Indemnification in a nutshell

Indemnification of D&Os (other than insurance)

Advance of legal costs to D&O
Such advances by the company are widely accepted. Although successful liability claims against D&Os are rare, and the legal costs are often shifted to the losing party, D&Os may encounter a significant expense burden for many years until the proceedings are closed-

Assumption of legal costs by the company
Usually, only part of the costs (i.e. attorneys’ fees) will be covered by the losing claimant in the case of a positive outcome for a D&O. Additionally, most of the law suits end up being settled, in which case no costs are reimbursed. In these cases, the assumption of costs by the company is generally allowed. However, some legal experts would consider this unlawful if the D&O is held liable, particularly in cases of wilful or substantial breaches of duties; most, though, allow an assumption of cost in case the D&O has breached his duties only negligently.

Indemnification clauses in articles of association or individual agreements
An indemnification for mere negligence is generally accepted with the argument that forcing D&Os to be too careful will make them totally risk averse. However, such clauses or agreements are in general regarded as unlawful to the extent they also cover wilful or substantial breaches.

Hold harmless clause by the major shareholder (e.g. the parent company)
Such clauses are considered lawful. The parent company then usually also undertakes not to bring any claims against D&Os in subsidiaries – this of course does not bind shareholders who have not consented to such an agreement nor creditors of the subsidiary. In any case, it is not possible to indemnify D&Os from criminal liability.