Posts in LLC Agreements

Court Of Chancery Limits Implied Duties

Gerber v. Enterprise Products Holdings LLC, C.A. 5989- VCN (January 6, 2012)

This is an important decision because it reaffirms the ability in an LLC agreement to severely limit the right to sue.  Here the LLC agreement first said that if the committee appointed to review conflict of interest decisions did so,  then there was no right to sue for breach of fiduciary duty by the controllers. The Plaintiff tried to argue that the implied duty to act in good faith and fairly still meant the controllers could not have acted in good faith by submitting the conflicted transaction to the committee.  However, the LLC agreement also said that if the controllers acted after receiving expert advice the transaction was fair, then they were conclusively presumed to have acted in good faith. The Court agreed that cut off the claim based on implied duties.

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Court Of Chancery Uses Computer Records To Unravel Facts

Phillips v. Hove, C.A. 3644-VCL (September 22, 2011)

This is an interesting decision for its very entertaining explanation of the facts and how the Court decided what was true in the face of false testimony.  Using the computer records to verify when documents were generated, the Court determined which story was most believable.

There are also some key legal determinations, although nothing really new.  For example, even though the LLC Agreement had provisions for dissolution,  the Court,  having concluded those would not work, ordered dissolution.

 

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Court Of Chancery Permits Full Transfer Of Membership

Achaian Inc. v. Leemon Family LLC, C.A. 6261-CS (August 9, 2011)

It is often unclear when a member of an LLC may transfer not just her financial interests but her voting rights as well.  The LLC Act leaves that issue to be determined by the LLC operating agreement.  Here the Court closely examines this issue and an LLC agreement and decides that a member's full interest may be transferred by her without the other members' consent.

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Court Of Chancery Upholds Fiduciary Duty In An Alternative entity

Paige Capital Management LLC. v. Lerner Master Fund LLC, C.A. 5502-CS (August 8, 2011)

This is an important decision and a lot of fun to read to boot.  The fun is in the all-too-human story it tells of personal ambition frustrated and what happens then.

There are 3 key points in its holding.  First, those who control an LLC owe fiduciary duties to the members unless the LLC Agreement clearly cancels those duties. This may be contrary to the views of at least 1 Supreme Court Justice who favors requiring those duties be spelled out in the agreement.

Second, vesting in a manager the "sole discretion" to decide a matter only means she is the only one who gets to vote on it.  It does not mean she can vote anyway she likes even if that is unfair. Here better drafting is needed.

Third, the Court will decide cases on their legal merits even if the winning party is a jerk.  Of course, here there was a bit of a contest to see who could be the biggest jerk.  Nonetheless, it is reassuring that the Court saw though all that to get to the real merits.

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Court of Chancery Interprets Conflict of Interest Provision of LLC Agreement

In re Atlas Energy Resources, LLC Unitholder Litigation, C.A. No. 4589-VCN (October 28, 2010)

This case is another example of the care practitioners must take in drafting LLC agreements. In this decision, Vice Chancellor Noble applied the Kahn v. Lynch entire fairness standard of review to a merger between a publicly traded LLC and its controlling unitholder.  Plaintiffs, LLC unitholders, alleged the controlling unitholder breached its fiduciary duties to minority unitholders by negotiating an unfair merger through an unfair process.  Plaintiffs also alleged that the directors and officers of the LLC breached their fiduciary duties by agreeing to the merger.

The controlling unitholder argued that it was not liable for breach of fiduciary duty because the LLC Agreement provided that if a conflict of interest arose between the LLC and controlling unitholder, it could be resolved by certain actions that had occurred here.  Plaintiffs argued that the conflict of interest at issue was between the controlling stockholder and minority unitholders and thus the LLC Agreement conflict of interest provision was inapplicable. The Court agreed and found the merger between the LLC and its controlling unit holder subject to the entire fairness standard of review.  In the absence of anything in the LLC Agreement addressing a conflict of interest between the controlling unitholders and minority unitholders, the Court saw no reason not to apply the reasoning of Kahn v. Lynch.  As is typical in cases where the entire fairness standard of review applies, the Court denied the controlling unitholder's motion to dismiss.

The Court did, however, grant the motion to dismiss of the LLC directors and officers. The LLC Agreement provided that the directors and officers did not owe fiduciary duties to the LLC or its members. Thus, unlike the provision governing conflicts of interest, this provision of the LLC Agreement expressly eliminated fiduciary duties of directors and officers to members. Under the LLC Agreement, the officers and directors were subject to a subjective good faith standard.  This standard of good faith is narrower than the good faith standard under Delaware law.  Applying this subjective standard of good faith, the Court found that Plaintiffs had failed to state a claim that the directors and officers believed they were acting against the best interests of the LLC's unitholders in negotiating the merger.

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Court Of Chancery Orders LLC Dissolved

Vila v. BVWEBTIES LLC , C.A. 4308-VCS (October 1, 2010)

This decision is a variation on the issue of when should a LLC be dissolved when the managers/ members are deadlocked.  Merely because 1 of the managers is able to keep the business functioning at some level is not sufficient to avoid dissolution when its basic purpose is not being fulfilled.

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Court Of Chancery Denies Receiver for LLC

Ross Holding and Management Company v Advance Realty Group LLC. , C.A. 4133-VCN (September 2, 2010) This decision affirms the power of the Court of Chancery under its equitable jurisprudence to appoint a receiver pendente lite for an LLC, even when the LLC agreement does not so provide.  Of course, as here, this drastic remedy is not to be used when the facts are in dispute. Share

Court Of Chancery Upholds Discretion Not To Invest

Related Westpac LLC v. JER Snowmass LLC, C.A. 5001-VCS (July 23, 2010)

For some reason probably rooted in human nature, parties to LLC agreements seem to think the agreement should provide that all the parties act "fairly" toward one another.  Of course, each party then defines what is "fair" by what they want to get out of the deal.  However, as this decision points out, when an agreement provides that a party has the discretion whether to advance additional funds or not, that is its choice to make.  Whether the choice is "fair" or not is irrelevant and the other parties to the agreement have no basis to complain about that decision.

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Court Of Chancery Upholds Nullification Claim

Thor Merritt Square LLC v. Bayview Malls LLC, C.A. 4480-VCP (March 5, 2010)

On occasion, the members of an LLC try to end its life by filing a certificate of cancellation with the Delaware Secretary of State. This is done in the hope that it will provide a defense to suits over the LLC's obligations. Well, that does not work. As this decision explains, a creditor may then file a claim to nullify the certificate of cancellation and to seek a receiver.

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Court Of Chancery Interprets Exculpation Clause In LLC Agreement

Kelly v. Blum, C.A. 4516-VCP (February 24, 2010)

It is well known that an LLC agreement may limit the right to sue for breaches of fiduciary duty. What is less well thought out is what language needs to be used to do so. This decision tells you what to say if you want to limit liability.

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Court of Chancery Expands Dissolution Remedy

Lola Cars International Limited v. Krohn Racing LLC, C.A. 4479-VCN (November, 12, 2009)

The Delaware Limited Liability Company Act permits the Court of Chancery to dissolve an LLC when it is not "reasonably practicable to carry on the business" of the LLC. The initial decisions under this statute tended to adopt a narrow construction of its terms and dissolution was not ordered just because of a business dispute between the members of the LLC. More recent decisions have expanded the circumstances when dissolution will be ordered, including when there is a management deadlock. This decision expands that trend to permit dissolution when there is serious mismanagement established. While not yet to the point of "no-fault" dissolution, the trend is headed that way, and it remains to be seen exactly how much mismanagement needs to be shown to win a dissolution decree. Probably disloyalty such as self-dealing is still required.

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Summary of Amendments to Delaware Alternative Entity Statutes

The Harvard Law School Forum on Corporate Governance and Financial Regulation has posted a useful summary of the recent amendments to Delaware's alternative entity statutes, drafted by Delaware practitioner Louis G. Hering.  The post can be viewed here.

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Court of Chancery Orders Dissolution Upon End of Term

In re Nextmedia Investors LLC, C.A. 4067-VCS (May 6, 2009)

This is an interesting case, because it upholds the right of a member of an LLC to have it dissolved at the end of the term set for its existence in the LLC Agreement even when more than 90% of the members want it to continue. In the current recession, many limited purpose investment funds are seeking to extend the term of their existence, because they have not been able to find an investment for their member or stockholders' money. When the LLC agreement or the corporate certificate of incorporation limits how long the entity may exist without making an investment of its funds, management may try to extend the life of the entity by amending its governing instrument. However, at least in the case of an LLC, when the LLC agreement says that all members must consent to extending the entity's existence, the court will uphold that requirement.

This decision reflects the primacy of contract law in the LLC context. The result may have been different for a Delaware corporation where a requirement for unanimous voting by stockholders is probably not valid.

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Court of Chancery Upholds Right of "Beneficial" Member to Sue in LLC Case

Mickman v. American International Processing LLC, C.A. No. 3869-VCP (Del. Ch. April 1, 2009)

In the case of an LLC, unlike with a Delaware corporation, the statutory definitions of who may seek court relief have not been broadened. Generally, only a member or manager has those rights, and membership is determined by the LLC operating agreement. This decision holds that a plaintiff may prove she is a member entitled to enforce membership rights by extrinsic evidence, such as a tax return listing her as a member.

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Court of Chancery Upholds LLC Dissolution Provision

Spellman v. Katz, C.A. 1838-VCN (Del. Ch. Feb. 6, 2009)

 

In drafting an LLC operating agreement, the key point to remember is that you get what you agreed to even if you later come to regret it. Here, the operating agreement included a provision that the LLC would be dissolved when certain events occurred. When those events occurred, one of the members claimed that he never intended the LLC would then be dissolved. Too bad said the Court and ordered dissolution and winding up.

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