Indemnification Clauses in Danish Public Limited Companies

Abstract

In light of the financial crisis in 2008, liability cases towards the management in public limited companies have become more present. As a result of this, companies have found it difficult to attract and maintain qualified members of the management due to their apprehension of being liable for future decision-making. In continuation of this, several qualified members of the management now demand indemnification clauses for certain actions that they might undertake during their tenure within the company. This corporate law issue is not addressed in the Danish legislation, nor has it been subject to judicial adjudication. In consideration thereof, numerous Danish public limited companies have despite this taken the liberty to implement indemnification clauses for members of their management. The legal analysis examines to which extent, public limited companies validly are able to indemnify members of management for future unknown liability. The legal analysis concludes that due to the absence of legislation governing the area, the principle, freedom of contract technically validates indemnification clauses as long as they do not conflict with the interest of the company or other prescriptive provisions. The economic analysis investigates to which extent indemnification clauses can be categorized as being efficient to the contract between the Board of Directors (“BoD”) and the company. The economic analysis initially concludes that indemnification clauses are efficient to attract qualified BoD’s and simultaneously maximize the company’s profit. In continuation thereof, the indemnification clauses also generate an incentive for the BoD to be more negligent. The economic analysis concludes that indemnification clauses alone are not efficient, but if the indemnification clauses are combined with incentive schemes, the indemnification clauses will be efficient. Based on the legal and economic analysis, the integrated analysis investigates measures, which can be implemented to construct a socially ideal solution in the area governing management liability. The integrated analysis concludes that risk-neutral parties should bear the risk and that regulation on the area for indemnification clauses leads to a more efficient socially ideal solution.