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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Showing 86 posts in LLC Agreements.
Chancery Allows Fiduciary Duty Claims to Proceed against Minority Members Who Blocked Financings in Order to Bankrupt Company and Facilitate Unfair Asset Purchase
Where parties to an LLC agreement do not unambiguously disclaim fiduciary duties, then Delaware law provides by default that managers owe traditional fiduciary duties to the entity and its members. The corporate law principles relating to fiduciary duties of controlling shareholders also apply, including that a minority member who exercises actual control may owe fiduciary duties. In this decision, the Court held that plaintiffs, the majority members of an LLC, adequately alleged that minority members exercised contractual blocking rights in a manner that gave them actual control over financing decisions and then used that control to implement in bad faith a scheme to enable the minority members to acquire the LLC’s assets on the cheap. With those allegations, the Court sustained a non-exculpated claim against the minority members for direct and derivative contract- and fiduciary-based claims. More ›
Chancery Rejects Challenge to Financing Made Open to All Investors, Reasons the LLC Operating Agreement Allows Self-Interested Conduct, so any Claims Must Assert Bad Faith
Verdesian Life Sciences, LLC is an agricultural company focused upon rolling up various companies with proprietary plant health technologies. All members of the Board of Managers of Verdesian were appointed by Paine Schwartz Partners, LLC (“Paine”), a private equity firm that owned over seventy percent of the Class A Units of the company. Paine also benefited from a management agreement that entitled it to receive certain management fees tied to acquisitions. The LLC Operating Agreement required the Managers to perform their duties in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of Verdesian. However, the Operating Agreement also allowed Managers and Members to “consider only such interests and factors as such Manager or Member desires, including its, his or her own interests” when facing discretionary decisions. The Court of Chancery concluded that the Operating Agreement “directs the Managers to operate in good faith and with ordinary care and effectively exculpates Managers for conflicted, negligent and other detrimental decisions … so long as taken in good faith.” More ›
Delaware courts generally respect contractual forum selection provisions. When it comes to Delaware LLCs, however, the Delaware statute expressly precludes a non-managing member from waiving its right to a Delaware forum for proceedings involving the LLC’s internal affairs. 6 Del. C. § 18-109(d). And, in general, any waiver of rights must encompass knowledge of the right and clearly expressed intent to relinquish it. This case discusses the interplay between these rules. More ›
Chancery Refuses to Reform Operating Agreement to Impose Class Voting Requirements Not Contained in the Plain Language of the Agreement
The Court of Chancery held that plaintiff common unitholders of an LLC failed to state a claim for breach of the operating agreement and failed to adequately plead reformation in connection with their challenge to an asset sale that resulted in the senior preferred unitholder receiving the entirety of the sale consideration. Applying fundamental tenets of contract interpretation, the Court reasoned that the plain language of the operating agreement only required a majority vote of the combined total of preferred and common unit holders, and not a majority vote of each separate class of preferred and common unitholders, to approve the asset sale. The Court also rejected the plaintiffs’ claim for reformation to impose a separate voting class requirement that was contained in a term sheet that preceded the operating agreement, but was ultimately omitted from the final operating agreement. In analyzing the reformation claim, the Court relied upon West Willow-Bay Court, LLC v. Robino-Bay Court Plaza, LLC, 2009 WL 3247992 (Del. Ch. Oct. 6, 2009), in which the plaintiffs unsuccessfully sought reformation based upon a unilateral mistake that a contract amendment did not comport with a prior memorandum of understanding. The Court found that the common unitholders reformation claim was insufficient for the same reasons relied upon by the Court in West Willow-Bay: (i) the term sheet was not binding; (ii) even a cursory review of the voting provision in the operating agreement would have put the plaintiffs on notice that it differed from the term sheet; and (iii) it was not apparent that the voting provision in the operating agreement was unacceptable to the plaintiffs. Accordingly, the Court dismissed both the plaintiffs’ claim for breach of the operating agreement and their alternative claim for reformation.
This case again illustrates the contractual nature of Delaware alternative entities and the important interpretive role the courts perform construing alternative entity agreements when internal governance disputes arise. The case arose out of the parties’ competing requests for declaratory judgment regarding Caiman Energy II, LLC’s (“Caiman”) limited liability agreement (“LLC Agreement”). The Defendants, including Caiman and EnCap Capital Management (“EnCap”), argued that the provisions of the LLC Agreement grant EnCap plenary power with respect to a Qualified IPO, including the ability to change the definition of a Qualified IPO and to modify the procedures the contracting parties would otherwise have to take relating to a Qualified IPO. EnCap asserted that it could implement an Up-C IPO using its authority to effect a Qualified IPO. An Up-C IPO refers to a transaction whereby a limited liability company (“LLC”), which is taxed as a pass-through entity, performs an IPO through a holding company that has an interest in the LLC. Plaintiff Williams Field Services Group, LLC (“Williams”) contended that the Encap proposed Up-C IPO was inconsistent with the terms of the LLC Agreement. More ›
Chancery Construes LLC Agreement as Imposing Only the Managerial Duty to Act in Good Faith and Dismisses Claims for Failure to Plead Bad Faith
Under Delaware law, the managers of a limited liability company owe the entity and its members the traditional common law fiduciary duties of care and loyalty. But parties may eliminate or modify those duties under the LLC’s operating agreement and impose contractual duties instead. When they do so, Delaware courts will analyze any challenged conduct of the manager against those contractual duties. Here, the Court of Chancery found the managers’ contractual duty to be a narrow one: act with a good faith belief that their conduct was in or not opposed to the LLC’s best interests. More ›
Court of Chancery Finds Agreements Unenforceable for Lack of Assent, Dismisses Remaining Claims for Lack of Personal Jurisdiction
Parties to a contract must provide evidence of an overt manifestation of assent for a contract to be enforceable under Delaware law. Upon remand from the Delaware Supreme Court, the Court of Chancery found such assent to be lacking and dismissed the remaining claims for lack of personal jurisdiction. More ›
Plaintiff was assigned a membership interest in the defendant, a Delaware limited liability company, and sought to exercise books and records inspection rights. But the LLC’s operating agreement circumscribed its members’ ability to transfer their interests, stating that any disposition without prior written consent of all members was “null and void,” and otherwise authorized only members to inspect books and records. According to the Court of Chancery, because the transferor never received prior written consent for the transfer to plaintiff, the transfer was void under the LLC agreement, plaintiff was not a member of the LLC, and plaintiff had no right to inspect the LLC’s books and records. In addition, the Court relied on the Delaware Supreme Court’s decision in CompoSecure, L.L.C. v. CardUX, LLC to find that the plaintiff could not rely on equitable theories to validate the transfer. According to the Court, equity can only validate voidable acts, not void acts. And the LLC agreement’s plain language in this case rendered the attempted transfer void, even if it would have been only voidable under common law.
Delaware law permits parties conducting their business as limited liability companies to include mandatory arbitration or forum selection clauses in their LLC agreements, even those naming a forum outside of Delaware. And the State’s public policy supports enforcing contracts, including forum selection clauses, unless specifically prohibited by statute or upon a showing of fraud or overreaching. There is an important statutory exception in this context. Under Delaware’s LLC statute, 6 Del. C. § 18-109(d), other than for arbitration, a non-managing member of an LLC cannot waive its right to sue in the Delaware courts for matters relating to the LLC’s “organization or internal affairs.” More ›
Section 109 of the Delaware Limited Liability Company Act is an “implied consent” statute. It provides for personal jurisdiction in Delaware over (i) “managers” named in the governing LLC agreement, and (ii) persons who otherwise “participate materially” in the LLC’s management. 6 Del. C. § 18-109(a). This recent decision is notable for holding that, based on the allegations, certain officers who performed important tasks for the LLC did not “participate materially” in its management for Section 109 purposes. The Court pointed to precedent holding that “material participation” for Section 109 purposes requires actual control or a decision making role. Here, one defendant was alleged to be a former manager who retained a “vice chairman” title and engaged a financial advisor on the LLC’s behalf. The other defendant at-issue served as the company’s President and CEO and had important day-to-day responsibilities. Such allegations fell short, however, in the circumstances alleged, where the plaintiffs’ complaint and arguments emphasized that, another defendant, who was designated as the “manager” in the governing LLC agreement, exercised “absolute control and discretion” and acted as “emperor, supreme leader and dictator for life.” The Court reasoned such contentions precluded a finding that the two officers possessed decision making authority of their own. Accordingly, they were not subject to personal jurisdiction under Section 109.
Superior Court CCLD Finds Court of Chancery Lacks Jurisdiction Over Dispute, Despite Forum Selection Clause in Agreement
Delaware law is clear that, while Courts will generally respect parties’ contractual choice of forum, a forum selection clause cannot confer jurisdiction or venue where it otherwise is not available. The contract at issue in this action, which arose out of stock purchase agreement in which plaintiff agreed to convey all of its issued and outstanding shares of a subsidiary to defendant, provided for exclusive jurisdiction in the Court of Chancery, or if the Court of Chancery lacked subject matter jurisdiction, the United States District Court for the District of Delaware. If the District of Delaware lacked jurisdiction, the venue would be in “any court of competent jurisdiction sitting in the State of Delaware[.]”
When the plaintiff filed suit in the Complex Commercial Litigation Division of Delaware’s Superior Court, the defendant argued that the parties’ dispute regarding post-closing tax matters should instead be filed in the Delaware Court of Chancery pursuant to 6 Del. C. § 18-111 (providing subject matter jurisdiction in the Court of Chancery to interpret and enforce LLC agreements and “any other instrument, document, agreement or certificate contemplated by … this chapter”). More ›
Under Section 18-802 of the Delaware LLC Act, the Court of Chancery may dissolve an LLC when it is “not reasonably practical” for it to carry on its business in conformity with its LLC agreement. This decision explains when that might occur, such as when the defined purpose becomes impossible to fulfill.
This is an important decision because it holds that an LLC agreement may make a contract void for failure to comply with the required provisions in the LLC agreement to enter into such a contract. If the contract is “void” it cannot be later ratified by implication when the parties follow the terms of the contract. Thus, when contracting with an LLC, it is necessary to read the actual LLC agreement to see if it requires any conditions to entering into a contract.
This is an interesting decision because it holds that an entity may bring a fraudulent inducement claim for statements made before it was formed when the statements caused it to be formed for a new business. It is also interesting because it awards attorney fees for lying during a trial.
When multiple LLC agreements for several entities contain provisions that relate across the entities, deciding how to interpret those provisions is a potential problem. As this decision points out, the separate identities of the entities need to be respected. Nonetheless, when the LLC agreements create contract rights, those rights can be enforced, just as a stockholders’ agreement can be enforced to require action by the signatories to the agreement.