In CompoSecure v. CardUX, 206 A.3d 808 (Del. 2018), the Delaware Supreme Court held that when parties use the word “void” to describe the consequences of a noncompliant act under an LLC agreement, the act is deemed void ab initio, which as a practical matter, means the act is incurably void. With certain limited exceptions, parties cannot later ratify or voluntary fix void acts, and they may not assert equitable defenses to bar a challenge to an alleged void act. This rule effectively allows parties to an LLC agreement to contract out of equity by describing an act as “void” in their agreement.

The consequences of this rule can be harsh and seemingly incompatible with the role of equity in our jurisprudence to ameliorate such results. Accordingly, in XRI Investment Holdings v. Holifield, No. 2021-0619-JTL, ___ A.3d ___ (Del. Ch. Sept. 19, 2022), faced with substantial evidence of the equitable defense of acquiescence to an alleged noncompliant act under an LLC agreement, the Delaware Court of Chancery could not consider this defense under the precepts of CompoSecure. In XRI Investment Holdings, the court held that a co-founder and LLC member’s transfer of his units to an entity that he owned was not a permitted transfer under the LLC agreement because he received consideration in the transfer as part of a larger financing transaction. Hence, the court found that the permitted transferee exception was not available, and violated the “No Transfer” provision under the LLC agreement, which in turn, provided that any transfer that violated the “No Transfer” provision was “void.” Bound by CompoSecure, the court declared that the transfer of the co-founder’s units was void, which left the units in his hands, instead of his transferee entity. Thus, the units were subject to foreclosure by the plaintiff XRI, which maintained an interest in the units as security for a defaulted loan to another entity owned by the co-founder.

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