Chancery Court Rules that LLC Unit Buyout Provision Operated As a Call Option

By Scott Waxman and Priya Chadha

In Kieran Walsh et al. v. White House Post Productions, LLC, et al., C.A. No. 2019-0419-KSJM (March 25, 2020), Plaintiffs Kieran Walsh and Francis Devlin brought claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and specific performance following a dispute with Defendant Carbon Visual Effects, LLC (the “Company”) regarding a buyout provision in the Company’s LLC Agreement.  On a motion to dismiss, Vice Chancellor McCormick held that the buyout provision operated as a call option, requiring Defendants to purchase Plaintiffs’ LLC units once it exercised its option by noticing its intent to purchase them.

The LLC Agreement included a buyout provision that allowed the Company to purchase a departing member’s units at fair market value.  The value was determined by an appraisal process that could include as many as three separate appraisals.  First, the Company hired an appraiser.  If the departing member did not agree with the results of the first appraisal, the member was permitted to hire a second appraiser.  If the results of the second appraisal were more than 10% higher than the first appraisal, the two appraisers jointly appointed a third appraiser whose determination was binding on both parties.

After Plaintiffs were informed that their service agreements would not be renewed, the Company subsequently provided the Plaintiffs with the result of the first appraisal.  Plaintiffs informed the Company that they would exercise their right to obtain a second appraisal and requested information necessary for that appraisal. The dispute between the parties arose when the Company informed Plaintiffs that it had changed its mind and no longer wished to purchase their units.  Plaintiffs went ahead with the second appraisal, which valued the units at a price that was over ten percent greater than the first appraisal.  Plaintiffs sought to have a third appraiser appointed in accordance with the LLC Agreement, but Defendants did not respond so Plaintiffs filed suit against the Company and its majority member, both of whom filed a motion to dismiss.

Vice Chancellor McCormick denied the motion to dismiss the claim for breach of contract as against the Company, holding that the Buyout Provision operated as a call option.  She explained that option contracts operate as an exception to the general rule that permits an offeror to revoke its offer prior to acceptance.  Option contracts instead have “two elements: the underlying offer concerning the sale or purchase of the property and the collateral promise to hold that offer open.”  Here, the underlying agreement was the Company’s right to purchase a departing member’s units, and the promise to keep the offer open was the member’s obligation to sell the units.  Because the buyout provision was a call option, the Company could not withdraw from the appraisal process once it exercised its option by noticing its intent to purchase the units and obtaining the first appraisal.  The Vice Chancellor also found that the Plaintiffs had stated a claim for specific performance.            

The Vice Chancellor granted the motion to dismiss the breach of the implied covenant of good faith and fair dealing because the breach of contract claim addressed the parties’ dispute, leaving no gap for the implied covenant claim to fill.  Finally, she dismissed all claims as against the majority member because it had no contractual rights or obligations under the buyout provision.

Leave a Reply

Copyright © 2019, K&L Gates LLP. All Rights Reserved.