Venture Capital Alert: Venture Capital & Private Equity Funds Need to Reconsider the Indemnification Rights of its Director Designees


A recent decision of the Delaware Court of Chancery changes the previously prevailing view among venture capital and private equity funds (“Funds”) that in the event of litigation against a Fund’s director designee, serving in his or her capacity as a director on the board of the Fund’s portfolio company, the portfolio company provides full indemnification to the director representative, and the Fund acts as a secondary source providing such indemnification only in the event the portfolio company is unable to pay. Following the decision in Levy v. HLI Operating Company, Inc., absent a contractual agreement to the contrary, the Fund and its portfolio company may be considered co-indemnitors, sharing indemnification responsibilities to the directors serving the portfolio company on behalf of the Funds. The Court explained that: “[a]s a general rule, in absence of contractual language to the contrary, two insurers who insure the same person for the same risk must share the loss.”

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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