New Hampshire LLC members and managers know all too well that from time to time, they will have to implement LLC business plans that are risky; they know that if these plans fail, they may get sued by non-manager members or by third parties; and they know that defending these suits could cost them a lot of money.

This is why these members and managers, if they get good legal advice, will insist that the operating agreements of their LLCs contain strong indemnification provisions. These provisions will provide that unless the LLC can prove that these risky LLC business plans are outright foolish (technically, “grossly negligent”) or otherwise gravely defective, the LLC itself will cover all of their defense costs and indeed, will even advance these costs to them.

Well-drafted advancement and indemnification provisions in the operating agreements of high-stakes LLCs are unavoidably lengthy and complex. The model indemnification provision I use in my own practice has 20 separate subsections and covers three pages of text. And many of these subsections are likely to be the subject of prolonged and intense among founders of high-stakes LLCs.

The reason is that, quite appropriately:

The managers of these LLCs want their lawyers, in negotiating their operating agreements on their behalf, to obtain for them the strongest possible indemnification protection, including ample indemnification insurance.

The non-manager members want their operating agreement to provide the weakest possible indemnification protections, so as to minimize the potential indemnification cash liability of their LLC.

Thus, for example:

Non-manager members of New Hampshire LLCs will want the indemnification provisions in their operating agreement to provide that managers won’t get any indemnification at all if they have engaged in any management inadequacy, even if entirely unconscious, with regard to the relevant management action or omission.

By contrast, managers will want these provisions to contain pro-manager defined terms — e.g., the term “indemnification,” “exculpation,” and “covered costs.”

Furthermore, because the key indemnification provision in the New Hampshire LLC Act — i.e., section 116 — is arguably anti-indemnitee, they may want their operating agreement to provide that the indemnification provision in their operating agreement will be governed not by the New Hampshire LLC Act, but rather, by the Delaware act and Delaware caselaw. Section 18-108 of the Delaware Act and the caselaw under it are very pro-indemnitee.

The lessons for the members of New Hampshire LLCs are these:

If the business of your LLC involves only modest financial stakes and if the risk that a manager will claim indemnification is small, the LLC ought to contain an indemnification provision, but it can be brief and simple.

However, if your LLC is high-stakes, you’ve got to have a comprehensive indemnification provision. In the case of a high-stakes LLC, this indemnification provision should be highly pro-manager if the managers have the necessary bargaining leverage. Otherwise, it should be highly pro-LLC.

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