In Walsh v. White House Post Productions, Del. Ch., C.A. No. 2019-0419-KSJM, McCormick, V.C. (Mar. 25, 2020) (Mem. Op.), the Delaware Court of Chancery held that a buyout provision in the operating agreement of a Delaware limited liability company was a “call option” and that the company could not withdraw from the buyout process following the company’s exercise of the option. The Court of Chancery’s opinion offers valuable guidance to Delaware limited liability companies when drafting the buyout provision of their operating agreements, as well as when Delaware limited liability companies are considering exercising a buyout right in accordance with the terms of their operating agreements.

As background, Carbon Visual Effects LLC is a Delaware limited liability company. The company is majority owned by White House Post Productions LLC, and Kieran Walsh and Francis Devlin are minority owners and employees. In January 2014, White House, Walsh and Devlin entered into an amended and restated limited liability company agreement (the LLC agreement). The LLC agreement provided that if a member ceased to be employed by the company for any reason, the company would have the right to buy the member’s units at fair market value, and the member would be obligated to sell his units to the company. The mechanism for determining fair market value can be summarized as follows: the company first obtains an appraisal and delivers it to the departing member(s), who can accept the results of the appraisal or dispute the results of the appraisal by obtaining a second appraisal. If the departing member(s) elects to obtain a second appraisal and the results of the second appraisal are within ten percent of the results of the first appraisal, then the fair market value of the units will be determined by averaging the results of the two appraisals. If the results of the second appraisal are more than 10% higher than the results of the first appraisal, then the two appraisers will jointly select a third appraiser, and the determination of the third appraiser will be binding on the company and the departing member(s).