Topic: Claw Back

Court of Chancery Reallocates Limited Liability Company Distributions According to Prior Agreements between the Parties

By Andrew Skouvakis and Thomas Meyer

In Finger Lakes Capital Partners, LLC v. Honeoye Lake Acquisition, LLC, the Court of Chancery held that proceeds from a limited liability company’s liquidity event distributed to the members of the limited liability company should be reallocated in accordance with prior agreements between the members. The Court found that an integration clause in the limited liability company agreement did not supersede allocation provisions in the prior agreements.

In 2003, Zubin Mehta and Gregory Shalov formed Finger Lakes Capital Partners, LLC (“Finger Lakes”) to sponsor investments in portfolio companies. Lyrical Partners, L.P. (“Lyrical”) provided the majority of the capital for these investments. In 2004, Mehta, Shalov, and Lyrical executed a binding term sheet (the “Term Sheet”) addressing the ongoing business relationship between Finger Lakes and Lyrical. Under the Term Sheet, Lyrical received a 25% ownership interest in Finger Lakes and was entitled to a percentage of portfolio company management fees that would otherwise go to Finger Lakes.

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