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Chancery Suggests Alternative Approach To Contracts Providing That Prohibited Acts Are Void Ab Initio

XRI Investment Holdings LLC v. Holifield, et al., C.A. No. 2021-0619-JTL (Del. Ch. Sept. 13, 2022)
Under precedents such as CompoSecure, L.L.C. v. CardUX, LLC (Del. 2018), acts defined by an LLC agreement as “void” or “void ab initio” are incurable, whether through equity or otherwise. For the Court of Chancery in this post-trial decision, applying the CompoSecure holding prohibited the Court from giving effect to the plaintiff’s acquiescence in the transaction at-issue. While respecting and applying CompoSecure, the Court proposed an alternative approach under which equitable doctrines may militate against holding that a challenged act may never be cured.

The LLC agreement here generally restricted transfers of equity interests unless the transfer met an express exception, with all non-conforming transfers deemed “void.” Under the circumstances of this case involving the plaintiff’s longstanding conduct amounting to acquiescence in the transfer at-issue, the Court found that the plaintiff acquiesced to the transfer. But the Court, following CompoSecure, reasoned it was required to find that the transfer was void ab initio and thus not subject to equitable defenses like acquiescence. 

The Court continued to discuss, however, a potential alternative approach for future developments in Delaware law. According to the Court, similar provisions in LLC agreements should be interpreted as rendering the transaction at-issue “voidable,” and thus equitable defenses may apply in litigation concerning its validity. In support, the Court discussed a number of considerations, including the availability of equitable defenses to legal claims, and precedent addressing the void-ab-initio-versus-voidable distinction. The Court also discussed, among other things, contract law principles under which prohibitions on modifications or waivers and provisions specifying remedies for a breach may not be enforced strictly in the circumstances of a particular case.

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