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Banking & Finance Law Report

Duty of Ohio LLCs to pay the Litigation Expenses of Their Managers, Officers, Employees and Agents

Posted in Corporate Governance, Corporate Law

Both Ohio corporations and Ohio LLCs are permitted (but not required) to enter into indemnity agreements with their officers, directors, managers and employees. But when forming an Ohio corporation or Ohio LLC, entities should carefully consider the differing mandatory indemnity obligations that also apply to each type of organization.  

As we noted in a previous post, the Ohio Supreme Court recently stated in Miller v. Miller that even without an indemnity agreement, Ohio corporations have certain mandatory responsibilities to pay directors’ litigation expenses (provided that a director first submits an "undertaking" to the corporation) under Ohio Revised Code §1701.13(E)(5)(a).

Mandatory indemnity requirements for Ohio LLCs are quite different. Ohio Revised Code §1705.32(C) states that to the extent that a "manager, officer, employee or agent" of a limited liability company has been successful on the merits or otherwise in defense of any action, suit or proceeding related to their status as a manager, officer, employee or agent, such person "shall" be indemnified against expenses that were actually and reasonably incurred. 

This statute does not allow an Ohio LLC to avoid the indemnity by making a statement in its articles of organization or operating agreement. The LLC statute also applies to managers, officers, employees and agents – the Ohio corporate statute described above applies only to directors. In those regards, an Ohio LLC’s mandatory indemnity requirements may seem more burdensome (from the LLC’s perspective) than the indemnity requirements applicable to an Ohio corporation.

The circumstances in which an Ohio LLC would have to pay litigation expenses are, however, less burdensome in other respects. While an Ohio corporation must indemnify litigation expenses as they are incurred, an Ohio LLC does not have to make any payments at all until a case has concluded. Also, Ohio corporations are only repaid by a director if it is proven by clear and convincing evidence in court that the director’s action or failure to act was taken deliberately to harm the corporation or with reckless disregard for the best interest of the corporation. By contrast, an Ohio LLC only has to pay the litigation expenses of a manager, officer, agent or employee if such persons are actually successful in defending the cases brought against them. Finally, while an Ohio corporation is required to reimburse "expenses incurred," an Ohio LLC is only required to reimburse "expenses actually and reasonably incurred."