Texas Business Corporation Act - Article 2.02-1. Power To Indemnify And To Purchase Indemnity Insurance; Duty To Indemnify

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Art. 2.02-1. Power to Indemnify and to Purchase Indemnity 
Insurance;  Duty to Indemnify

A. In this article:                                                           

(1) "Corporation" includes any domestic or foreign predecessor 
entity of the corporation in a merger, conversion, or other 
transaction in which some or all of the liabilities of the 
predecessor are transferred to the corporation by operation of law 
and in any other transaction in which the corporation assumes the 
liabilities of the predecessor but does not specifically exclude 
liabilities that are the subject matter of this article.

(2) "Director" means any person who is or was a director of the 
corporation and any person who, while a director of the 
corporation, is or was serving at the request of the corporation as 
a director, officer, partner, venturer, proprietor, trustee, 
employee, agent, or similar functionary of another foreign or 
domestic corporation, employee benefit plan, other enterprise, or 
other entity.

(3) "Expenses" include court costs and attorneys' fees.                       

(4) "Official capacity" means                                                 

(a) when used with respect to a director, the office of director in 
the corporation, and

(b) when used with respect to a person other than a director, the 
elective or appointive office in the corporation held by the 
officer or the employment or agency relationship undertaken by the 
employee or agent in behalf of the corporation, but

(c) in both Paragraphs (a) and (b) does not include service for any 
other foreign or domestic corporation or any employee benefit plan, 
other enterprise, or other entity.

(5) "Proceeding" means any threatened, pending, or completed 
action, suit, or proceeding, whether civil, criminal, 
administrative, arbitrative, or investigative, any appeal in such 
an action, suit, or proceeding, and any inquiry or investigation 
that could lead to such an action, suit, or proceeding.

B. A corporation may indemnify a person who was, is, or is 
threatened to be made a named defendant or respondent in a 
proceeding because the person is or was a director only if it is 
determined in accordance with Section F of this article that the 
person:

(1) conducted himself in good faith;                                          

(2) reasonably believed:                                                      

(a) in the case of conduct in his official capacity as a director of 
the corporation, that his conduct was in the corporation's best 
interests;  and

(b) in all other cases, that his conduct was at least not opposed to 
the corporation's best interests;  and

(3) in the case of any criminal proceeding, had no reasonable cause 
to believe his conduct was unlawful.

C. Except to the extent permitted by Section E of this article, a 
director may not be indemnified under Section B of this article in 
respect of a proceeding:

(1) in which the person is found liable on the basis that personal 
benefit was improperly received by him, whether or not the benefit 
resulted from an action taken in the person's official capacity;  or

(2) in which the person is found liable to the corporation.                   

D. The termination of a proceeding by judgment, order, settlement, 
or conviction, or on a plea of nolo contendere or its equivalent is 
not of itself determinative that the person did not meet the 
requirements set forth in Section B of this article.  A person shall 
be deemed to have been found liable in respect of any claim, issue 
or matter only after the person shall have been so adjudged by a 
court of competent jurisdiction after exhaustion of all appeals 
therefrom.

E. A person may be indemnified under Section B of this article 
against judgments, penalties (including excise and similar taxes), 
fines, settlements, and reasonable expenses actually incurred by 
the person in connection with the proceeding;  but if the person is 
found liable to the corporation or is found liable on the basis that 
personal benefit was improperly received by the person, the 
indemnification (1) is limited to reasonable expenses actually 
incurred by the person in connection with the proceeding and (2) 
shall not be made in respect of any proceeding in which the person 
shall have been found liable for willful or intentional misconduct 
in the performance of his duty to the corporation.

F. A determination of indemnification under Section B of this 
article must be made:

(1) by a majority vote of the directors who at the time of the vote 
are not named defendants or respondents in the proceeding, 
regardless of whether the directors not named defendants or 
respondents constitute a quorum;

(2) by a majority vote of a committee of the board of directors, if:          

(a) the committee is designated by a majority vote of the directors 
who at the time of the vote are not named defendants or respondents 
in the proceeding, regardless of whether the directors not named 
defendants or respondents constitute a quorum;  and

(b) the committee consists solely of one or more of the directors 
not named as defendants or respondents in the proceeding;

(3) by special legal counsel selected by the board of directors or a 
committee of the board by vote as set forth in Subsection (1) or (2) 
of this section;  or

(4) by the shareholders in a vote that excludes the shares held by 
directors who are named defendants or respondents in the 
proceeding.

G. Authorization of indemnification and determination as to 
reasonableness of expenses must be made in the same manner as the 
determination that indemnification is permissible, except that if 
the determination that indemnification is permissible is made by 
special legal counsel, authorization of indemnification and 
determination as to reasonableness of expenses must be made in the 
manner specified by Subsection (3) of Section F of this article for 
the selection of special legal counsel.  A provision contained in 
the articles of incorporation, the bylaws, a resolution of 
shareholders or directors, or an agreement that makes mandatory the 
indemnification permitted under Section B of this article shall be 
deemed to constitute authorization of indemnification in the manner 
required by this section even though such provision may not have 
been adopted or authorized in the same manner as the determination 
that indemnification is permissible.

H. A corporation shall indemnify a director against reasonable 
expenses incurred by him in connection with a proceeding in which he 
is a named defendant or respondent because he is or was a director 
if he has been wholly successful, on the merits or otherwise, in the 
defense of the proceeding.

I. If, in a suit for the indemnification required by Section H of 
this article, a court of competent jurisdiction determines that the 
director is entitled to indemnification under that section, the 
court shall order indemnification and shall award to the director 
the expenses incurred in securing the indemnification.

J. If, upon application of a director, a court of competent 
jurisdiction determines, after giving any notice the court 
considers necessary, that the director is fairly and reasonably 
entitled to indemnification in view of all the relevant 
circumstances, whether or not he has met the requirements set forth 
in Section B of this article or has been found liable in the 
circumstances described by Section C of this article, the court may 
order the indemnification that the court determines is proper and 
equitable;  but if the person is found liable to the corporation or 
is found liable on the basis that personal benefit was improperly 
received by the person, the indemnification shall be limited to 
reasonable expenses actually incurred by the person in connection 
with the proceeding.

K. Reasonable expenses incurred by a present director who was, is, 
or is threatened to be made a named defendant or respondent in a 
proceeding may be paid or reimbursed by the corporation, in advance 
of the final disposition of the proceeding and without the 
determination specified in Section F of this article or the 
authorization or determination specified in Section G of this 
article, after the corporation receives a written affirmation by 
the director of his good faith belief that he has met the standard 
of conduct necessary for indemnification under this article and a 
written undertaking by or on behalf of the director to repay the 
amount paid or reimbursed if it is ultimately determined that he has 
not met that standard or if it is ultimately determined that 
indemnification of the director against expenses incurred by him in 
connection with that proceeding is prohibited by Section E of this 
article.  Notwithstanding any authorization or determination 
specified in this article, reasonable expenses incurred by a former 
director or officer, or a present or former employee or agent of the 
corporation, who was, is, or is threatened to be made a named 
defendant or respondent in a proceeding may be paid or reimbursed by 
the corporation, in advance of the final disposition of the 
proceeding, on any terms the corporation considers appropriate.  A 
provision contained in the articles of incorporation, the bylaws, a 
resolution of shareholders or directors, or an agreement that makes 
mandatory the payment or reimbursement permitted under this section 
shall be deemed to constitute authorization of that payment or 
reimbursement.

L. The written undertaking required by Section K of this article 
must be an unlimited general obligation of the director but need not 
be secured.  It may be accepted without reference to financial 
ability to make repayment.

M. A provision for a corporation to indemnify or to advance expenses 
to a director who was, is, or is threatened to be made a named 
defendant or respondent in a proceeding, whether contained in the 
articles of incorporation, the bylaws, a resolution of shareholders 
or directors, an agreement, or otherwise, except in accordance with 
Section R of this article, is valid only to the extent it is 
consistent with this article as limited by the articles of 
incorporation, if such a limitation exists.

N. Notwithstanding any other provision of this article, a 
corporation may pay or reimburse expenses incurred by a director in 
connection with his appearance as a witness or other participation 
in a proceeding at a time when he is not a named defendant or 
respondent in the proceeding.

O. An officer of the corporation shall be indemnified as, and to the 
same extent, provided by Sections H, I, and J of this article for a 
director and is entitled to seek indemnification under those 
sections to the same extent as a director.  A corporation may 
indemnify and advance expenses to an officer, employee, or agent of 
the corporation to the same extent that it may indemnify and advance 
expenses to directors under this article.  A determination of 
indemnification for an employee or agent of the corporation is not 
required to be made in accordance with Section F of this article.

P. A corporation may indemnify and advance expenses to persons who 
are not or were not officers, employees, or agents of the 
corporation but who are or were serving at the request of the 
corporation as a director, officer, partner, venturer, proprietor, 
trustee, employee, agent, or similar functionary of another foreign 
or domestic corporation, employee benefit plan, other enterprise, 
or other entity to the same extent that it may indemnify and advance 
expenses to directors under this article.

Q. A corporation may indemnify and advance expenses to an officer, 
employee, agent, or person identified in Section P of this article 
and who is not a director to such further extent, consistent with 
law, as may be provided by its articles of incorporation, bylaws, 
general or specific action of its board of directors, or contract or 
as permitted or required by common law.

R. A corporation may purchase and maintain insurance or another 
arrangement on behalf of any person who is or was a director, 
officer, employee, or agent of the corporation or who is or was 
serving at the request of the corporation as a director, officer, 
partner, venturer, proprietor, trustee, employee, agent, or 
similar functionary of another foreign or domestic corporation, 
employee benefit plan, other enterprise, or other entity, against 
any liability asserted against him and incurred by him in such a 
capacity or arising out of his status as such a person, whether or 
not the corporation would have the power to indemnify him against 
that liability under this article.  If the insurance or other 
arrangement is with a person or entity that is not regularly engaged 
in the business of providing insurance coverage, the insurance or 
arrangement may provide for payment of a liability with respect to 
which the corporation would not have the power to indemnify the 
person only if including coverage for the additional liability has 
been approved by the shareholders of the corporation.  Without 
limiting the power of the corporation to procure or maintain any 
kind of insurance or other arrangement, a corporation may, for the 
benefit of persons indemnified by the corporation, (1) create a 
trust fund;  (2) establish any form of self-insurance;  (3) secure 
its indemnity obligation by grant of a security interest or other 
lien on the assets of the corporation;  or (4) establish a letter of 
credit, guaranty, or surety arrangement.  The insurance or other 
arrangement may be procured, maintained, or established within the 
corporation or with any insurer or other person deemed appropriate 
by the board of directors regardless of whether all or part of the 
stock or other securities of the insurer or other person are owned 
in whole or part by the corporation.  In the absence of fraud, the 
judgment of the board of directors as to the terms and conditions of 
the insurance or other arrangement and the identity of the insurer 
or other person participating in an arrangement shall be conclusive 
and the insurance or arrangement shall not be voidable and shall not 
subject the directors approving the insurance or arrangement to 
liability, on any ground, regardless of whether directors 
participating in the approval are beneficiaries of the insurance or 
arrangement.

S. Any indemnification of or advance of expenses to a director in 
accordance with this article shall be reported in writing to the 
shareholders with or before the notice or waiver of notice of the 
next shareholders' meeting or with or before the next submission to 
shareholders of a consent to action without a meeting pursuant to 
Section A, Article 9.10, of this Act and, in any case, within the 
12-month period immediately following the date of the 
indemnification or advance.

T. For purposes of this article, the corporation is deemed to have 
requested a director to serve as a trustee, employee, agent, or 
similar functionary of an employee benefit plan whenever the 
performance by him of his duties to the corporation also imposes 
duties on or otherwise involves services by him to the plan or 
participants or beneficiaries of the plan.  Excise taxes assessed 
on a director with respect to an employee benefit plan pursuant to 
applicable law are deemed fines.  Action taken or omitted by a 
director with respect to an employee benefit plan in the 
performance of his duties for a purpose reasonably believed by him 
to be in the interest of the participants and beneficiaries of the 
plan is deemed to be for a purpose which is not opposed to the best 
interests of the corporation.

U. The articles of incorporation of a corporation may restrict the 
circumstances under which the corporation is required or permitted 
to indemnify a person under Section H, I, J, O, P, or Q of this 
article.

Added by Acts 1983, 68th Leg., p. 3143, ch. 540, Sec. 2, eff. Aug. 
29, 1983.  Amended by Acts 1985, 69th Leg., ch. 128, Sec. 1, eff. May 
20, 1985;  Acts 1987, 70th Leg., ch. 93, Sec. 3, eff. Aug. 31, 1987;  
Acts 1989, 71st Leg., ch. 801, Sec. 2, eff. Aug. 28, 1989;  Acts 
1997, 75th Leg., ch. 375, Sec. 2, eff. Sept. 1, 1997.

Sec. F amended by Acts 2003, 78th Leg., ch. 238, Sec. 3, eff. Sept. 
1, 2003;  Sec. K amended by Acts 2003, 78th Leg., ch. 238, Sec. 3, 
eff. Sept. 1, 2003;  Sec. O amended by Acts 2003, 78th Leg., ch. 238, 
Sec. 3, eff. Sept. 1, 2003.

Last modified: August 10, 2007