Hampton v. Turner, C.A. No. 8963-VCN (Del. Ch. Apr. 29, 2015) (Noble, V.C.)

In a letter opinion analyzing how provisions of a limited liability company operating agreement fit together, the Court of Chancery denied defendants’ motion for summary judgment as to plaintiffs’ claim for judicial dissolution of T4Analytics LLC (“T4”).  Defendants T4 and its manager/chief executive officer (individually and as a trustee of a related trust) had argued that plaintiffs lacked standing to pursue dissolution because they were no longer members of T4 and that T4 had properly paid plaintiffs the fair market value of their units.  In denying summary judgment, the Court interpreted T4’s contractual right under the operating agreement to purchase units of a member who seeks dissolution for the “Fair Market Value” of the member’s units.  The Court also discussed, but did not rule, on the question of whether plaintiffs lacked standing because the purchase of their units had been completed.

Plaintiffs, who were three of the four founders of T4, never made any capital contributions but together held a 70.62% interest in the medical technology company.  On October 1, 2013, plaintiffs filed a complaint asking for T4’s dissolution pursuant to 6 Del. C. § 18-801 by plaintiffs’ agreement or 6 Del. C. § 18-802 “on the grounds that it is not reasonably practicable to carry on the business” of T4 in conformity with its operating agreement.  In response, T4 sent a letter stating its intent to exercise an option under its operating agreement to purchase the units of a member who sought dissolution for the “Fair Market Value” of the member’s units.  Pursuant to the operating agreement, an appraiser determined that T4 had a Fair Market Value of $1,886,000, but explained that he could not make a determination of the value of plaintiffs’ units because of conflicting interpretations of the operating agreement.  In October 2014, T4 issued checks to each of the plaintiffs based on a purchase price of $197,029, purporting to close the acquisition of the plaintiffs’ units.

The crux of the parties’ interpretive dispute was whether it was proper to apply the operating agreement’s “waterfall” provision to the “Fair Market Value” of T4 used as the basis of the purchase price paid to the plaintiffs.  The defendants’ position was that the payment of the purchase price to plaintiffs qualified as a “distribution” to the plaintiffs and, therefore, the waterfall provision applied and it was proper to deduct the amount of capital contributions from the “Fair Market Value” used to calculate the purchase price.  The Court disagreed with defendants’ reading of the operating agreement, noting (i) that the waterfall provision refers to distributions of excess cash and (ii) that the purchase provisions employed by T4 do not refer to the waterfall provision.  Even though the Court was sympathetic to defendants’ argument that failing to apply the waterfall provision distorted the basic business deal of the parties, the Court found that the result was neither absurd nor inequitable and that it could not disrupt the objective language of the operating agreement.

Because of uncertainty related to an issue raised late in the briefing, the Court did not rule on the question of whether plaintiffs lacked standing to pursue dissolution.  Under Delaware’s Limited Liability Company Act, a plaintiff would lack standing if it were no longer a member.  Defendants asserted not only that the payment tendered for plaintiffs’ units was correct but that, if that amount was incorrect, they should have the thirty days permitted under the operating agreement to decide whether to complete the purchase of plaintiffs’ units.  As the Court phrased it, “an entirely different course for the litigation seems likely” if the purchase of plaintiffs’ units is not “completed” and T4 has the choice of “restoring” plaintiffs to their prior status as unit holders with standing to seek dissolution of T4.  Because it believed the parties did not have fair opportunity to address this issue, the Court declined to weigh in. This and a related argument—that T4’s failure to pay the proper purchase amount in a timely fashion resulting in the loss of the right to exercise that option—remain for the parties to address, according to the Court.

About Potter Anderson

Potter Anderson & Corroon LLP is one of the largest and most highly regarded Delaware law firms, providing legal services to regional, national, and international clients. With more than 100 attorneys, the firm’s practice is centered on corporate law, corporate litigation, intellectual property, commercial litigation, bankruptcy, labor and employment, and real estate.