When an internal company dispute turns into litigation, one of the first practical questions is not necessarily who will win on the merits, but who will pay the legal bills while the case is pending. That is why advancement and indemnification provisions matter so much in LLC agreements, board service arrangements, and deal documents.[1] In Energy Founders Fund, LP v. Daskevich, the Texas Business Court recently issued a noteworthy opinion making various determinations regarding a former director’s advancement rights. First, the court held that a company could not avoid advancement obligations to a director by amending internal governance documents at the time of suit or after a suit is filed. Second, the court determined that advancement rights in Texas depend on what the corporate provisions say and the capacity in which the defendant director is sued. Both of the court’s determination provide practical takeaways for companies that employ these types of provisions.
The case in question arose from a disputed drag-along sale involving a Texas limited liability company. In September 2024, a majority of the board approved a sale transaction, but one of the director-members voted against it. After the transaction was approved, another equity holder and others contended that the director had improperly refused, or failed, to take the steps necessary to transfer his membership units as required by the LLC agreement’s drag-along provisions. The equity holder sued the director and his wife, and the live pleading ultimately sought a declaration that the units had transferred automatically upon issuance of the drag-along notice.
An advancement dispute quickly arose in the litigation. The director wanted his fees paid during the suit, so he moved to compel immediate payment. He claimed that his right to advanced fees flowed from the company’s governing documents. More specifically, the Third Amended Company Agreement, which was in effect when the underlying events occurred, contained advancement and indemnification protections for directors. And these provisions mandated advancement if: (1) the director provided a written undertaking to repay advanced fees in the event indemnification later proved unavailable, and (2) the board made a determination that the director had the financial ability to repay.
However, on the same day suit was filed, the company adopted a Fourth Amended Company Agreement attempting to modify the director’s advancement rights. That amendment both eliminated the board and the advancement provisions in the governing documents. When director later requested advancement, the company refused.
The court agreed with the director on two important points. First, it held that the earlier agreement governed because advancement rights are determined by the contractual framework in place when the relevant conduct occurred, not by later amendments adopted after the dispute arises. Second, it held that the company could not rely on the absence of a board determination where the company itself had made that condition impossible to satisfy by eliminating the board.
The director nonetheless still lost the motion seeking advancement of fees. The court held that advancement was unavailable because the claims actually asserted against him were not brought “by reason of” his service as a director. The suit instead arose from his actions as an equity owner. That distinction was significant. Applying a narrow, pleadings-focused approach, the court found that the live dispute concerned conduct of the defendant as an equity holder (in resisting the transfer of his units under the drag-along provisions), not his conduct as a director performing board-level duties, and thus the advancement provisions did not strictly apply.
The practical lessons are significant. Advancement and indemnification provisions should not be treated as boilerplate, particularly in LLC agreements and investor-backed company documents. Once a dispute arises involving a party with potential indemnification or advancement rights, it may be too late in certain instances for the company to go back to review or modify those terms. Companies and their counsel should undertake a review on the front end whether governing documents clearly define covered capacities, covered claims, conditions to payment, and amendment mechanics—and then think through how those terms may play out in future legal disputes. Litigators should also pay close attention to how claims are pleaded, because this decision underscores that the framing of the live petition may determine whether defense costs will be advanced at all.
For companies, boards, investors, and executives, the present is always the best time to revisit LLC agreements, advancement procedures, and indemnification language before a transaction or internal dispute turns those provisions into the next emergency motion.
[1] Advancement concerns interim payment of defense costs while litigation is ongoing; indemnification concerns ultimate responsibility for those costs after the case ends. Texas LLCs retain broad freedom to define the scope of such rights in their governing documents.
