Delaware entities generally provide broad advancement and indemnification rights to encourage directors and officers to serve. Absent such protection, managers bear the costs of defense for claims against them arising out of acts they perform in carrying out their company duties. Qualified officers and directors likely would be reluctant to serve or too risk-averse if every official act they performed were subject to litigation that the manager had to pay personally to defend.

At the same time, companies generally regret broad advancement and indemnification rights when such protection inures to the benefit of a manager whose acts of disloyalty, fraud or bad faith allegedly injured the company. The Delaware courts understand the reluctance of companies in these situations to advance funds but at the same time have been consistent in requiring Delaware entities to honor such obligations so as to enforce the underlying policy: encouraging people to serve without fear of personal monetary liability for acts performed by reason of their position or in the course of performance of their duties. The recent case of Fillip v. Centerstone Linen Services, C.A. No. 8712-ML (December 3, 2013), well illustrates the tension, the court’s enforcement of unambiguous advancement provisions to the benefit of people who are accused of acting disloyally, and the consequences of opposing a manager’s request for advancement when the court finds the opposition lacks merit.

Background

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