Barber, Charles F.

English

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Washington and Bishop, Jr.: Indemnifying the Corporate Executive

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REVIEWS
reminds us that "the actual decisions clearly pointed in the direction of sup-
port for public regulation.""1 So long as Waite was Chief Justice, the Court
"never became, wittingly or unwittingly, a tool of business."'
12
In view of the record which Mr. Magrath so ably presents, one is tempted
to ask why constitutional historians often underrate Chief Justice Waite. Per-
haps the simplest explanation is that for years Waite has been the victim of
the envious Justice Samuel F. Miller's witticism: "I can't make a silk purse
out of a sow's ear. I can't make a great Chief Justice out of a small man."'
More basic, however, is the present-day unpopularity of some of Waite's
fundamental ideas. In an age of growing nationalism the Chief Justice never
outgrew his conviction that the Constitution meant what it seemed to mean
and that in a federal system it was imperative to differentiate between the
functions of the central and the local governments. In both civil rights cases
and cases involving economic legislation Waite cast his votes for states' rights.
Another of his basic beliefs was in judicial deference to legislative decisions.
"Of the propriety of legislative interference within the scope of legislative
power," the Chief Justice said tartly, "the legislature is the exclusive judge."'14
"In my judgment," he added, "the fault of Judges sometimes is to try and
make too much law at once.'
5
Because such beliefs may be unfashionable these days, it is unlikely that
Professor Magrath's book will succeed in making of Chief Justice Waite
either a major or a respected figure in our judicial history. But his biography
of the neglected Chief Justice should do much to demolish the stereotype that
the Court in the postwar decades was simply the bulwark of private property.
In presenting this revisionist view, Mr. Magrath has proved himself one of
the ablest of the young historians who are painting a new and more complex
picture of the decades following the Civil War.
DAVID DONALDt
INDEMNIFYING T RE CORPORATE EXECUTIVE. By George T. Washington and
Joseph W. Bishop, Jr. New York: The Ronald Press Company, 1963. $15.00.
THuiS is a probing and provocative study of the law and public policy in-
volved in the reimbursement of corporate executives for personal liability
arising out of their corporate connections. Its publication coincides with a
renewed flurry of interest in the subject, aroused by recent sharp reminders
11. P. 201.
12. Ibid.
13. P. 271.
14. P. 189.
15. P. 209.
tHarry C. Black Professor of American History, The Johns Hopkins University.
194
THE YALE LAW JOURNAL
of the executive's personal exposure to serious trouble and substantial expense
under the federal antitrust and securities laws.
Professor Bishop of Yale has effectively collaborated with Judge Washington
in revising and bringing up to date the latter's pioneering study of indemni-
fication included in his 1942 treatise on compensation of corporate executives.'
The subject was then in high fashion. The depression had spawned a large
number of shareholder derivative suits against corporate executives, and,
while the few reported cases left the issue in some confusion, it had been
generally assumed that the costs incurred by an executive in at least a success-
ful defense of an action should or could be paid by the corporation. But in
1939, New York Dock Co. v. McCollom,2 a suit for declaratory judgment
brought by the corporation against certain of its directors who had successfully
defended a derivative suit, held that the directors were not entitled to reim-
bursement. In the years immediately following this decision, hundreds of
corporations adopted by-laws providing for indemnification. In April 1941,
New York led a parade of states by amending its corporation law to authorize
and provide for indemnification under prescribed circumstances.
Writing in 1942, Judge Washington evaluated indemnity provisions. Noting
some examples of indemnity arrangements bordering upon exculpation, he
cautioned restraint and warned management that it would make a grave mis-
take if it sought greater dispensations than enlightened public opinion would
grant.
In 1956, Professor Bishop, then in private practice, took another hard look
at the issues.3 Whereas Judge Washington had focused on problems arising
in derivative suits, Professor Bishop's study emphasized the different prin-
ciples applicable in suits brought by third parties against the corporation and
its directors. Frankly concerned with the uncertainties faced by persons invited
to serve as directors of corporations in which they had no substantial financial
stake, he asked rhetorically whether such persons, realistically evaluating the
risks involved, would consider "the game worth the candle". 4
The basic issue is how far risks, traditionally imposed on management, may
properly be shifted to the enterprise. In terms of policy, fairness to the indi-
vidual must be balanced against the necessity of ensuring that proper standards
of management responsibility toward shareholders and the public are main-
tained. Fairness requires reasonable protection for the individual who acts in
good faith. The potential liabilities, counsel fees, and other expenses to which
an executive is regularly exposed in his corporate position are of an order of
magnitude which, even if tolerable in the corporate scale of income and ex-
penditure, would be overwhelming to the individual. But, as Professor Bishop
points out, the line must be drawn somewhere. It is the authors' purpose in
1. WASHiNGTON, CoRPORATE EXECUTVES' COMPENSATION (1942)
2. 173 Misc. 106, 16 N.Y.S.2d 844 (1939).
3. Bishop, Current Status of Corporate Directors' Right to TIdemnification.
69 HARv. L. REv. 1057 (1956).
4. Id., at 1060.
[Vol. 73: 532
REVIEWS
the present volume "to examine the many and complex considerations, legal
and other-wise, which affect the point at which that line is drawn and to venture
some conclusions as to the nature of fair and reasonable solutions in varying
circumstances". 5
This purpose the authors accomplish very well indeed. They deal with the
pros and cons of direct participation by the corporation in the defense of
management 6 and with reimbursement.7 Different considerations are shown
to be relevant in "drawing the line" in derivative suits, where the gravamen
of the complaint is mismanagement, and in third party actions where the
individual's legal troubles usually arise from his actions on behalf of the cor-
poration but where indemnification may involve more troublesome issues of
public policy. The authors then cover the ground twice again. First, this is
done in a detailed and caustic analysis of the statutes enacted in some 32
jurisdictions, few of which distinguish between the issues presented in deriva-
tive actions and those presented in third party actions, and many of which
(including the relevant section of the Model Business Corporation Act 8 and
its Delaware prototype 9) the authors regard as "inordinately permissive". 10
Finally, the authors analyze critically the scope and form of typical by-laws
which have been adopted by leading corporations. Chapters dealing with the
tax status of indemnity payments and the role of the Securities and Exchange
Commission, together with Appendices which include the full text of all 32
statutes and 29 examples of by-law provisions, strengthen the book's usefulness
as a working tool.
Where should the line be drawn? Clearly, executives ought to be indemnified
when they are vindicated on the merits and ought not be indemnified when
they have been finally adjudged by a court to be guilty of dereliction in their
duty to the corporation. A gray area lies between. The authors' views are
succinctly summarized when they give reasonable limits of a by-law providing
"the maximum of protection which corporate management really needs and
to which it is fairly entitled"." They would sanction indemnification when the
defense has been successful on the merits. In other cases, they distinguish
between derivative suits and third party suits not in the right of the corporation.
As to the former, if no payment has been made to the corporation, indemnifi-
cation of legal expenses is appropriate only after a "genuinely impartial
agency"'1 has determined that the individual's conduct was not in fact neg-
ligent or wrongful. If payment has been made to the corporation under a
settlement or pursuant to judgment, expenses (but never the amount paid to
5. P.v.
6. Pp. 37-74.
7. Pp. 75-111.
8. ABA-ALI MODEL Bus. CoRp. AcT, § 4(o) (1960).
9. DEL. CoDE ANN. tit. 8, § 122(10) (1953).
10. P. 168.
11. Pp. 202-04.
12. P. 202.
1964
THE YALE LAW JOURNAL
the corporation) may be reimbursed only after a court has approved both the
settlement and the reimbursement. In third party suits, the authors find wider
scope for indemnification. They deem it appropriate to provide indemnification
for expenses (including fines and payments in satisfaction of judgment or
pursuant to compromise settlement) in civil or criminal cases if a court or other
impartial agency determines that the individual was acting in good faith,
within the reasonable scope of his authority, and without reason to believe
that his conduct was illegal or otherwise wrongful. In third party situations,
the authors focus on the good faith of the executive and are less concerned
than some other contemporary commentators 13 that fairness to the individual
will undermine the regulatory purpose of the legislation giving rise to the
liability.
This book will undoubtedly become a standard reference work for lawyers,
legislators, and judges called upon to deal with the problem of indemnification.
The clarity of its message and the soundness of its scholarship virtually assures
that it will influence the development of the law toward the norms delineated
by Judge Washington and Professor Bishop.
CHARLES F. BARBERt
13. See Note, Indemnification of Directors: The Problems Posed by Federal Securi-
ties and Antitrust Legislation, 76 HARv. L. REv. 1403 (1963).
tMember of the New York Bar.
(Vol. 73 : 532


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