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Court of Chancery Upholds Drag Along Rights

Minnesota Invco of RSA #7, Inc. v. Midwest Wireless Holdings LLC, C.A. No. 1887-N, 2006 WL 1596675 (Del. Ch. June 7, 2006). In this case, the Court of Chancery was required to interpret complex agreements between the members of a Delaware limited liability company. The Court held that the defendant holding company had the right to "drag along" holders of a minority interest in an operating subsidiary of the holding company in connection with the sale of the holding company.

As is not too infrequent, minority members in a LLC had negotiated contract rights to protect their interests from abuse by the majority owners, including limits on the voting power of the majority owners. Here the parties had later agreed to reorganize the LLC and related entities into a holding company, while still protecting the plaintiffs' rights as continuing members of the LLC. Under the terms of the reorganization agreement, it controlled the parties' relationship if its terms conflicted with the terms of their earlier agreement concerning minority rights in the LLC. When the holding company was sold, the minority owners in the LLC claimed they did not have to go along with the sale because that would violate their rights as minority owners. The Court of Chancery held that the minority owners had lost their rights to block the sale of the holding company by virtue of the reorganization agreements executed when the holding company was formed. Further, the Court held that the minority investors could be "dragged along" to sell their interests in the LLC over their objections because the reorganization agreements superseded their rights as minority owners. The lesson is that a party needs to be careful to protect its existing contract rights when entering into any new agreement that may affect those rights in a less than clear manner. If you snooze, you lose.



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