Recommended Alerts

Sign Up For Alerts

Large IRAs and High-Income Retirement Savers Targeted by Amendment to Budget Reconciliation Bill

Last week, Richard Neal (D-Mass), chairman of the House Committee on Ways and Means, unveiled an amendment to help fund the $3.5 trillion budget reconciliation legislation that is currently under consideration in Congress. The Neal amendment would make dramatic changes to the rules governing retirement plans for certain high-income taxpayers by imposing new asset limitations and prohibitions. It would also require distributions and IRA contribution limitations for certain individuals with retirement savings over $10 million, require distributions of Roth balances in excess of $20 million and end the practice of so-called “back-door” Roth conversions. These changes aim to effectively prohibit mega IRAs, which were the subject of extensive press reports earlier this year following ProPublica’s revelation of multiple large IRAs, including Peter Thiel’s $5 billion mega-Roth IRA.

Read More

Delaware Chancery Court Offers a Partial Solution to Recent Decisions that Adversely Affect Private Equity Fund Indemnification

Time to Read: 2 minutes Practices: Private Funds, Corporate & Securities Litigation, Private Equity, Securities & Public Companies

Printer-Friendly Version

A recent Delaware decision provides guidance to private equity organizations seeking to avoid co-indemnification obligations with the sponsor's portfolio company for an investment professional who is serving as a director or officer of the portfolio company. 

In Sodona v. American Stock Exchange LLC, the Chancery Court provided a partial roadmap to address an earlier Delaware decision that disrupted settled expectations concerning the respective obligations of a private equity fund and its portfolio company to pay advancement and indemnification to, or on behalf of, a principal of the private equity fund serving as a director or officer of the portfolio company. This decision offers some relief from the Chancery Court's decision in Levy v. HLI Operating Co., which raised the very real prospect that, in the absence of appropriate contractual provisions at the private equity organization and/or portfolio company levels, a portfolio company could successfully take the position that the private equity fund or its affiliates is a "co-indemnitor" (along with the portfolio company) and, as such, is obligated to indemnify each of the private equity fund's board designees at the portfolio company on a "co-equal," or pro rata, basis with the portfolio company.

In particular, in Sodona, the Chancery Court enforced a contractual prioritization term providing that a parent corporation's obligations to indemnify directors serving at a subsidiary, at the request of the parent, would only take effect if the subsidiary were financially or legally unable to make an advancement or indemnification payment.  Otherwise, the subsidiary is obligated to indemnify on a primary basis. The Court held that this provision was sufficient to permit the parent to avoid co-indemnitor status with its subsidiary. 

Takeaways from Levy and Sodona
Certain takeaways from the recent Delaware decisions include the following:

  • Absent clear contractual provisions, the Delaware courts will not presume that a private equity organization's obligation to indemnify its director designees is secondary to the portfolio company's obligation to indemnify the directors.
  • Absent such contractual clarity, a private equity organization is at risk of being required to pay indemnification to its director designees despite a portfolio company's indemnification obligation to the designees.
  • There are several reasonably efficient alternative solutions for the problem raised by Levy v. HLI. Op. Co., which, as a practical matter, do not require extensive review and amendment of each portfolio company-level or fund-level agreement.
  • To effectively address the issue raised by these cases, it is important to carefully consider a private equity organization's particular circumstances and the options available to the firm.

Private equity funds and other companies should take notice of the Sodona decision. The articles "Director and Officer Liability: Delaware Reinforces the Limits on Indemnification Claims" and "Advancement and Indemnification Update: Sodona v. American Stock Exchange" by Ropes & Gray partners Randall Bodner and Peter Welsh further describe each of the above cases and potential solutions to the issues that can arise from this developing area of the law.

Contact Information
If you would like to learn more about these recent Delaware decisions, please contact your legal advisor at Ropes & Gray or a member of our Private Investment Funds team.

Printer-Friendly Version

Cookie Settings