In North Carolina, pursuant to General Statutes Chapter 55 Part 8, corporations can indemnify their directors, officers, employees, and agents. Indemnification is an agreement between the corporation and its employee to limit the personal liability of the employee when acting within the scope of their employment or on behalf of the corporation. Often, the corporation agrees to purchase liability insurance covering their employee or to simply cover the costs associated with any risk or litigation that may develop from the defense of the employee or the corporation.
Why Indemnify?
According to the State of North Carolina, “it is the public policy of this State to enable corporations to attract and maintain responsible, qualified directors, officers, and employees, and, to that end, to permit corporations to allocate the risk of personal liability for those directors and employees.” N.C. G.S. §55A-8-50. In short, the intent is for corporations to facilitate its good faith employees’ decision-making and assessed risks, while protecting those employees from personal or financial ruin. This offers the potential for corporations to seek advancement, whether it be contractually, technologically, or structurally.
Who can be Indemnified?
Directors, officers, employees, and agents of a corporation can be protected under indemnification if they are made a party to a proceeding for which a liability was incurred. However, there are certain requirements that must be met for the shield of indemnity to be invoked. First, the employee must be acting in good faith. Next, the employee must reasonably believe they are performing duties within their official capacity, and those duties are in the best interest of the corporation. Lastly, should it be a criminal proceeding, there can be no reasonable cause to believe the employee’s conduct was unlawful. An employee found to be acting against the best interest of the corporation, for personal gain, or illegally will not be covered by indemnity.
Limitations on Indemnity
Indemnification can be reduced by the company itself. For example, a corporation may choose to limit indemnification or any advances on expenses by establishing those restrictions in the articles of incorporation. A Limited Liability Company (LLC) may also minimize indemnification through its operating agreement.
How does this impact You?
If you are a business owner or an employee, indemnification is a subject worth understanding as it can serve as insulation for your personal and financial liability. If you would like more in-depth information, please contact our office.
Revolution Law Group is located in Greensboro, NC, and serves individuals and small businesses throughout the Triad and surrounding areas. To contact us please visit Revolution.law or call 336-333-7907.
The information included here is for informational purposes only, is not exhaustive of all considerations when creating documents, is not intended to be legal advice, and should not be relied upon for that purpose. We strongly recommend you consult with an attorney and do not attempt to create your own documents.