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Court of Chancery Holds Advancement Lost Despite Conversion

Bernstein v. Tractmanager Inc., C.A. No. 7263-VCL (November 20, 2007).

This decision illustrates the perils in converting from an LLC to a corporate form without considering the consequences. Here, the LLC involved did not provide for mandatory advancement rights. The LLC was then converted into a Delaware corporation whose bylaws did provide for advancement as a matter of right. Quite possibly this was thought to be a good idea as the attorney who did the conversion was about to be sued by the entity and was a director who now thought he was covered. Unfortunately, the LLC did not provide for advancement and the Court of Chancery held that it was the LLC's operating agreement that controlled the right to advancement. Thus, advancement was denied.

The lesson here is that in converting from one form of entity to another do not assume that the new entity is obligated to fulfill all the obligations that might have been the responsibility of its predecessor. That was the losing party's argument. The problem was that the LLC was not obligated to him and thus, there was no liability to follow upon conversion. If you want the new entity to be liable then say so.