Posts in LLCs

Chancery Denies Bid to Dismiss Derivative Claims Amid Alleged “Gamesmanship” Regarding Composition of LLC’s Board of Managers

Schoenmann v. Irvin, C.A. 2021-0326-SG (Del. Ch. Jun. 2, 2022)
After the plaintiff filed his direct and derivative claims in April 2021, the defendants – the company and its controller – circulated in June 2021 a written consent purporting to change the composition of the company’s board of managers as of January 2021. The defendants then moved to dismiss the derivative claims on the grounds that the plaintiff did not plead demand futility with respect to the purported new board. Based on the plaintiff’s allegations, the Court agreed with the plaintiff that it was reasonably inferable that the consent was backdated. But the Court ultimately decided the matter on a different ground: even if the board composition validly changed in January 2021, equity would not reward the defendants’ gamesmanship in delaying notice of the change. Because it was reasonable to infer that the change was made in anticipation of the plaintiff’s derivative claims and to thwart them, and the plaintiff properly pleaded demand futility with respect to the board of which he had notice, the Court allowed those claims to proceed.

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Chancery Dismisses Contract, Dissolution, and Direct Claims, But Upholds Derivative Claim for Alleged Transfer of Funds Between Medicinal Marijuana Entities

BET FRX LLC v. Myers, C.A. No. 2019-0894-KSJM (Del. Ch. Apr. 27, 2022)
A minority member of a limited liability company had invested $8 million in the LLC. The LLC owned a majority interest in an entity that held a Pennsylvania medical marijuana grower and processor license. In addition to obtaining its membership interest, the plaintiff’s investment also secured appointment rights for one of the three manager positions, rights to participate in board decisions, and a veto right over sixteen types of actions. Ultimately, the plaintiff brought a series of claims in the Court of Chancery, alleging that the other members and their principals had funneled the plaintiff’s investment into a company that they owned—an Ohio-based medical marijuana company—via intercompany loans that were not being repaid and coverage of other corporate expenses. Defendants sought to dismiss all claims. More ›

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Chancery Requires Fuller Disclosure for Receiver Appointment

In re VBR Agency LLC, C.A. No. 2022-0328-JTL (Del. Ch. Apr. 20, 2022)
Petitioners often call upon the Court of Chancery to appoint receivers to settle a company’s business. As this decision describes, “[i]n recent years, the members of the court have been forced to address actions taken by custodians or receivers who obtained appointments on … scant records. In some of those situations, the custodian or receiver has taken action that caused the court to question whether the appointment should have been made, or the court has learned information that might have caused the court to decline to make the appointment in the first instance. … Delaware has a significant interest in ensuring that questionable individuals do not use judicial proceedings to gain control over Delaware entities. Delaware likewise has an interest in ensuring that its entities are not used as vehicles for improper schemes.” Here, considering these concerns, the Court declined to make an appointment, first requiring additional information beyond that in the petition. The petitioner sought an appointment allegedly for the purpose of litigation involving a defunct LLC. The Court viewed as material additional information regarding the regulatory or legal histories of the receiver and any affiliates, as well as the receiver’s specific plans for the LLC beyond the general purposes stated in the petition.

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Chancery Enforces LLC Members’ Right to Approve Amendments to LLC Agreement

Zohar III Ltd. v. Stila Styles LLC, C.A. No. 2021-0384-JRS (Del. Ch. May 26, 2022)
This decision arises out of control disputes involving the portfolio companies of the entity Zohar III – here, the limited liability company Stila Styles LLC. Stila Styles’ Manager had approved via written consent a transaction that purported to create new units, with those new units controlling who served as the LLC’s Manager. The LLC agreement did authorize the Manager to create new units. But it generally authorized amendment or modification of the agreement “only by the Members.” Because the transaction effectively amended the LLC agreement by taking away certain Members’ rights respecting the Manager role, and the Manager did not obtain the Members’ approval, the Manager’s written consent approving the transaction was invalid and the transaction was void.

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Non-Resident Asset Managers Found Not To Be “Acting Managers” Subject To Personal Jurisdiction Under Delaware LLC Act

Dlayal Holdings, Inc. v. Gracey, C.A. 2020-1070-LWW (Del. Ch. Dec. 27, 2021)
Under 6 Del. C. § 18-109(a), serving as the manager of a Delaware LLC constitutes consent to be served through the company’s registered agent for all Delaware proceedings “involving or relating to the [company’s] business ... or a violation by the manager ... of a duty” to the company or its members. By its terms, the statute applies not only to formal managers identified in the company’s governing documents but also to acting managers – that is, persons who “participate[] materially in the management” of the company. This case clarifies what constitutes material participation under § 18-109(a). More ›

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Chancery Dismisses Complaint Against LLC Directors Based on Specific Terms of the Operating Agreement and Laches

Erisman v. Zaitsev, C.A. No. 2020-0903-JRS (Del. Ch. Dec. 29, 2021)
Under Delaware law, parties to limited liability company agreements have the freedom to alter or eliminate fiduciary duties, and to eliminate liability for breaches of contractual and fiduciary duties. Here, the Court of Chancery dismissed LLC members’ complaint because, among other reasons, the Operating Agreement (i) replaced default common law fiduciary duties with a contractual standard that limited director liability to claims in which directors did not rely on the terms of the Operating Agreement in good faith; and (ii) it further provided that the directors were not liable for money damages unless they failed to act in good faith, engaged in intentional misconduct or a knowing violation of the law, derived an improper personal benefit, or breached their duty of loyalty to the company. More ›

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Applying Plain Contract Language, Chancery Awards $147 Million in Damages to Start-Up Company for Breach of Joint Venture Agreement

Symbiont.io, Inc. v. Ipreo Hldgs., LLC, C.A. No. 2019-0407-JTL (Del. Ch. Aug. 13, 2021)
Delaware is a pro-contractarian state.  When fashioning an award for a breach of contract, a Delaware court can consider: (1) the bargained-for damages remedy; (2) whether at the time of contracting the damages from a breach would be uncertain or incapable of accurate calculation; and (3) whether the amount contractually called for would be unconscionable. More ›

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Chancery Finds Equitable Defenses Bar LLC Dilution and Redomestication Claims, and Holds it Lacks Jurisdiction to Dissolve a Foreign Entity

In re Coinmint, LLC, C.A. No. 2019-0983-MTZ (Del. Ch. Aug. 12, 2021)
This decision illustrates that, in specific circumstances, the equitable defenses of waiver, acquiescence, and estoppel may preclude a party from challenging otherwise voidable actions. In addition, deciding an issue of first impression, the Court held that it lacks subject matter jurisdiction to equitably dissolve a non-Delaware business entity. More ›

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Chancery Dismisses Claims Relating to Proposed Financing of Italian Soccer Club

Feldman v. AS Roma SPV GP, LLC, C.A. No. 2020-0314-PAF (Del. Ch. July 22, 2021)
In Feldman, plaintiffs were minority members of a Delaware limited liability company that held a controlling interest in a premier Italian soccer club. The LLC’s managing member and its controllers and associated entities sought to exit their control investment in the club. A sales process stalled during the coronavirus pandemic. The controllers called for additional capital from existing members on a pro rata basis, either through new financing or conversion of debt, in exchange for units with priority status and liquidation preferences. The controllers approved a related amendment to the LLC agreement. Due to insufficient interest from members, the controllers instead proposed a financing transaction that included member loans with certain preferences, such as premium payments in the event of the company’s sale. Eighty percent of membership interests participated in the loans. Soon after, a sale of the club was announced. More ›

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Chancery Addresses Claims Arising Out of LLC Dispute Involving Parallel Venture

Largo Legacy Group, LLC v. Evens Charles, C.A. No. 2020-0105-MTZ (Del. Ch. June 30, 2021)
In this LLC dispute, an investor in a hotel development company alleged that the company principals breached the operating agreement and their fiduciary duties by implementing a fraudulent scheme whereby a parallel venture, that they owned and controlled, was provided with certain adjacent land and company funds in a manner that improperly advantaged the parallel venture and the principals while harming the plaintiff. The plaintiff also alleged that the defendants had breached their fiduciary and contractual duties by refusing to provide it with financial information that it was entitled to under the operating agreement. The defendants moved to dismiss. The Court of Chancery, finding, as an initial matter, that laches did not block the claims, held that while plaintiff had failed to plead its fraud claim with adequate particularity, it had properly pled both its breach of fiduciary duty claim in connection with the alleged scheme and its breach of contract claim in connection with the company’s refusal to provide certain financial information. In addition to dismissing the fraud claim, the Court also dismissed plaintiff’s duplicative breach of fiduciary duty claim relating to the withheld financial information.  More ›

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Delaware Court of Chancery Applies Direct/Derivative Distinction In Voting Context

Clifford Paper, Inc. v. WPP Investors, LLC, 2021 WL 2211694 (Del. Ch. Jun. 1, 2021)
The disenfranchisement of an investor with voting or consent rights often is considered to be a direct harm, thus permitting the investor to bring direct claims. Sometimes, however, the alleged harm from the violation of voting rights is to the company, and it does not directly affect the investor. The Court of Chancery’s recent decision in Clifford Paper, Inc. v. WPP Investors, LLC, 2021 WL 2211694 (Del. Ch. Jun. 1, 2021), illustrates that, in such instances, a court applying Delaware law may treat those claims as derivative. More ›

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Implied Covenant of Good Faith and Fair Dealing Saves Employee’s Claim for Improper Termination Under Company’s LLC Agreement

Smith v. Scott, C.A. No. 2020-0263-JRS (Del. Ch. Apr. 23, 2021)
The Delaware LLC Act provides that fiduciary duties may be expanded or limited by the provisions of an LLC agreement. If the agreement is silent, then traditional corporate fiduciary duties apply. However, if the agreement unambiguously disclaims fiduciary duties, then the only duties that exist are those specified contractually in the LLC agreement and the implied covenant of good faith and fair dealing.  More ›

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Chancery Finds It Reasonably Conceivable that Judicial Dissolution May Be Warranted When LLC’s Deadlock Provision Failed

Seokoh, Inc. v. Lard-PT, LLC, C.A. No. 2020-0613-JRS (Del. Ch. Mar. 30, 2021)
On application from a member or manager of an LLC, the Court of Chancery may dissolve an LLC whenever it is not reasonably practicable for the LLC to carry on the business in conformity with the LLC agreement. Several factors may suggest a lack of reasonable practicability, including that the members are deadlocked at the board level, the operating agreement gives no means for navigating around the deadlock, and due to the financial conditions of the LLC, there is effectively no business to operate. In this case, the Court held that the petitioner adequately pled board deadlock and ongoing negative financial performance due to the parties’ inability to agree. In rejecting the respondent’s argument that the parties’ “I cut; you choose” deadlock procedure precluded a judicial decree of dissolution, based on the pleaded facts, the Court found that it was reasonably conceivable that the deadlock procedure had broken down irretrievably. Because the contractual procedure did not mandate a price, pricing formula, or a closing timeline and the plaintiff adequately alleged that the parties were not dealing with each other in good faith and in a commercially reasonable manner, it was reasonably conceivable that judicial dissolution might be warranted. The Court therefore denied the respondent’s motion to dismiss.

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Court of Chancery Harmonizes Operating Agreement Governance Provisions To Resolve LLC Control Dispute

Pearl City Elevator, Inc. v. Gieseke, C.A. No. 2020-0419-JRS (Del. Ch. Mar. 23, 2021)

Under Delaware law, limited liability company agreements are interpreted like other contracts; they are read as a whole in light of the commercial context, in a manner that gives effect to and harmonizes all of their terms. In this expedited control dispute, the Court of Chancery applied those canons to consider whether certain of the plaintiff’s purchases of units from other members complied with transfer restrictions. More ›

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Chancery Confirms that the Implied Covenant Imposes a “Good Faith” Component to an Agreement to Negotiate

DG BF, LLC v. Ray, C.A. No. 2020-0459-MTZ (Del. Ch. Mar. 1, 2021)

The Operating Agreement for an LLC involved in the cannabis industry provided for a five-member board of managers, with one Independent Manager appointed by a process of negotiation between two other managers (the plaintiff in the action and one of the defendants). Under the process set forth in the Operating Agreement, either side could present various candidates until there was agreement, which was supposed to happen within a 180-day period. The parties could also mutually agree to extend the deadline. More ›

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