Both Ohio corporations and Ohio LLCs are permitted (but not required) to enter into indemnity agreements with their officers, directors, managers and employees. But when forming an Ohio corporation or Ohio LLC, entities should carefully consider the differing mandatory indemnity obligations that also apply to each type of organization.
As we noted in a previous post, the Ohio Supreme Court recently stated in Miller v. Miller that even without an indemnity agreement, Ohio corporations have certain mandatory responsibilities to pay directors’ litigation expenses (provided that a director first submits an "undertaking" to the corporation) under Ohio Revised Code §1701.13(E)(5)(a).
Mandatory indemnity requirements for Ohio LLCs are quite different. Ohio Revised Code §1705.32(C) states that to the extent that a "manager, officer, employee or agent" of a limited liability company has been successful on the merits or otherwise in defense of any action, suit or proceeding related to their status as a manager, officer, employee or agent, such person "shall" be indemnified against expenses that were actually and reasonably incurred.
This statute does not allow an Ohio LLC to avoid the indemnity by making a statement in its articles of organization or operating agreement. The LLC statute also applies to managers, officers, employees and agents – the Ohio corporate statute described above applies only to directors. In those regards, an Ohio LLC’s mandatory indemnity requirements may seem more burdensome (from the LLC’s perspective) than the indemnity requirements applicable to an Ohio corporation.
The circumstances in which an Ohio LLC would have to pay litigation expenses …
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Ohio corporations should carefully consider whether their articles of incorporation or code of regulations should state that Ohio Revised Code §1701.13(E)(5)(a) does not apply to the corporation. Without making that exclusion, the lack of an indemnity agreement will not prevent a director from exercising his statutory right to receive (from the corporation) payment of his litigation expenses.
Corporations and their directors often enter into indemnity agreements. These agreements usually state that the company will reimburse the director for certain expenses (such as legal fees) incurred by the director as a result of his or her status as a director. But Miller v. Miller, a recent decision by the Ohio Supreme Court, makes clear that even without an indemnity agreement, Ohio corporations have (unless otherwise stated in their articles of incorporation or code of regulations) certain mandatory responsibilities to pay directors’ litigation expenses.
Ohio Revised Code §1701.13(E)(5)(a) states that Ohio corporations "shall" pay the expenses (when they are incurred) of directors who are subject to "actions, suits, or proceedings" asserted against a director because he is a director. The only step a director must take to receive such advances is to execute an "undertaking," which must state that the director will: (i) reasonably cooperate with the corporation concerning the action, suit or proceeding, and (ii) repay all expense to the corporation if it is proven in court by clear and convincing evidence that the director’s action or failure to act was taken deliberately to harm the corporation or with reckless disregard for the best interest …
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Enforcement of a relatively new rule of the Financial Industry Regulatory Authority (FINRA) has resulted in significant fees in 2011 for small issuers with securities traded over-the-counter (OTC), such as some community banks. FINRA Rule 6490 requires issuers to provide notice to FINRA of certain company-related actions, such as dividends and stock splits, or face a $5,000 fee, which some might characterize as a fine.
FINRA’s ability to charge issuers is new as of 2010, and is a significant departure from FINRA’s historically ministerial role with respect to issuers. FINRA primarily oversees broker-dealer member firms, but it also performs certain functions for issuers of OTC securities. For example, it reviews and processes requests to announce or publish certain actions by issuers of OTC securities and maintains the symbols database for OTC securities. …
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