MBE Rules · Business Associations
Indemnification
Cal. Corp. Code § 317
The rule
Corporations must indemnify agents successful on the merits, may indemnify good-faith conduct reasonably believed in the corporation's best interest, and cannot indemnify for breaches of loyalty adjudged in derivative suits absent court approval.
In plain English
Indemnification refers to a corporation's obligation to reimburse its agents for expenses incurred while acting on behalf of the corporation. If an agent wins a legal case, the corporation must indemnify them; if they acted in good faith and believed their actions were in the corporation's best interest, they may also be indemnified. However, if an agent is found to have breached their loyalty in a derivative suit, the corporation cannot indemnify them unless a court approves it.
Worked example
A corporate officer is sued for mismanagement but successfully defends against the claims in court. The corporation indemnifies the officer for legal fees incurred during the lawsuit. In a separate case, another officer is found to have acted disloyally in a derivative suit; the corporation cannot indemnify them without court approval. Therefore, the first officer receives indemnification, while the second does not.
Memory hook
Indemnify the winner, but beware of loyalty breaches!
The trap
Exams often present scenarios where students must differentiate between successful defenses and breaches of loyalty, leading to confusion about indemnification eligibility. Students may mistakenly think all good-faith actions qualify for indemnification.
How examiners test it
Questions typically involve fact patterns where agents face legal challenges, requiring candidates to analyze whether indemnification applies based on the outcome of the case and the nature of the conduct involved.
Drill this rule until it can't fail you.
Vrenberg generates unlimited questions on this exact rule, tracks your mastery of it, and brings it back until it sticks.