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Oregon's Corporate Protection Rules Undergo Refinement

February 2013

Published in The Daily Journal of Commerce

New Oregon laws provide some clarity concerning an issue that previously was uncertain: Can an Oregon corporation eliminate or reduce its obligation to indemnify a corporate director after an act or omission by the person ultimately results in a lawsuit?

Provisions granting a director a right to indemnification or advance payment of litigation expenses frequently are included in a corporation's bylaws or articles of incorporation. Indemnification and advancement refer to the rights that a director has for reimbursement of expenses incurred as a result of litigation related to their acts or omissions as a director.

Corporations offer these protections to directors in order to recruit and retain high quality people. In essence, these provisions offer some security to directors who may need to make difficult decisions on behalf of the corporation.

Oregon's statutes recently were amended to expressly state that a director's right to receive indemnification or advance payment of litigation expenses from the corporation (pursuant to the corporation's articles of incorporation or bylaws) may not be impaired or eliminated after the director's act or omission that would otherwise entitle the director to indemnification or advance payment of litigation expenses.

These new rules essentially prohibit a corporation from changing the rules regarding indemnification after the director has done something that could potentially result in a lawsuit against the director.

The revised law applies to claims for indemnification or payment in connection with proceedings that occur on or after June 2, 2011. The new provisions apply not only to Oregon corporations, but also to cooperative corporations and nonprofit corporations.

These revisions are a reaction to developments in Delaware corporate law. A 2008 Delaware case, Schoon v. Troy Corporation, created uncertainty regarding whether a corporation could retroactively revoke a provision regarding advancement of litigation costs after the director's act or omission occurred.

In Schoon, the corporation's bylaws required the corporation to advance litigation costs for current and former directors. After the director resigned, the corporation amended its bylaws to eliminate the provision regarding advancement of litigation expenses to former directors.

The Delaware court held that the director's right to advancement of litigation expenses could be changed if the lawsuit against the director arose after the bylaws were amended, even though the director's act or omission occurred during his tenure as a director. The Schoon decision was criticized for allowing a corporation to retroactively deny a director's right to indemnification after the director's act or omission, thereby erasing the protections provided to the director when they were appointed.

The new Oregon laws will prohibit what occurred in Schoon. However, the new Oregon laws do include an exception that allows a corporation to retain the flexibility to alter its indemnity provisions after a director's act or omission.

If a corporation adopts a provision (either in its articles of incorporation, bylaws, or by resolution) that expressly authorizes the elimination or reduction of a director's right to indemnity or advance payment of litigation expenses after an act or omission occurs, then the corporation remains free to adjust a director's indemnification and advancement protections. However, these provisions must be enacted prior to a director's act or omission in order for the corporation to take advantage of this exception.

Of course, directors and corporations are always free to enter into contractual indemnification agreements that can be enforced independent of the articles of incorporation or bylaws.

Nevertheless, the new Oregon laws provide additional certainty to directors that the corporation will not be able to unilaterally change its articles or bylaws regarding indemnification unless the bylaws expressly stated that such changes could occur at the time of the director's act or omission.

Chris Burdett is an associate in the litigation group at Sussman Shank LLP. Contact him at 503-972-2529 or cburdett@sussmanshank.com.

Read more: http://djcoregon.com/news/2012/02/09/oregons-corporate-protection-rules-undergo-refinement/#ixzz2MhgWSrmd

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