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What is an Indemnification Provision and should we have one?

An indemnification provision will obligate the company to indemnify (meaning, hold harmless from costs, fees, expenses, etc.) its directors or officers if they are the subject of claims, liabilities, or lawsuits during the course of their duties for the company.

Generally, indemnification provides do not provide indemnification if the officer/director has been a “bad actor” – meaning, actually participating in fraud, theft, deception, etc.).

Nearly all corporations have indemnity provisions, as the directors/officers do not want to be left out in the cold if claims are alleged against them for matters arising out of their work and performance for the company.

If you decide to skip having an indemnification provision in your company’s Articles of Incorporation or By-Laws, then officers and directors who are sued for acts or omissions during the course of their duties on behalf of the company may be personally responsible for the costs, fees, and expenses of defending the lawsuit, and paying any settlement or judgment awarded against them. This may make it very unattractive for officers and directors to come and want to work for your company.

For these and other reasons, most corporations have indemnification provisions protecting their officers and directors.

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