Topic: LLC Agreement

Interpretation of an LLC Agreement with Respect to the Appointment and Removal of Board Members Is Strictly Based on the Plain Language Contained in the Four Corners of the LLC Agreement

By Scott E. Waxman and Jennifer J. Yeung

Where one fifty-percent owner of a single member LLC wished to remove the existing tiebreaker director, the Delaware Court of Chancery held that he could not do so.  A governing LLC agreement’s plain language must be strictly construed; and in this case, it did not provide for unilateral removal of a board member.

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Chancery Court Dismisses Former LLC Member’s Claims for Alleged Amounts Owed and Breach by Former Co-Members

By: Scott E. Waxman and Michael C. Payant

In Terry L. Menacker v. Overture, L.L.C., et al., C.A. No. 2019-0762-JTL (Del. Ch. Aug. 4, 2020), the Delaware Court of Chancery (the “Court”) considered a motion to dismiss claims by a former member of Overture L.L.C. (the “Company”) concerning a dispute over a buyout payment allegedly due upon his withdrawal as a member, certain other alleged past-due amounts, and an alleged breach of fiduciary duty by former co-members of the Company. The Court dismissed all claims, holding that (i) the Court lacked subject matter jurisdiction over the buyout payment dispute because it was subject to arbitration; (ii) plaintiff’s allegations regarding other amounts owed failed to state claims upon which relief could be granted; and (iii) plaintiff’s claims for breach of duty were derivative claims for which plaintiff lacked standing.

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Chancery Court Denies Assignor’s Inspection Demand under Real Party in Interest Rule, Prohibits Substitute Plaintiff

By: Scott E. Waxman and Michael C. Payant

In SolarReserve CSP Holdings, LLC v. Tonopah Solar Energy, LLC, C.A. No 2020-0064-JRS (Del. Ch. July 24, 2020), the Delaware Court of Chancery (the “Court”) examined an alleged breach of contract based on the denial of inspection rights to which SolarReserve CSP Holdings, LLC (“SR”) was allegedly entitled under the LLC Agreement (the “LLCA”) of Tonopah Solar Energy, LLC (the “Company”). The Court entered judgment for the Company, finding (i) SR was not a real party in interest under Chancery Court Rule 17 because it had made a complete assignment of its rights under the LLCA, and (ii) the real party in interest assignee was not entitled to inspection rights under the LLCA.

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Specific Language of Operating Agreements Key in Chancery Court Dismissal of “Laundry List” of Claims Against LLC Managers

By: Scott Waxman and Rich Minice

In 77 Charters, Inc. v. Gould et al.., C.A. No. 2019-0127-JRS (Del. Ch. May 18, 2020), 77 Charters, Inc. (“Plaintiff”) brought suit against defendants Jonathan Gould (“Gould”), Stonemar MM Cookeville, LLC (“Stonemar MM”), Cookeville Corridor, LLC (the “Preferred Purchaser”) and Eightfold Cookeville Investor, LLC (the “New Investor” and together with Gould, Stonemar MM and the Preferred Purchaser, the “Named Defendants”) for a series of alleged “wrongful acts” in connection with the management and sale of a shopping mall (the “Property”), which also implicated Stonemar Cookeville Partners, LLC (“Cookeville Partners”) and Cookeville Retail Holdings, LLC (“Cookeville Retail”). In delivering its opinion, which centered on the nature of Delaware limited liability companies as creatures of contract, and thus, the controlling nature of the applicable operating agreements and contracts into which the parties had entered, the Delaware Court of Chancery (the “Court”) ruled that only Plaintiff’s claims which could be connected to an alleged wrongful amendment of the operating agreement of Cookeville Retail could survive Defendants’ Motion to Dismiss (the “Motion”).

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Court Relies on Canons of Construction to find LLC Agreement Consent Right Inapplicable to Contemplated Sale of Subsidiary Stock

By: Scott E. Waxman and Michael C. Payant

In AM General Holdings LLC v. The Renco Group, Inc., et al., CA. No. 7639 and The Renco Group, Inc. v. MacAndrews AMG Holdings, LLC, et al., C.A. No. 7668-VCS (Del. Ch. June 26, 2020), the Delaware Court of Chancery (the “Court”) considered the latest dispute in a nearly decade-long litigation between The Renco Group, Inc. (“Renco”) and MacAndrews AMG Holdings LLC (“MacAndrews”), regarding interpretation of the Limited Liability Company Agreement (the “Agreement”) for AM General Holdings LLC (“Holdco”). Relying on canons of construction, the Court determined the Agreement did not provide Renco a consent right with respect to a contemplated subsidiary sale, and granted MacAndrews’ motion for judgment on the pleadings.

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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.

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Delaware Court of Chancery Applies Narrow Arbitration Provision in Member Dispute; Stays Claims Pending Arbitration

By Scott E. Waxman and Jessica A. Pingleton

In 360 Campaign Consulting, LLC et al. v. Diversity Communication, LLC, et al., C.A. No. 2019-0807-MTZ (Del. Ch. Mar. 20, 2020), the Delaware Court of Chancery (the “Court”) applied a middle ground approach based on the plain language of an arbitration provision in a governing limited liability company agreement (the “LLC Agreement”), holding that only disputes, controversies or claims between Members arising out of or relating to the LLC Agreement were arbitrable. The Court granted a stay of all remaining claims pending resolution of the arbitration.

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Delaware Court of Chancery Allows Direct Claims for Breach of Contract and Fraud to Proceed, Even After Dismissing Related Derivative Claims

By Scott E. Waxman and Frank J. Mazzucco

In MKE Holdings, Ltd. and David Bergevin v. Kevin Schwartz, et al. and Verdesian Life Sciences, LLC, C.A. No. 2018-0729-SG (Del. Ch. Jan. 29, 2020), the Delaware Court of Chancery allowed direct claims for breach of contract and fraud in connection with an equity financing to survive a motion to dismiss, even after having previously dismissed the related derivative claims.  

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MANAGERS NOT PROPERLY REMOVED FROM LLC DESPITE SOLE MEMBER’S INTENT

By: Scott Waxman and Zack Sager

In Llamas v. Titus, the Court of Chancery held that, despite the intent of an LLC’s sole member, certain managers of the LLC were not removed as such because the sole member did not expressly remove them.  In its analysis, the Court applied corporate law principles by analogy because the LLC adopted a corporate-like structure.

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Court of Chancery Finds that the Implied Contractual Covenant of Good Faith and Fair Dealing Requires Delaware LLC to Exercise Discretion in Good Faith

By: Scott Waxman and Zack Sager

In Coca-Cola Beverages Florida Holdings, LLC v. Goins, the Court of Chancery granted in part and denied in part a motion to dismiss a claim for breach of the implied contractual covenant of good faith and fair dealing, and, in so doing, found that the discretion afforded to a Delaware limited liability company under an agreement was required to be exercised in good faith.  In addition, the Court analyzed a motion to dismiss claims for breach of contract, unjust enrichment, quantum meruit, and fraud.

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