Advancement rights assure directors and officers that if they are sued for conduct arising out of their company service, the company will pay their attorney fees and costs as they are incurred. Without advancement rights, many people would not serve out of fear that their personal assets would be depleted in defending suits based on their conduct as directors or officers. For that reason, Delaware courts regularly enforce advancement rights, even after a finding of criminal guilt at the trial level, until the judgment is final and all appeals are exhausted. Nonetheless, mandatory advancement rights apply only if provided by charter, bylaw or contract. The recent case of Grace v. Ashbridge LLC, C.A. No. 8348-VCN (Del. Ch. Dec. 31, 2013), provides a cautionary tale that advancement rights that may have existed when the entity was a corporation do not necessarily survive intact when the entity converts to a limited liability company.
Background
Plaintiff Charles Grace was the co-trustee of a family trust that held shares of a Delaware corporation that converted into defendant Ashbridge Partners LLC, a Delaware limited liability company. Defendant Ashbridge Partners LLC changed its name to Ashbridge LLC. Grace also served as chair, a member of the governing boards and a member or shareholder of Ashbridge LLC and its predecessor, Ashbridge Corp. Upon the filing of an accounting in a Pennsylvania court by the trustees of the family trust, beneficiaries of that trust filed objections to that accounting based upon alleged breach of fiduciary duty and diminution in the value of the trust due to imprudent investments, improper loans and self-dealing. The Court of Chancery noted that the beneficiaries’ objections to the accounting did not refer to any act taken by Ashbridge LLC. Grace nonetheless asserted entitlement to advancement from Ashbridge LLC for his expenses in responding to the objections to the accounting, a failed mediation, and his Court of Chancery action seeking advancement.
