Hedge Fund Managers Must Exercise Restraint in Deploying Indemnification Provisions

Indemnification provisions are the forbidden fruit in every hedge fund partnership agreement.  On the one hand, they are typically drafted in such a broad fashion as to protect the general partner and its affiliates from seemingly any issue arising out of the partnership, provided that their actions do not constitute gross negligence, willful misconduct, fraud or bad faith.  On the other hand, utilizing an indemnification provision almost always places the general partner and investment adviser’s fiduciary duties at risk.  In a guest article, David T. Martin, a partner at Cummings & Lockwood, explains how courts have analyzed indemnification provisions under Delaware law and offers some fundamental principles that every fund counsel should consider before deploying an indemnification provision.  For more on indemnification, see “Stanley Druckenmiller’s Counsel Provides a Tutorial for Negotiating Exculpation, Indemnification, Redemption, Withdrawal and Amendment Provisions in Hedge Fund Governing Documents,” Hedge Fund Law Report, Vol. 7, No. 5 (Feb. 6, 2014).  For a Cayman Islands perspective, see our two-part series on “Exculpation and Indemnity Clauses in the Hedge Fund Context”: Part One, Vol. 3, No. 50 (Dec. 29, 2010); and Part Two, Vol. 4, No. 1 (Jan. 7, 2011).

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