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Failure to Make Capital Contribution Does Not Necessarily Result in Reduction of Interest in LLC or LP

Articles & Publications

December 2014
Morris James LLP
Business Law Today

The Delaware Court of Chancery was recently faced with a variation of Hypothetical 1 in Grove v. Brown, 2013 WL 4041495 (Del. Ch. Aug. 8, 2013), and its answer to the question posed above likely has implications to the answer to Hypothetical 2. Although failure to make an initial capital contribution may be somewhat unusual, LLC members and LP partners often must decide how to answer a capital call like that in Hypothetical 2.

The Grove Decision

In the Grove decision, the Court of Chancery explained that a member’s failure to make the full amount of his initial capital contribution did not cause any reduction in his membership interest. If the members of an LLC or partners of an LP wish to have membership interest or partnership interest reduced for a deficiency of a capital contribution, the Court of Chancery held those parties must contract for it in the operating agreement.

As explained below, in the context of capital calls, courts have enforced such provisions permitting dilution for failing to respond to a capital call. However, if the LLC agreement is silent on the subject, based on the Grove decision, a noncontributing member who fails to answer the call may find that the non-contributing member still owns the same amount of interest, and the contributing member who pays in additional capital may find that you do not always get what you pay for.

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