Parties who form Delaware limited liability companies to organize their business affairs do so to structure their relationships contractually. This enables them to organize the governance and economic rights in a manner tailored to the enterprise they are establishing. They do so secure in the knowledge that the Delaware Limited Liability Company Act expressly provides that it is the policy of the Delaware act “to give maximum effect to the principle of freedom of contract and to the enforcement of limited liability company agreements.” If the parties ever have a dispute over their internal affairs, then a Delaware court will apply well-settled principles of contract interpretation to resolve it. The recent decision of Capone v. LDH Management Holdings, C.A. No. 11687-VCG (Del. Ch. Apr. 25, 2018), illustrates the court’s application of contract law principles to determine that two Delaware LLCs’ affairs were not wound up in compliance with the Delaware LLC Act resulting in the nullification of prior-filed certificates of cancellation.

Background

Plaintiffs in this action were employees of a Delaware LLC that had formed an employee equity incentive plan. Pursuant to that plan plaintiffs received membership interests (units) in a separate Delaware LLC (management holdings), which held a 15-percent profits interest in the company. Plaintiffs effectively held indirect profits interest in the company of 1.5 and 0.7 percent. The company created another Delaware LLC to manage management holdings (managing member) (together with management holdings, the Delaware LLCs). The company terminated each plaintiff without cause effective in the early part of 2011. The company’s LLC agreement entitled it to redeem the units of any employees so terminated at “the fair market value for such snit as of the last day of the last fiscal year preceding the fiscal year in which the call notice is given.” Since the redemptions occurred on April 12, 2011, Dec. 31, 2010, was the relevant “as of” date to determine fair market value. The company on Dec. 23, 2010, finalized its valuation of its operating assets. Based on that valuation the company determined that as of Dec. 31, 2010, the operating assets had a value of $1.43 billion. Thereafter, pursuant to a sales process that had begun in the fall of 2010, the company sold its operating assets for $1.925 billion on March 22, 2011. On April 12, 2011, the company redeemed the plaintiffs’ units based on a valuation of the company as a whole of $1.744 billion and of the operating assets at $1.43 billion. The plaintiffs through written and oral communications to company management between April and June 2011 questioned how the company could have valued the company as a whole for approximately $200 MM less than the value that only a portion of its assets had sold for three weeks earlier.

Claims and Defenses