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Albert H. Manwaring IV

Delaware corporate law allows for a corporation to agree in its organizational documents or contracts to advance legal fees and expenses in defense of actions, arising from a person’s service to the company. To encourage quality leadership of companies, the policy under Delaware law is to broadly construe indemnity and advancement provisions in favor of permitting advancement. In its recent decision in Freeman Family v. Park Avenue Landing, C.A. No. 2018-0683-TMR (Del. Ch. April 30, 2019), the Delaware Court of Chancery determined whether a member of a limited liability company was entitled to advancement under the indemnity and advancement provisions of its operating agreement. The operating agreement imposed a duty on the plaintiff to use its best efforts in its capacity as member to either exchange certain real property or have it developed. In the underlying New Jersey suit, for which advancement was sought, the defendant company challenged the plaintiff member’s call rights based on the member’s alleged failure to use its best efforts concerning the property under the operating agreement.

In contrast to the general corporation law context, the fundamental principle underlying an LLC relationship in an operating agreement under the Delaware LLC Act is the freedom of contract—where members are free to arrange their duties and governance as they choose. Overlaying the principle of freedom of contract in the LLC context, however, is the concept that if the parties adopt provisions from the general corporation law, the Court of Chancery may rely on its general corporate law precedent to interpret these provisions.

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