In an era of increasing shareholder activism and the threat of securities class action lawsuits, it is crucial that board members and officers, and particularly those at publicly‐traded companies, take measures to protect themselves from unnecessary exposure to liability. For most executives, it is prudent to enter into a personal indemnification agreement with their employer, while those at larger companies should also evaluate the benefits and costs of obtaining directors’ and officer’s liability coverage (i.e. D&O insurance).

Personal Indemnification Agreements

Under most Canadian corporate law statutes, a corporation may indemnify a director or officer against costs and expenses reasonably incurred by such an individual in respect of legal proceedings involving the individual by virtue of his/her association with the corporation. Rather than simply relying on indemnification provisions in a company’s by‐laws, an executive may enter into an indemnity agreement with the company utilizing his/her services. In this way, the right to indemnity is contractual rather than discretionary or otherwise open to unilateral amendment.

Indemnity agreements usually include provisions relating to, among other matters, reimbursement and/or advances of losses and expenses incurred by the indemnified individual, circumstances in which indemnification is unavailable, and the maintenance of D&O insurance.

Typically, in order to receive indemnification the individual in question must have been acting honestly and in good faith with a view to the best interests of the corporation, or, in the case of certain criminal or administrative proceedings, must have had reasonable grounds to believe that his/her conduct was lawful.

D&O Insurance

D&O insurance is used to protect executives from liability incurred for wrongful acts committed while acting in their official capacities. In circumstances where a corporate indemnity is unavailable, whether due to an exercise of discretion or insufficient  financial resources, D&O insurance may prove invaluable even after considering the cost of premiums.

A standard D&O insurance policy covers claims against directors and officers, both in circumstances where there is no corporate indemnity available and where such an indemnity is relied upon and the corporation seeks reimbursement. Some policies may also provide extended coverage to the company itself or other forms of extended coverage, and as with any insurance policy, D&O insurance typically excludes certain varieties of claims (such as uninsurable claims and claims insured under other policies).

Coverage is available at the time a claim is made against a director or officer, regardless of when the activity forming the basis for the claim occurred.