Corporate Agent Liability - Section 317 California Corporations Code
Section 317 gives a corporation the authority, and in some instances imposes an obligation upon the corporation, to indemnify a person "who was or is a party or is threatened to be made a party" to any legal proceeding "by reason of the fact that the person is or was an agent of the corporation."
The issues in this appeal are focused upon subdivisions (c) and (d) of this section.
Subdivision (c) of section 317 states in pertinent part:
"A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action by or in the right of the corporation to procure a judgment in its favor by reason of the fact that the person is or was an agent of the corporation, against expenses actually and reasonably incurred by that person in connection with the defense or settlement of the action if the person acted in good faith, in a manner the person believed to be in the best interests of the corporation and its shareholders."
Subdivision (d) of section 317 provides:
"To the extent that an agent of a corporation has been successful on the merits in defense of any proceeding referred to in subdivision (b) or (c) or in defense of any claim, issue, or matter therein, the agent shall be indemnified against expenses actually and reasonably incurred by the agent in connection therewith."
Thus, subdivision (c) of section 317 establishes corporate authority to indemnify an agent who is made or threatened to be made a party to an action by or in the right of the corporation, while subdivision (d) makes indemnification obligatory when the agent successfully defends such a proceeding on the merits.
Read together, these subdivisions limit the right to seek reimbursement to a person who (1) is an agent of the corporation, and (2) is made or threatened to be made a party to an action or proceeding "by reason of the fact that the person is or was an agent of the corporation . . . ."
Section 317 was enacted to encourage capable individuals to act for and in the place of the corporation by affording them indemnification for the expenses of defending against lawsuits to which they are made parties because they are agents of the corporation. (APSB Bancorp v. Thornton Grant, supra, 26 Cal. App. 4th at p. 931; see People v. Treadwell, supra, 69 Cal. at p. 236.)
As explained in a legislative committee comment:
"The practical effect of prior restrictions on the indemnification of corporate directors, officers, or employees for the reasonable expenses of defending against a lawsuit was to force an official or employee of the corporation who is being sued as such to enter into some settlement of the action regardless of how confident he and the corporation may be that the action is without merit.
In the case of a derivative action, this was particularly true due to the large fees and expenses which may be incurred by the corporation's agent in defense of the action since indemnification was only available at the conclusion of the action. . ... . . the purpose of the indemnification provisions in the new law is to provide sufficient flexibility to afford reasonable protection for directors and officers while imposing safeguards which adequately protect the shareholders in the granting of indemnification.
In general, section 317 provides that a corporation may advance 'expenses' incurred by a corporate 'agent' in defending any 'proceeding' prior to the final disposition of such proceeding upon the receipt of an undertaking that the agent will reimburse the corporation unless it is ultimately determined that the agent is entitled to indemnification. . . .. . . If a corporate agent has been successful on the merits . . ., section 317 expressly provides that he shall be indemnified against expenses actually and reasonably incurred by him." (Leg. Com. com., reprinted at 23E West's Ann. Corp. Code (1990 ed.) foll. 317, pp. 209-210.)
Thus, section 317 is intended not only to afford reasonable protection to corporate agents, but also to impose safeguards to protect shareholders by restricting indemnity to situations in which liability is sought to be imposed upon an individual by reason of the fact the person was an agent of a corporation, i.e., based upon acts or omissions in which, under general principles of agency law, the person was charged with acting for and in the place of the corporation.
As demonstrated by the facts of this case, neither of these purposes is advanced by applying section 317 to an outside attorney retained by a corporation to represent it at trial, who then is sued by the corporation on the ground that the attorney committed legal malpractice while representing the corporation.