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Chancery Refuses to Reform Operating Agreement to Impose Class Voting Requirements Not Contained in the Plain Language of the Agreement

Posted In LLC Agreements

JJS, Ltd. v. Steelpoint CP Holdings, LLC, C.A. No. 2019-0072-KSJM (Del. Ch. Oct. 11, 2019).

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.