USA Law and Practice Contributed by: Lisa Fontenot, Jennifer Broder, Per Chilstrom and Lothar Determann, Baker McKenzie
chases or redemptions. This provision does not elimi - nate the underlying breach, meaning the court can still issue an injunction to provide relief. In addition, officers may not be exculpated for claims brought by or in the right of the corporation (ie, derivative actions). Indemnification Delaware law authorises corporations to indem - nify and advance expenses to directors and officers if they act in good faith and in the best interests of the corporation with no reasonable cause to believe their behaviour was unlawful. Indemnification is not exclusive, and companies may expand indemnifica - tion rights beyond statutory minimums, though the enforceability of provisions exceeding state law limits remains unclear. However, indemnification has signifi - cant limitations in bankruptcy contexts, and federal securities laws prohibit indemnification or insurance for liabilities arising from fraud or intentional miscon - duct. D&O insurance Delaware law permits corporations to purchase insur - ance covering any liability asserted against directors or officers in their status as such, whether or not the corporation has power to indemnify them for the liabil - ity. D&O insurance is subject to limitations, such as exclusions for fraud or intentional misconduct, and may be affected by the financial health of the corpora - tion (eg, bankruptcy). 3.10 Payments to Directors/Officers Approvals Requirements For US companies, remuneration, fees or benefits payable to directors and officers generally require approval by the board of directors, often delegated to the compensation committee. In Delaware, board decisions regarding executive compensation are generally protected by the busi - ness judgement rule. However, a conflict of interest resulting in the application of the entire fairness stand - ard may arise where directors approve compensation arrangements for themselves or for officers that are controlling shareholders of the corporation, requiring directors to demonstrate that the compensation was both procedurally and substantively fair to the cor - poration and its shareholders. Under this standard,
directors face potential liability for breach of fiduciary duty, waste and unjust enrichment claims. Shareholder approval is required for certain equity compensation plans and performance-based com - pensation arrangements (and material amendments to such arrangements) by stock exchange rules and fed - eral securities laws, and failure to comply can result in: • liability for directors and officers; • invalidation of compensation arrangements; • shareholder litigation; • violation of exchange listing requirements; and • regulatory enforcement actions. Disclosure Requirements US public companies are required to make extensive disclosures regarding compensation, fees and ben - efits payable to directors and officers, primarily under SEC rules and federal securities laws. Specifically, US public companies must disclose the compensation of their named executive officers (generally the CEO, CFO and three other most highly compensated execu - tive officers) and directors in the company’s annual meeting proxy statement and the items listed below. • Summary Compensation Table: three-year table for named executive officers showing salary, bonus, equity, non-equity incentives, pension value changes, deferred compensation earnings, other compensation and total compensation, plus narra - tive. • Director Compensation Table: prior fiscal-year table showing each director’s cash, equity and other compensation, plus narrative. • Pay Ratio Disclosure: disclose the CEO-pay to median employee-pay ratio, subject to limited exemptions. • Pay for Performance: provide the required five- year pay-versus-performance table and narra - tive describing how compensation paid relates to performance. • Hedging Disclosure: state whether directors, offic - ers or employees may hedge company securities received as compensation. • Potential Payments on Termination or Change in Control: describe circumstances triggering CEO
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