Reed Smith Client Alerts

The Delaware Supreme Court’s decision in Northeastern Aviation Corp. v. Pasternack1 is a recent example of how broadly indemnification obligations can extend under Delaware law. In Pasternack, the Delaware Supreme Court affirmed the Court of Chancery’s holding that a pilot, commissioned by a Delaware-incorporated aircraft charter company, was an “agent” of the corporation, and, therefore, was found to be entitled to indemnification under the corporation’s bylaws. The reasoning in Pasternack extends to advancement, which often has materially more profound consequences for the corporation.

Indemnification and advancement 

Under Section 145(c) of the Delaware General Corporation Law (DGCL), Delaware corporations are required, in certain circumstances, to indemnify directors and officers of the corporation for costs incurred in connection with litigation and other proceedings arising from the official’s corporate role, including attorneys’ fees and expenses.2 The proceeding involving the corporate official must arise “by reason of the fact” that the person serves or served on behalf of the corporation, and the corporate official must be successful on the merits or otherwise in the defense of the proceeding. Delaware corporations may elect to provide greater indemnification than required by Delaware law, expanding the scope of indemnification in three ways:

  • Delaware corporations can expand the class of potential parties entitled to indemnification beyond directors and officers to the corporation’s employees and agents.3
  • In addition to costs actually and reasonably incurred in connection with the proceeding, Delaware corporations can provide indemnification for judgments, fines, and amounts paid in settlement actually and reasonably incurred in connection with proceedings by third parties (but not proceedings against the corporation).4
  • Delaware corporations can expand indemnification rights so the indemnified party does not need to be successful on the merits or otherwise, so long as the indemnified party “acted in good faith and in a manner the person reasonably believed to be in the best interests of the corporation.”5