Advancement and indemnification rights are vital in attracting the best and brightest individuals to serve as managers of Delaware entities. Those rights are meant to provide managers of Delaware entities comfort when accepting positions that often lead to being named in litigation. In the limited liability company context, a manager’s advancement and indemnification rights are often derived from the entity’s operating agreement. And seeing as Delaware courts strive to enforce the express terms of an agreement, advancement and indemnification provisions must be drafted with precision. As discussed below, contractual limitations and qualifications on advancement and indemnification rights will be interpreted in a way that gives meaning to all terms in the agreement.
In Harrison v. Quivus Systems, C.A. 12084-VCMR, the Delaware Court of Chancery was confronted with a matter wherein the plaintiff sought advancement of expenses arising from litigation brought against him by Quivus Systems, for actions the plaintiff allegedly took while acting as CEO of Quivus. The Quivus operating agreement required the company, to the fullest extent allowed under Delaware law, to advance and indemnify expenses to its present and future CEO. John Harrison was removed as CEO of Quivus on July 1, 2014. Just over a year later, a derivative action was filed on behalf of Quivus in the Superior Court of the District of Columbia alleging a variety of claims against Harrison in his role as CEO, including that Harrison mismanaged and looted the assets of Quivus. Harrison filed an answer and counterclaim, alleging that Quivus’ financial condition was not the result of Harrison’s purported mismanagement. Subsequently, Harrison made a demand on the company for advancement of certain expenses incurred in the D.C. action, including his defense of all but one count of the derivative complaint and also the expenses incurred in prosecuting his counterclaims. Following Quivus’ rejection of his demand for advancement, Harrison filed a complaint in the Court of Chancery.
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