Posts in LLC Agreements

Court Of Chancery Applies The Covenant Of Good Faith And Fair Dealing To Fill A Gap

In re Oxbow Carbon LLC Unitholder Litigation, C.A. 12447-VCL (February 12, 2018)

This may be the definitive decision on when and how to apply the covenant in every LLC agreement to act in good faith and deal fairly. Here the “gap” the parties did not address in their LLC agreement concerns the rights of newly admitted LLC members to block a forced sale of the entity.  While that right was addressed in the initial LLC agreement, the terms on which new members were admitted years later were not addressed at that time. The decision is also noteworthy in how it decides to fill the gap the parties left, by deciding what they would have done had they thought about it.

Share

Court Of Chancery Resolves Good Faith Claim In LLC Context

Miller v. HCP & Company, C.A. 2017-0291-SG (February 1, 2018)

This decision resolves the tricky issue of when the provisions of an LLC agreement do not allow “gap filling” so as to permit a claim for violation of the covenant to act in good faith and fairly. Briefly, when the LLC agreement permits the governing body of an LLC to act in its “sole” discretion and otherwise has an effective limit on the exercise of that discretion [such as permitting deals only with outsiders] then there is no reason to limit the discretion by imposing a duty to act in good faith. Of course, that may also require a waiver of fiduciary duties in the LLC agreement.

Share

Court Of Chancery Explains Inspection Rights Under An LLC Agreement

Aloha Power Company LLC v. Regenesis Power LLC, C.A. 12697-VCMR (Dec. 22, 2017)

This books and records decision addresses inspection rights granted under an LLC agreement. It also is useful as a reminder that a mere decline in an entity’s performance is not a sufficient proper purpose supporting inspection.  While the “credible basis” standard for suspecting mismanagement is low, it is not that low.

Share

Court Of Chancery Limits Creditor Standing

Trusa v. Nepo, C.A. No. 12071 (April 13, 2017)

This decision holds that a creditor lacks standing to bring breach of fiduciary duty claims arising out of the management of an LLC. Of course, creditors are better served by drafting the loan documents to protect their rights.

Share

Court Of Chancery Explains Limitation On Fiduciary Duty Claims

CelestialRX Investments LLC v Krivulka, C.A.11733-VCG (January 31, 2017)

This decision explains how a provision in an LLC agreement waiving fiduciary duties is to be applied in the context of conflicted transactions. It is a good summary of Delaware law on that issue. 

It also has an instructive summary of the law governing contract interpretation, albeit under New York law.

Share

Court Of Chancery Requires SLC Member Be A “Director”

Obeid v. Hogan, C.A. 11900-VCL (June 10, 2016)

Under the famous Zapata decision, a board of directors may take control of a derivative case, provided it meets the test set out in that opinion. But may such a board, or the managers in an LLC, delegate that authority to a non-member? This decision says that delegation is not appropriate for an LLC with a management structure similar to a corporation or in an LLC that limits the delegation authority of it member-managers.

Share

Court Of Chancery Explains Claims Available To LLC Members

CMS Investment Holdings LLC v. Castle, C.A. No. 9468-VCP (June 23, 2015)

This is an interesting decision because it explains what direct claims are available to investors in an LLC. More ›

Share

Court Of Chancery Orders Dissolution Despite LLC Agreement Bar

Meyer Natural Foods LLC v. Duff, C.A. 9703-VCN (June 4, 2015)

This decision may answer the question of whether an LLC Agreement’s bar of dissolution without a member’s consent trumps the statutory remedy of court-ordered dissolution when the entity’s purpose cannot be achieved any longer. It concludes that dissolution is proper under the facts presented where the objecting member really had no good reason to object.

Share

Court Of Chancery Permits Equitable Dissolution

In re Carlisle Etcetera LLC, C.A. 10280-VCL (April 30, 2015)

In this precedent-setting decision, the Court upholds the right of an assignee of an LLC interest to petition for its dissolution. The LLC Act itself limits a dissolution petition to managers or members, but drawing on precedent upholding the broad powers of a court of equity, the Court holds that an equitable remedy exists that permits an assignee to also seek dissolution.

Share

Court Of Chancery Explains LLC Agreement

Hampton v. Turner, C.A. 8963-VCN (April 29, 2015)

A repeat issue with using the LLC form of entity is trying to figure out what the LLC agreement means. This decision is another example of the Court sorting through conflicting interpretations that must have surprised at least one of the parties.  As such it is a useful, if limited by its facts, primer on proper interpretation.

Share

Court Of Chancery Explains Amendment-By-Merger Doctrine

In re Kinder Morgan Inc. Corporate Reorganization Litigation, C.A. 10093-VCL (November 5, 2014)

This decision explains the Amendment-By-Merger Exception that is found in alternative entity agreements. The purpose of the Exception is to be sure that a merger agreement that has the affect of amending the operating agreement gets the same vote, including class votes, that an equivalent amendment to the operating agreement would require under the terms of the operating agreement.  Such clauses try to prevent a merger agreement from being used, as is done for corporations, to amend the basic deal set out in the parties' agreement.

The decision also has an interesting discussion of what constitutes an amendment to an operating agreement, a point that is not always clear.

Share

Court Of Chancery Holds LLC Agreements Are Binding Even If Not Signed

Seaport Village Ltd. v. Seaport Village Operating Company LLC, C.A. 8841-VCL (September 24, 2014) In an opinion that should come as no big surprise, the Court of Chancery holds that the parties to an LLC agreement, including the LLC, are bound by the terms of that agreement even if they have not signed a written agreement. After all, that is what the statute says expressly.  In short, there is no statute of frauds that requires a writing to be bound to an agreement in this context. Share

Court Of Chancery Explains Member Fiduciary Duty

Xcell Energy and Coal Company LLC v. Energy Investment Group LLC, C.A. No. 8652-VCN (June 30, 2014) The question of whether the members of an LLC owe fiduciary duties to the other members  is dependent on the terms of the LLC agreement. When there is a manager designated by the LLC agreement, the members as members will not ordinarily have fiduciary duties. Share

Court Of Chancery Explains Covenant Application In LLC Agreement

Allen v. El Paso Pipeline GP Company LLC, C.A. No. 7520-VCL (June 20, 2014) One of the more difficult tasks a court faces is the determination of what complicated LLC agreements mean in terms of dealing with conflict of interest issues.  Considering that LLCs and LLPs are used in large part to permit such conflict deals that might not pass muster in a corporate form, this is a common issue.  First, the Court needs to deal with the form of conflict resolution provided for by the governing agreement. Here, that as not too difficult given the broad discretion given to the conflict committee involved. More difficult, however, is considering if the covenant of good faith and fair dealing is involved to invoke some right the plaintiff can use to assert a claim.  That decision boils down to seeing if there is some gap the covenant might fill in terms of what the operating agreement provides. Here, the Court found that the agreement clearly covered the transaction involved and left no room for some covenant duties to be asserted.  The analysis is a model for others to follow and illustrates how narrow the covenant really is. Share

Court Of Chancery Enforces Manager Rights In LLC

2009 Caiola Family Trust v. PWA LLC, C.A. 8028-VCP (April 30, 2014)

The language of an LLC agreement is all important in determining what it permits. This decision illustrates that point by holding that, under the LLC agreement involved, a 90% owner cannot remove the LLC manager.  This seems counterintuitive.  But that is the lesson of LLC law - you get what you agree to even if it is odd.

Share