By Andrew Skouvakis and Peter C. Seel
In Hampton v. Turner, Vice Chancellor Noble denied a motion for summary judgment in a dispute about whether a limited liability company had properly exercised a redemption option under its operating agreement and tendered the correct purchase price for three members’ limited liability company interests, after such members sought judicial dissolution of the company. In denying summary judgment, Vice Chancellor Noble found that the operating agreement was unambiguous with respect to the application of the redemption option provisions and how those should be interpreted to determine a purchase price.
Three members of T4Analytics LLC, a Delaware limited liability company (the “Company”), filed a complaint with the Court of Chancery seeking judicial dissolution of the Company pursuant to Sections 18-801 and 18-802 of the Delaware Limited Liability Company Act. In response, the Company decided to exercise an option under its operating agreement to redeem such members’ limited liability company interests. Following a determination by an independent appraiser that the Company had a fair market value of $1,886,000, the Company issued to each member it sought to redeem a check in the amount of $197,029.80, purportedly representing each member’s 23.54% interest. The Company arrived at this figure by first subtracting from the Company’s value capital contributions made by other members pursuant to a distribution waterfall provision of the operating agreement, which was the only part of the operating agreement that expressly addressed distributions. The Company then moved for summary judgment, arguing that because it had purchased the members’ interests they now lacked standing to pursue judicial dissolution. The members against whom the redemption option was exercised argued that the waterfall provision did not apply to redemptions and, because each member is entitled to 23.54% of the Company’s appraised value without regard to capital contributions, the Company had not yet purchased their interests.
Vice Chancellor Noble agreed that the waterfall provision did not apply. He found that, even though “distributions” could mean any payments made to members, the waterfall provision was not applicable to the exercise by the Company of its redemption option. Accordingly, he held that the plain meaning of the applicable redemption provisions required that any purchase of interests by the Company be based solely on the members’ pro rata percentage of the appraised value of the Company. Vice Chancellor Noble also noted that members who contribute property to a business like the Company no longer own that property, and if they intend to recapture previously contributed property after terminating their business relationships they should contractually protect their rights.