judgment and (3) that the removal of the director is necessary to avoid irreparable harm to the corporation. Action brought under new Section 225(c) must be brought separate from and after the action in which the director is convicted of a felony in connection with his or her duties to the corporation, or found by a court to have committed a breach of the duty of loyalty. This amendment is similar to, although narrower than, the judicial removal of directors provision in the Model Business Corporation Act, which many states have adopted.
Indemnification and Advancement Rights
Generally, corporations reimburse, or advance funds to, a director who was made a party to any litigation due to his or her position as a director for any expenses incurred in connection with such litigation. Section 145(f) of the Delaware General Corporation Law was amended to provide that, in most circumstances, a corporation cannot eliminate or
impair a director’s right to indemnification or advancement of expenses granted under its organizational documents through an amendment to such provision adopted after the occurrence of the act or omission to which the indemnification or advancement of expenses relates. Such an amendment is permitted, however, when there is a provision in the organizational documents at the time of the act that provides for post-event amendment. This amendment is a legislative response to the case Schoon v. Troy Corp. In Schoon, the Delaware Court of Chancery held that as long as no claim for indemnification has actually been made, a board of directors can adopt an amendment to a corporation’s organizational documents to eliminate indemnification or advancement rights for claims relating to actions taken prior to such amendment.
After the decision in Schoon, many corporations revised their organizational documents to negate the effects of the Court of Chancery’s decision. The recent amendment eliminates the need to do so because it effectively reverses the decision in Schoon, absent express authorization to the contrary. Corporations who desire the flexibility to amend their indemnity provisions should review their organizational documents and consider whether an amendment is necessary.