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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Chancery Awards Advancement to LLC Member Applying Corporate Law Precedent
Delaware law, under 8 Del. C. § 145, allows for a corporation to agree in corporate documents or contracts to advance legal fees and expenses arising out of one’s service to the company. Aiming to bolster quality leadership, Delaware’s policy is to construe advancement provisions broadly in favor of advancement. Parties also utilize advancement provisions in the LLC context. Different from the corporate context, the foundational principle underlying an LLC relationship is the freedom of contract—the idea that parties are free to arrange their dealings as they choose. Overlaying this important principle is the notion developed under Delaware case law that, while the contract is paramount in the LLC context, structural choices might result in a court importing ideas from an analogous body of law, like corporate law. This recent Court of Chancery opinion recognizes and illustrates that notion when dealing with claimed advancement rights, explaining “parties are free to contract into corporate case law (or not) when they create LLCs, and courts will respect that choice.”
Here, the parties disputed whether the LLC agreement entitled a member to advancement. The operating agreement obligated the plaintiff member to use its best efforts to either exchange certain real property or have it developed. In the underlying suit for which the member sought advancement, the parties disputed the validity of certain call rights based on the member’s alleged failure to use its best efforts concerning the property. Because the language in the operating agreement’s advancement provision was “nearly identical” to the language found in 8 Del. C. § 145, the Court found that the parties intended to import corporate principles and thus utilized Section 145 to guide its interpretation. The Court looked to Delaware precedent addressing whether suit is brought against a party “by reason of the fact” that the party was acting in an official capacity on the company’s behalf. Under that case law, “by reason of the fact” is interpreted broadly and requires only some sort of nexus or casual connection between the official capacity and the suit. Here, the Court held that the underlying action directly implicated the member’s performance of its official duties under the operating agreement. Therefore, advancement was appropriate.