Delaware statutes enabling formation of unincorporated entities like limited liability companies (LLCs) and limited partnerships afford freedom for owners to structure business relationships as they see fit. This freedom carries with it the responsibility  to accurately and completely describe the parties’ rights and duties. It also means that when disputes arise among owners or managers, a Delaware court will resolve the dispute through application of principles of contract interpretation. Moreover, if the parties in their foundational agreement do not address an issue, the court will apply default rules under the applicable business entity statute. The recent case of Domain Associates LLC v. Shah, C.A. No. 12921-VCL (Aug. 13, 2018), well illustrates these principles—the court applied default rules under the Limited Liability Company Act to hold that an expelled member of a Delaware LLC was entitled to the fair value of his interest and not simply to the value of his capital account.

Background

This dispute arose when principals of Domain Associates LLC exercised their rights to force the withdrawal of a member of the LLC. The operating agreement allowed for this expulsion upon a vote of all the other members. The LLC offered to pay the departing member the value of his capital account which was approximately $438,000. He refused to accept this payment and when a mediation failed, this action, initiated by the company, proceeded. A three-day trial ensued with Domain reflecting the court’s post-trial decision.

Court Finds Parties’ LLC Agreement Was Silent as to Compensation Due a Member Upon Forced Withdrawal