In September 2013, the Delaware Court of Chancery ruled in Costantini, et al. v. Swiss Farm Stores Acquisition LLC that a provision in an LLC agreement that reflects the indemnification language of the Delaware General Corporation Law (DGCL) is interpreted the same way to allow indemnification to a prevailing manager.
Earlier, the court had dismissed the case by Swiss Farm Stores Acquisition LLC (Swiss Farm) against Messrs. Costantini and Kahn for breach of fiduciary duty, because the applicable statute of limitations had run; the dismissal was appealed and affirmed by the Delaware Supreme Court. As a result, Messrs. Costantini and Kahn in this case sought indemnification for their fees and costs incurred in the fiduciary duty litigation.
Sections 145(a) and (b) of the DGCL generally permit Delaware corporations to indemnify their officers, directors, employees and agents in third-party or derivative actions, as long as such person acted in good faith. Section 145(c) generally requires Delaware corporations to indemnify any corporate director or officer who is made a party to a proceeding by reason of his or her service to the corporation and has achieved success on the merits or otherwise.
Limited liability companies are “creatures of contract,” and Delaware law provides great flexibility and freedom to determine the rights and responsibilities of its members. In this case, Swiss Farm’s LLC Agreement mirrored the permissive and mandatory indemnification rights in the DGCL for members of the boards of managers, officers, employees or agents. As a result, since Mr. Costantini was a member of the board of managers of Swiss Farm, he was entitled to the indemnification benefits provided for in the LLC Agreement. Mr. Kahn, however, was not within the class of indemnitees covered by the LLC Agreement, and therefore he was not entitled to indemnification.