Indemnification and Advancement Rights Under the Delaware LLC Act

Steven D. Goldberg, Esq. Wilmington, DE
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We have pointed out in previous posts that the Delaware LLC Act is an enabling act, that is, it provides a framework upon which the drafter of the company agreement may build.  The Delaware Act contains many default provisions, however indemnification is not one of them.

Section 18-108, Indemnification, provides:
“Subject to such standards and restrictions, if any, as are set forth in its limited liability company agreement, a limited liability company may, and shall have the power to, indemnify and hold harmless any member or manager or other person from and against any and all claims and demands whatsoever.”

Section 108 confirms that the LLC has the power to indemnify and hold harmless any member or manager or other person, however the drafters left it up to the terms of the LLC agreement to establish first whether the company will indemnify and then the standards to be applied.

The starting and ending point on any claim for indemnification is the company agreement itself. The most often litigated  issue under indemnification is the right of a covered person to receive an advancement for expenses.  In practical terms the right to an advancement is as important as the right to indemnification itself.  Litigation and defending ones self in a court or investigative proceeding are expensive in the real world. In the absence of a right to an advancement the covered person may not be able to avail himself or herself to indemnification as they may not be able to afford the initial cost to defend themselves in the proceeding. The Act itself, unlike Section 145 of the DGCL, does not address advancement. Delaware courts have held that in the absence of a provision in the company agreement itself, there is no implied right to receive an advancement for expenses. The courts have applied corporate decisions to claims for advancement. The courts have concluded that under Delaware law the right to expenses and the right to advancement are distinct concepts and the right to recover expenses does not imply the right to an advancement.

The indemnification provisions of the company agreement need to be carefully drafted to cover, or eliminate from coverage, persons who the company intends to either cover or eliminate. Most indemnification provisions are drawn from Section 145 and standard corporate bylaw provisions.  The DGCL does not differentiate between claims for indemnification and advancement by a plaintiff or defendant. Therefore if a company does not want a aggrieved member or manager who is suing the company to seek an advancement of expenses to sue the company, the company agreement must preclude such claims.

In a recent case the Delaware Courts have held that a company may amend its company agreement to limit or eliminate a right to indemnification between the time of the occurrance which gives rise to a  right to indemnification and the time that the claim for indemnification is made.

The indemnification provisions in the accompaning PDF file are typical of well drafted company agreements. Indemnification Section

I have an active Delaware business practice as well as a practice in Delaware’s State and Federal courts. If you or your client have a business matter or a matter which you wish to litigate in Delaware or has a matter pending in Delaware, we would appreciate the opportunity to consult with you regarding our representation. Please remember that we do not accept representation without a written engagement letter.

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