COURT OF CHANCERY DENIES MOTION FOR DECLARATORY JUDGMENT

By: Scott Waxman and Zack Sager

In DG BF, LLC v. Ray, the Delaware Court of Chancery denied the plaintiffs’ motion for declaratory judgment, which sought confirmation that a manager’s consent was necessary in order to issue a new series of units of a limited liability company and to amend a limited liability company agreement.

The limited liability company at issue was American General Resources LLC (the “Company”).  The plaintiffs were DG BF, LLC (“DG BF”), a party to the limited liability company agreement of the Company (the “LLC Agreement”), and Jeff Menashe (“Menashe”, and together with DG BF, the “Plaintiffs”), a Managing Member of DG BF and a Member and the Series D Manager of the Company.  The Company sought to issue Series E units that would give the Series E unitholders certain preferences over the Series D unitholders (the “Series E Issuance”).  The Plaintiffs sought a declaratory judgment, which asked the Court to confirm that the consent of Menashe, as the Series D Manager, was needed for the Company to effectuate the Series E Issuance and, in connection therewith, amend the LLC Agreement (the “Amendment”).

Per the LLC Agreement, the Board of Managers of the Company needed to approve the Series E Issuance and the Amendment.  In addition, the Plaintiffs argued, the Amendment required the consent of the Series D Manager because, under a certain section of the LLC Agreement, the consent of the Series D Manager was needed to effectuate an amendment that removed any rights expressly granted to the holders of the Series D units.  According to the Plaintiffs, amending the LLC Agreement to grant Series E unitholders a liquidation preference over the Series D unitholders was akin to removing a right expressly granted to the Series D unitholders, thus triggering the Series D Manager’s consent right.  The Court held that, while the LLC Agreement granted the Series D unitholders a contractual right of priority over all other classes of interests in the event of liquidation and the right to be the first equity holders to receive distributions, the LLC Agreement did not expressly grant those rights in perpetuity or in all future equity issuances.  In fact, the LLC Agreement contemplated senior issuances.  In this context, the absence of clear language granting the Series D unitholders the permanent right to be the senior series led the Court to conclude that no such right was expressly granted.  Since no such right was expressly granted, the Series E Issuance would not have removed any right expressly granted to the Series D unitholders and the Series D Manager’s consent right under the section of the LLC Agreement at issue was not triggered.  Accordingly, the Court denied the Plaintiffs’ motion for a declaratory judgment. 

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