Bylaw Indemnification and the Statute of Frauds

In a recent post on his blog, Keith Bishop asks the question, Are charter indemnification provisions contracts? Many companies include provisions in their articles and bylaws that mandate indemnification of directors and officers, and they often say that they are contract rights. But, as he points out, saying something is so doesn’t necessarily make it so. He goes through a careful analysis of the elements of a contract, indicating that an indemnification provision in articles or bylaws could constitute indeed constitute a contractual obligation.

In addressing the Statute of Frauds (which requires a writing for certain types of agreements), he notes that contracts of suretyship must be in writing and signed. True that, but is an indemnification agreement a contract of suretyship? I don’t think so. A surety or guarantor is one who promises to answer for the debt, default, or miscarriage of another while an indemnitor is one who promises to compensate for a loss or liability incurred. Although the two have a similar effect, they are different types of obligations. The Statute of Frauds could apply to some types of indemnification, however, and if it does, then a signature would be required.

Keith points out that “Bylaws are not usually signed, but they are often certified by the corporate secretary.” Certification by the secretary might not do the trick since the secretary’s signature is to a certification of the bylaws. But it we take it one step further, we can find the necessary signature. Note that the Statute of Frauds does not require the contract itself be signed; it simply requires a memorandum of the agreement signed by the party to be charged. In the case of an indemnification provision, the party to be charged is the corporation.

In private companies, bylaws are typically adopted by the incorporator as part of the organization of the corporation. The incorporator usually acts by signing a written consent that adopts the bylaws. The text of the bylaws coupled with the consent signed by the incorporator should suffice as a memorandum under the Statute of Frauds.

What if the board adopts a bylaw providing for indemnification? If the board acts by written consent in lieu of a meeting, the consent must be signed by all the directors. The bylaw together with the minutes signed by the directors should suffice as a memorandum for the Statute of Frauds. If the board adopts the bylaw at a meeting, the directors don’t normally sign the minutes. But the minutes are normally signed by the secretary, and in this case, the signature by the secretary is not merely a certification but a signature intended to make the minutes effective. And, of course, the secretary is the proper person to sign the minutes. Thus, board minutes adopting a bylaw providing for indemnification signed by the secretary coupled with the bylaw provision itself should satisfy the memorandum requirement of the Statute of Frauds.

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