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Corporations
Code section 204 sets forth optional provisions that may be included
in an articles of incorporation. Although these provisions are not required,
some of them MUST be included in the articles of incorporation for them
to be effective. For example, a corporation may, if desired, have a limited
existence. However, for the corporation's existence to be limited to a
certain duration, a provision making such limitation must be included
in the articles of incorporation. Otherwise, a corporation's existence
continues until it is dissolved by proper methods.
Corporation
Code section 204(a) sets forth all the optional provision that, unless
included in the Articles, will not be effective. There are a total of
11 such provisions. The 
is programmed to include only 2 of these provisions. These 2 provisions
are explained below:
LIMITATION OF DIRECTOR LIABILITY
Directors have certain duties to the corporations for which they serve.
If they breach their duties, they are liable to the corporation. However,
the Articles of Incorporation may contain a provision that eliminates
or limits this liability.
Why would a director want
this? Such a provision protects directors and therefore
is very important and useful for directors. A person who intends to serve
as a director is likely to want such a provision since he/she will benefit
from it.
Why would a corporation
want this? One reason may be to prevent scaring off desired
personnel. Corporate liability intimidates many people. A corporation
seeking to recruit someone particular onto the board of directors may
have an easier time doing so if director liability is limited. This may
not mean much if your corporation consists only of you and a couple of
friends. However, as your corporation grows, this could become more important.
Furthermore, it is important to understand that such a provision does
not eliminate or limit liability for acts of intentional misconduct, absence
of good faith, where a director derives an improper personal benefit,
and other certain situations where the interests of fairness would not
be served. The list of exceptions is found in Corporations
Code section 204(a)(10). Hence, by having such a provision, the corporation
is not giving a director free reign to act as desired.
PLEASE KEEP IN MIND, that this provision does not eliminate or limit liability
of officers for any act or omission as an officer, notwithstanding that
the officer is also a director or that his or her actions, if negligent
or improper, have been ratified by the directors.
INDEMNIFICATION OF AGENTS
To indemnify someone means to secure him/her against a future loss
or damage. To "secure" against a future loss or damage usually
means paying money for the loss or damage, if and when it occurs. Indemnification
is usually limited to certain circumstances.
For example, if a corporation indemnifies its agents against negligent
performance of duties, and that situation later occurs and causes damage
to the agent, the corporation will pay for any loss or damage suffered
by the agent as a result of that situation.
California
Corporations Code section 317 authorizes a corporation to indemnify
agents sued for carrying out activities on its behalf. However, depending
on the circumstances, indemnification may be mandatory or prohibited.
With respect to the Articles of Incorporation, a provision may be included
that allows a corporation to indemnify agents in excess of what is allowed
under Section 317, but only for breach of duty to the corporation and
its stockholders. This type of indemnification would NOT cover any
acts that a director would be liable for under California
Corporations Code section 204(a)(10) (discussed above) or for circumstances
in which indemnity is expressly prohibited by California
Corporations Code section 317.
Please note that unlike the "Limitation of Director Liability"
provision above that applies only to directors, the indemnification provision
applies to "agents" of a corporation. Agent is defined in California
Corporations Code section 317 as: any person who is or was a director,
officer, employee or other agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or
agent of another foreign or domestic corporation, partnership, joint venture,
trust or other enterprise, or was a director, officer, employee or agent
of a foreign or domestic corporation which was a predecessor corporation
of the corporation or of another enterprise at the request of the predecessor
corporation.
Why would an agent want
this? Such a provision protects agents and therefore is
very important and useful for agents (such as CEO's). A person who intends
to serve as an officer, employee, or other agent is likely to want such
a provision since he/she will benefit from it.
Why would a corporation
want this? One reason may be to prevent scaring off desired
personnel. Corporate liability intimidates many people. A corporation
seeking to recruit a talented officer (such as a CEO) will probably have
difficulty doing so unless agent liability is limited. This may not mean
much if your corporation consists only of you and a couple of friends.
However, as your corporation grows, this could become more important.
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