An LLC’s Operating Agreement can modify basic functions of LLC members or managers. This includes indemnification clauses which may require the LLC to indemnify members or managers against lawsuits. In Branin v. Stein Roe Inv. Counsel, a disagreement arose when the LLC amended the indemnification provision. Unlike the old provision, the new indemnification rules prevented an employee from being indemnified in certain circumstances. That employee, Francis Branin, filed suit arguing that his original indemnification rights should not be replaced by the new amendment. The Delaware Court of Chancery agreed.
In this case, Branin was being sued by his former employer for soliciting former clients. After 10 years of litigation, the charges were eventually dismissed. In this interim period, the LLC which Branin worked for changed their indemnification clause in the operating agreement. This second version of the indemnification clause was much more stringent, and would not cover Branin’s $3million legal fees. The question then became the following: Does the second version of the indemnification preclude the indemnification allowed under the original clause?
The court decided that the first agreement included an enforceable indemnification clause. Also, after looking to previous cases involving indemnification clauses, the Delaware Court of Chancery ruled that the right to be indemnified vests when the initial lawsuit was filed. Due to Branin’s right being vested under the first version of the indemnification provision, the second version had no effect. This shows that LLCs cannot rid their responsibility to indemnify once the provision has been triggered. Therefore, LLCs should design these types of clauses carefully and not blindly accept a boilerplate indemnification clause which may expose the LLC to more liability than desired.