Meaning
Specific exception in a corporate agreement that removes the company’s obligation to pay for an executive’s legal losses under certain conditions protects the firm from funding bad actors. A managerial indemnity carveout applies when a director is found to have acted with criminal intent or gained an illegal personal profit. This provision shifts the financial burden of a lawsuit from the shareholders back to the individual officer.
Exclusion Scope
Conduct that falls outside the business judgment rule forms the primary target for these restrictions. The managerial indemnity carveout often lists fraud and intentional violations of the law as non-indemnifiable acts. Clear definitions in the employment contract prevent the company from being forced to defend a manager who knowingly harmed the business.
Litigation Impact
Initial defense costs are sometimes paid by the company subject to a clawback agreement if a court later finds the manager liable. Under a managerial indemnity carveout, the officer must repay every dollar if the final verdict confirms a prohibited act. This arrangement maintains the balance between supporting leaders and holding them accountable.
Risk Retention
Executives often purchase personal insurance to cover the gaps created by these legal exceptions. A managerial indemnity carveout forces the manager to bear the cost of their own moral hazard. This exposure encourages more cautious decision making during high stakes negotiations.
