Advancement Denied Due to Gap in Documents When LLC Converted to Corporation
In Bernstein v. Tractmanager, Inc., 2007 WL 4179088 (Del. Ch., Nov. 20, 2007), read opinion here, the Chancery Court determined that the bylaws of a corporation that had formerly been an LLC, were not specific enough to provide advancement for claims that arose during the period that the entity was an LLC. The bylaws should have been more clear if that was what the parties had intended. Here is the summary of the case from the court's opinion:
This advancement action arose after the conversion of a limited liability company into a corporation. In that context, the court is asked to determine whether the corporation’s bylaws providing a mandatory right of advancement to its officers and directors should be read to apply equally to the former managers of the LLC, even where the LLC’s operating agreement provided for indemnification but not for mandatory advancement.
The court concludes that the right to indemnification or advancement for claims that arose during the life of the LLC continues to be governed by the terms of the old operating agreement. Thus, to the extent a claim is made against an officer or director of the corporation arising out of actions taken pre-conversion in his or her capacity as an officer or manager of the LLC, he or she has no mandatory right to advancement with respect thereto. While rights created by the LLC’s operating agreement may be enforced against the corporation into which the LLC was converted, the corporation’s bylaws do not govern the rights of former officers or managers of the LLC.
