Indemnification Agreement
(Spin-off or Carve-out Subsidiary)

Summary

This template indemnification agreement provides protections for corporate officers and directors against risks of claims and actions against them as a condition to accepting their appointments in connection with a spin-off or equity carve-out. Such protections include (i) director & officer insurance policies, which the corporation purchases on the directors' and officers' behalf; and (ii) indemnification by the corporation. This template includes practical guidance, drafting notes, and alternate clauses. Section 145 of the Delaware General Corporation Law (8 Del. C. § 145) permits a corporation to indemnify its current and former directors and officers against claims arising by reason of the fact that they are or were directors and officers of the corporation. Section 145 also allows the corporation to advance expenses to directors and officers in defending their claims. Other states have similar statutes. Indemnification and advancement are often provided for in a corporation's charter or bylaws, but an individual director or officer may want to enter into an indemnification agreement with the corporation so that such person's specific indemnification rights are clearly delineated. Indemnification agreements generally contain provisions that define the type of expenses and proceedings for which the indemnitee is entitled to receive indemnification (and advancement, if any). Depending on how these provisions are drafted, an indemnitee could be entitled to receive indemnification for a broad range of proceedings and expenses including actions like testifying as a witness or attending depositions; or the indemnitee may have such rights only in regard to a smaller scope of proceedings such as those in which the indemnitee is the named defendant in a legal claim. Similarly, many agreements will explicitly list the types of actions for which the indemnitee is not entitled to receive indemnification (such as in situations where the director acted in bad faith). Indemnification agreements also typically address the priority of indemnification if the indemnitee is entitled to receive indemnification from multiple sources. Indemnification agreements typically include a provision that describes how a company makes a determination of whether the indemnitee is entitled to indemnification or advancement and the avenues of recourse for the indemnitee if it is determined that the indemnitee is not entitled to such protections. A common formulation permits the former director or officer following a change of control to choose among the corporation's disinterested directors or an "independent" counsel (meaning a law firm that has not worked for the corporation for some agreed-upon period of time) to determine whether such person has met the requisite standard of conduct for "permissive" indemnification. This template contemplates an agreement by a corporation that has become newly independent (either by a spin-off or equity carve-out) to indemnify a person who will serve it as a director or officer. A spin-off or carve-out subsidiary will often have former members of its parent company's management serve as directors or officers. Such persons will likely insist on indemnification and advancement provisions that are at least comparable to those that they were entitled to from the parent company. For a full listing of key content for in-house counsel and corporate secretaries when performing corporate functions, see In-House Corporate Secretary Resource Kit. For additional information, see Indemnification Provisions in Private Acquisition Agreements, Indemnification Claims in Acquisitions, Indemnification Clause (Deductible), Indemnification Clause (Combination Basket), Indemnification Clause (Tipping Basket), Indemnification Clauses (Representations and Warranties Insurance). For a broad collection of content related to divestiture transactions, see Divestitures of Divisions and Subsidiaries Resource Kit.