Source: https://www.delawarellcblog.com/page/3/
Timestamp: 2019-04-19 15:14:39+00:00

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The 2010 amendments to the Delaware LLC Act have been signed into law by the Governor. The amendments have an effective date of August 2, 2010. HB 372. This legislation was the product of a years’ work by the Delaware Bar Association’s Alternative Entity Sub Committee of the Corporation Council. I am a member of the Committee, though the comments expressed herein are mine and not necessarily those of the Committee. The Committee’s work is reviewed by the Corporation Council and the Bar Association’s Executive Committee, it is then recommended to the General Assembly.
I previously made a post on a Chancery Court decision on the application of the statute of frauds to an oral Delaware LLC Agreement. Section 1 of the Bill confirms that notwithstanding the decision of the Court of Chancery, the statute of frauds does not apply to an oral LLC Agreement.
Sections 2, 26 & 27 of the Bill were included at the request of the Secretary of State and permit service of process upon the Secretary of State by means of “electronic transmission” in accordance with rules to be adopted by the Secretary.
Section 3 is a confirmation that unless otherwise provided in a LLC Agreement, the LLC has the power and authority to grant, hold or exercise a power of attorney, including an irrevocable power of attorney. Section 5 provides that powers of attorney granted regarding to the organization, internal affairs or termination of a LLC granted by a member, a person seeking to become a member or an assignee of a member shall be irrevocable if it states that it it is irrevocable and is coupled with an interest sufficient in law to support an irrevocable power. The section states that a power is coupled with an interest if it is granted regarding to the organization, internal affairs or termination of a LLC granted by a member, a person seeking to become a member or an assignee of a member of the LLC and the power is granted to the company, a manager, member or certain other designated persons. Much of the discussion regarding powers of attorney resulted from unfortunate legislation adopted in New York which brought into question may powers routinely granted in commercial transactions.
In tender offers, the offeror will generally structure the tender using a Delaware LLC as the offeror and following the close of the transaction will enter into a merger with the target. Delaware does not have a short form merger provision which would permit a parent LLC to merge with a 90% owned subsidiary corporation. (In a short form merger the parent owning not less than 90% of the subsidiary may cause a merger between the parent and subsidiary without the approval of the remaining 10% stockholders or members.) On the corporate side a new Section 267 of the DGCL provides the mechanism for short form mergers. Sections 6, 7, 8, 9, 10, 11, 13, 14, 15, 16, 17, 20 and 30 facilitate the short form merger.
Sections 12, 18 & 19 permit service upon the Secretary of State under 18-209(c)(8), 213(b)(7) and 216(e)(7) by electronic transmission in accordance with rules adopted by the Secretary.
Section 21 amends 18-305(f) which grants the Court of Chancery the power to enforce a demand for information under Section 19-305. As currently drafted the Section only permitted the Court to order the disclosure of a current list of members and their last know address. The Amendment grants authority to the Court to order disclosure of all of the information set out in subsection (a). The amendment allows the parties to shorten or extend the 5 day response period in the Company Agreement, but not beyond 30 days.
Section 22 is a technical amendment to 18-305(g) to clarify that the right to obtain information may be restricted in an amendment to a Company agreement and that the restriction are not intended to limit any other restrictions provided under the Chapter.
Sections 23 and 24 confirm the circumstances under which an assignee may be admitted as a member. Section 18-702 is amended by providing that in addition to an assignee being admitted “except a provided in a limited liability company agreement” that an assignee may be admitted upon the affirmative vote or written consent of all of the members, deleting the phrase “other than the member assigning the limited liability company interest; or (2) Compliance with any procedure provided for in the limited liability company agreement”. Section 18-704(a) is also amended to make it clear that the assignee is admitted as a member “as provided in the limited liability company agreement” and “Unless otherwise provided in the limited liability company agreement, upon the affirmative vote or written consent of all of the members of the limited liability company” and deleting, inter alia, the phrase “other than the member assigning…”.
Section 25 requires that in order for a foreign LLC to register in Delaware under 18-902 it must supply a good standing certificate and if the certificate is in a foreign language, a translation.
Section 29 adds to 18-1101 a new subsection (i) that reads “A limited liability company agreement that provides for the application of Delaware Law shall be governed by and construed under the laws of the State of Delaware in accordance with its terms.” This may seem obvious that if the parties form a LLC under the Delaware Act that it should be construed under the laws of Delaware and in most cases it is, in particular regarding its organization, dissolution and internal affairs. It is not entirely clear what constitutes “internal affairs” however the term is often found in decisions and law review articles dealing with LLC’s as well as corporations. One area where the issue arises is when the agreement address issues that are not within those categories such as employment, redemption and other similar business deal issues. Delaware Courts have upheld that a LLC agreement may be governed by the laws of other states and in one case permitted it to be governed by the DGCL.
The issues addressed in these amandments should not create substantial debate. The only issue which may cause some discussion is Section1 and its relationship to the Olson case.
The Institute for Legal Reform, an arm of the U.S Chamber of Commerce, has again ranked the legal environment in Delaware number 1 in the nation. The survey has been conducted by the Institute since 2002 and in each year Delaware has been ranked number 1. In the ten categories Delaware ranked number 1 in 8 of the categories.
The report is based upon interview with 1,482 general counsel and senior management of companies with revenue of at least $100 million. The report states that two-thirds, or 67%, of the 1,482 corporate lawyers contacted for the survey say a state’s lawsuit environment is likely to impact important business decisions at their company, such as where to locate or expand their business—up 10% from just three years ago.
Other states ranking near the top were #2 North Dakota, #3 Nebraska, #4 Indiana, and #5 Iowa. States often selected by large companies for business formations Colorado was #8, New York was #23, Nevada was #28, New Jersey was #32, Florida was #42, California was #46 and bringing up the bottom was West Virginia at #50.
Companies do not intend to be sued when they are considering a state in which to form, however as pointed out in the Illinois article, companies consider the legal environment in a state as an important factor in case they are sued. It is interesting to note that when a company is formed by a large law firm, the firms will generally select Delaware while small firms select their own jurisdiction.
If a company is to be formed in a state other than the local jurisdiction, it makes no sense to form in a state which ranks 23 or below for fairness in its legal climate.
I have an active Delaware business practice as well as a practice in Delaware’s State and Federal courts. If you or your client have a business matter or a matter which you wish to litigate in Delaware or have a matter pending in Delaware, we would appreciate the opportunity to consult with you regarding our representation. Please remember that we do not accept representation without a written engagement letter.
Section 18-101(7) of the Delaware LLC Act provides that the LLC agreement means “any agreement (whether referred to as a limited liability company agreement, operating agreement or otherwise) written, oral or implied, of the member or members as to the affairs of a limited liability company and the conduct of its business.” If an agreement may be “oral or implied” one could reasonably assume that such an agreement has been taken out of the Statute of Frauds.
Delaware’s Statute of Frauds, 6 Del. C. §2714(a) bars the enforcement of an agreement “that is not to be performed within the space of one year from the making thereof,” unless it is (1) written and (2) signed by the party against whom the agreement is to be enforced. Only if the parties cannot possibly perform the agreement within one year does the statute of frauds apply and require a writing, signed by the charged party.
The Delaware Supreme decided the case of Olson v. Viking Global on December 15, 2009. Olson v Viking Global The case in part involved the enforcement of an unsigned LLC Company Agreement which was drafted for a hedge fund. Olson sought to enforce an earn out provision of the unsigned agreement on the basis that it represented an “oral” Company Agreement as permitted under the Act. The Company and the remaining members defended on the basis that an agreement had not been formed and even if there was an agreement a provided in the unsigned agreement, the provision in question was unenforceable under the Delaware Statute of Frauds as the earn out could not possibly be performed within one year of the date the agreement was allegedly made.
The Court’s holding in this case may come as a suprise to many practitioners who reasonably interpreted 18-101(7) as an implied repeal of the Statute of Frauds. While most agreements do not contain complicated earn out provision that last over a series of years, some agreements do contain provisions that implicate the Statute of Frauds. The use of oral or implied Company Agreements has always been a difficult practice issue. While permitted by the Act, the use of oral agreements has always been frowned upon by practitioners. This decision gives one more reason why the practioner will press his or her clients to reduce their agreements to writing and to follow through with clients to assure that agreements sent out for signature are actually signed.
I have an active Delaware business practice as well as a practice in Delaware’s State and Federal courts. If you or your client have a business matter or a matter which you wish to litigate in Delaware or has a matter pending in Delaware, we would appreciate the opportunity to consult with you regarding our representation. Please remember that we do not accept representation without a written engagement letter.
The Delaware General Corporation Law and the Delaware Limited Liability Company Act have become the de-facto national corporation and LLC laws. As such the State of Delaware is and has been the favored jurisdiction to form business entities. As the favored jurisdiction it also the jurisdiction where many companies choose to litigate as a company’s jurisdiction of formation or incorporation is one of the jurisdictions where personal service may be had against a company without having to rely on a “long arm” statute.
The Judges of the United States District Court for the District of Delaware, the Delaware Superior Court and the Delaware Court of Chancery have an enviable national reputation for fairness and thoughtful jurisprudence which has caused an arm of the US Chamber of Commerce to rank Delaware number 1 in the nation as the best jurisdiction to litigate business disputes. Sometimes, however, one of the parties to such litigation seeks to transfer the litigation to another jurisdiction, often referred to as a montion Forum Non Conveniens. They seek transfer for a variety of reasons, the convenience of the parties, a witness may not be available in Delaware, a similar case is pending in the other jurisdiction or the interests of justice. Recently the USDC handed down a decision in the case of Ethicon Endo-Surgery, Inc., v. Hologic, Inc., and Suros Surgical Systems, Inc., CA 09-580-JJF. Ethicon v Hologic Both corporations are incorporated in Delaware.
In October, 2007, Hologic had commenced a patent infringement action against Ethicon in the USDC ED Ohio. That matter was scheduled for trial on November 16, 2009. On April 30, 2009, Ethicon commenced the Delaware Action which is scheduled for trial in September 2010. The Delaware Action involved additional patents and an affiliated party. Hologic filed a motion to transfer the action to Ohio where it contends that related patents are being litigated, that the parties to the actions are the same and that the “public interest factors” weigh in favor of transfer.
The Court began its analysis under 28 U.S.C. § 1404(a) “for the convenience of the parties and witnesses, in the interest of justice, a district court may transfer a civil action to any other district of division where it might have been brought.” The leading case in the 3rd Circuit is Jumara v. State Farm Ins. Co., 55 F.3d 873 (3d Cir. 1995) where in the court set out 6 tests to consider the private interests of the litigants: “(1) the plaintiff’s choice of forum; (2) the defendant’s preferred forum; (3) where the claim arose; (4) the convenience of the parties; (5) the convenience of the witnesses, but only to the extent that the witnesses may be unavailable for trial in one of the fora; and (6) the location of books and records, again, only to the extent that they may not be available in one of the fora.” Id. at 879. In addition the Jumara court laid out 6 additional test when considering the “public” interests of the litigants; “(1) the enforcability of the judgment; (2) practical considerations that could make the trial easier, quicker or less expensive; (3) court congestion; (4) local interest in the controversy; (5) public policies of the fora; and (6) the trial judge’s familiarity with the applicable state law.” Id. at 879-80.
“Although the Court recognizes that the deference given to Ethicon’s choice of forum is somewhat lessened by virtue of the fact that Ethicon has not filed in its home turf, the public and private interest factors do not weigh strongly enough in favor of transfer”.
This is a well reasoned opinion by a well respected jurist. Transfer decisions never are black and white, they often turn on the facts and circumstances of the case and often how interested the judge himself or herself is in the subject matter of the case.
Must a Delaware LLC have a manager?
Recently I have noticed a number of searches reaching this site asking whether a Delaware LLC must have a manager. In previous posts I have written about the duties of the manager of a Delaware LLC and that the LLC must have a company agreement, however I have not explored the question of whether it must have a manager.
The short and direct answer is NO.
Section 18-101(10) defines the manager as : (10) “Manager” means a person who is named as a manager of a limited liability company in, or designated as a manager of a limited liability company pursuant to, a limited liability company agreement or similar instrument under which the limited liability company is formed. The definition is somewhat of a tautology, it does not explain either the necessity or function of the manager.
§ 18-402. Management of limited liability company.
Unless otherwise provided in a limited liability company agreement, the management of a limited liability company shall be vested in its members in proportion to the then current percentage or other interest of members in the profits of the limited liability company owned by all of the members, the decision of members owning more than 50 percent of the said percentage or other interest in the profits controlling; provided however, that if a limited liability company agreement provides for the management, in whole or in part, of a limited liability company by a manager, the management of the limited liability company, to the extent so provided, shall be vested in the manager who shall be chosen in the manner provided in the limited liability company agreement. The manager shall also hold the offices and have the responsibilities accorded to the manager by or in the manner provided in a limited liability company agreement. Subject to § 18-602 of this title, a manager shall cease to be a manager as provided in a limited liability company agreement. A limited liability company may have more than 1 manager. Unless otherwise provided in a limited liability company agreement, each member and manager has the authority to bind the limited liability company.
A company managed it members is referred to as a member managed company. In a member managed company it is often the case that the company agreement will provide that less than all of the members will have the day to day authority to manage and bind the company. Some agreements will provide for a board of directors or board of managers who will set policy. Some agreements will designate one of the members to serve as the “managing member”. The term managing member is not found in the Act. It is often the case that the managing member is not designated as a manager as such person does not, under the agreement, have the full power and authority of a manager under 18-402 and 404.
If the agrement provides for the managment of the company by one or more managers, the agreement may give the manager or managers absolute authority to manage the company without any participation of the members, similar to a limited partnership. In other situations the authority of the manager may limitd such that he may not take specified actions without the prior consent of a stated percentage of the interests approving such actions. These specified actions are often referred to a “major decisions.” If the agreement call for more than one manager, it must also provide for rules to govern their actions and to provide a remedy if the managers deadlock.
A manager (as well as a member) need not be a natural person, but may be another LLC, corporation or other business entity. A single member LLC may also have a manager. The manager of any LLC, single member or multi-member need not be a member. Under Section 18-403, a manager may make a capital contribution to the company and share in the profits and distributions as a member. A person who serves both as a manager and member is subject to the rights and restrictions of both.
I continue to emphasize that proper drafting is essential. The company agreement is a contract governed by Delaware law and it is necessary for a Delaware attorney to review the agreement for compliance with Delaware law before execution. I have an active Delaware business practice as well as a practice in Delaware’s State and Federal courts. If you or your client have a business matter or a matter which you wish to litigate in Delaware or has a matter pending in Delaware, we would appreciate the opportunity to consult with you regarding our representation. Please remember that we do not accept representation without a written engagement letter.
Fiduciary duties of a director of a Delaware corporation, the current standard.
Generally I write about limited liability companies, however some corporate decision will directly impact upon LLC law. The case I discuss today is one of those decisions.
In 2007 the Delaware Supreme court decided the case of North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, et al., (Del. Supr. 2007) 930 A2d 92. Prior to the release of this decision the Chancery cases and commentators had hinted at the concept that a director had a distinct and cognizable fiduciary duty to the corporation’s creditors while operating in the “zone of insolvency” and when “insolvent”. Ghewalla holds that creditors of an Delaware corporation have no direct right to sue the directors for a breach of fiduciary duties while operating in the “zone of insolvency”. Additionally the creditors of an “insolvent” Delaware corporation do not have a direct right to sue the Directors for breach of fiduciary duties to the creditor, though in insolvency the creditors do have the right to sue derivatively. Many practitioers initially thought that this decision did not change the landscape as the creditors could accomplish derivately what they could not accomplish directly. These derivative claims, in my view, are based upon the same fiduciary duties which the directors have irrespectively of insolvency and the Court did not create or recognize a new or enhanced set of duties owed to creditors in their capacity as creditors. New or enhanced duties would create an impossible delemma for directors of a troubled corporation.
The director defendants served as directors of Clearwire Holdings, Inc., at the behest of their employer Goldman Sachs & Co. The complaint alleges that the defendants, though less than a majority of the directors, were able to dominate the company as Goldman was its only source of funding. The plaintiff is a creditor of Clearwire and asserted a direct (not derivative) claim for breach of fiduciary duties against the defendants while Clearwire was either insolvent or operated in the zone of insolvency.
In this opinion, we hold that the creditors of a Delaware corporation that is either insolvent or in the zone of insolvency have no right, as a matter of law, to assert direct claims for breach of fiduciary duty against the corporation’s directors.
Note that the Court used the word “direct” and not “derivative”. As this case involved a direct action, the court could have stopped there, however the Court then went on to examine whether a creditor had any derivative rights. The Court concluded, based upon earlier Chancery decisions, that creditors have the right to bring derivative claims when the company is insolvent.
It is my conclusion that the fiduciary duties which the directors of a Delaware corporation owe to to the corporation and its stockholder owners do not change in insolvency, however the creditors have the right in insolvency to step into the rights of the shareholder owners and sue derivatively on behalf of the corporation. To hold otherwise would place the directors in a dilemma when the corporation is in the zone of insolvency, always having to determine whether the corporation was insolvent and thereby triggering a different set of fiduciary duties. Such a holding would be contrary to the “brightly lined chanel markers” referred to by Justice Holland.
In a thoughtful article published in the August 2009 issue of The Business Lawyer, Volume 64, Number 4 at pae 1087, Sabin Willett wrote “Gheewalla and the Director’s Dilema. In this article he thoroughly reviews the case law and commentators opinions on Ghewalla. I recomend this article to you.
Whether your company is a Delaware corporation or a LLC where fiduciary duties have not either been eliminated or limited, careful drafting is required. I have an active Delaware business practice as well as a practice in Delaware’s State and Federal courts. If you or your client have a business matter or a matter which you wish to litigate in Delaware or has a matter pending in Delaware, we would appreciate the opportunity to consult with you regarding our representation. Please remember that we do not accept representation without a written engagement letter.
This post will address arbitration under an agreement that is subject to Delaware law. The legal concepts are uniquely applicable to a Limited Liability Company Agreement, however the concepts are also applicable to all “Delaware Agreements” generally.
Arbitration, as a mechanism for dispute resolution, has become increasingly important. There are several business risk of arbitration. Paramount is that an unskilled arbitrator will be selected or appointed depending upon the mechanism provided in the agreement and that arbitrator will “split the baby”. Agreements to arbitrate disputes must be carefully written; they must clearly define what disputes are to be subject to arbitration and which, if any, are not; the agreement needs to address whether or not the determination of whether a dispute is subject to arbitration or not is itself subject to arbitration; how the arbitrator is to be selected or whether the parties will defer to a third party such as the American Arbitration Association, the National Arbitration Forum or the International Council for Commercial Arbitration to select the arbitrator; what rules will govern the arbitration itself including whether the local rules of evidence will apply; the authority of the arbitrator, will the judgment be limited to actual damages, will consequential damages be permitted and will exemplary or punitive damages be permitted; who will pay the costs assesed by the arbitration sponsoring organization as well as the arbitrator’s fee and associated costs of the arbitration itself; and finally will attorney fees and costs of the prevailing party be included in the award.
I personally do not like the traditional 3 arbitrator panel model. My experience with that model has been that the award tends to come in somewhere between the two competing demands rather than one party clearly prevailing. I prefer the model adopted by professional baseball where there is a single arbitrator selected by the parties where the arbitrator has only the power to pick one of the positions submitted by the parties plus award attorneys fees and costs to the prevailing party plus award the costs of the arbitration. The arbitrator may make corrections to computational errors of a party, however, aside from making such corrections the arbitrator is limited to picking a winning position and cannot modify the position of any party and therefore cannot split the baby.
If an arbitration agreement is to provide for the award of counsel fees to the prevailing party the notion of “prevailing” must be defined carefully and the concept of costs must be included with “reasonable counsel fees” as counsel fees does not by definition include the attorney’s costs. Costs of arbitration (arbitrator’s fee, AAA fees, room charges, etc.,) are not “costs” in the general sense and must be addressed specifically.
The decision to arbitrate disputes is a decision to forgo the right to a hearing before a court applying traditional court rules and rules of evidence and forego the right to judicial review of the substantive merits of the arbitrator’s decision. In Delaware the Court of Chancery may review an arbitration order under 5 limited circumstances set out in the statute (10 Del C. § 5714). The Court does not sit as an appellate court reviewing the arbitrator’s legal findings and procedural actions.
Chancellor Chandler on August 18, 2009 decided the case of World-Win Marketing, Inc. v Granley Management Co. (CA 3905-CC) Decision: world-win v ganley In this case the arbitrator in an AAA arbitration decided that both parties were equally at fault and awarded plaintiff one half of the amount it demanded. The arbitration agreement stated that “the prevailing party shall be entitled to recover all reasonable costs incurred in connection therewith, including attorneys’ fees.” The arbitrator decided that the plaintiff was not entitled to attorneys’ fees as part of the award and the plaintiff sought an order vacating the portion of the award denying attornys’ fees contending that the arbitrator exceeded his authority in not including attorneys’ fees in the award.
The plaintiff contended that “prevailing party” under Delaware practice means the party which receives the award. The Court stated that under Delaware law the “prvailing party” is determined by reference to substantive issues, not damages. In the case under review the arbitrator found that both parties “where equally negligent in the performance of the Agreement, and in the breach of numerour provisions of said Agreement” and therfore denied an award of attorneys’ fees.
The Chancellor addressed several issues of general interest to my readers.
This case is illustrative of the pitfalls of arbitration and the need to address the meaning of even well understood contractual terms in drafting the agreement to arbitrate disputes within the LLC agrement. As with any agreement to be interpreted under Delaware law, the input and review by a Delaware attorney is required. I have an active Delaware business practice as well as a practice in Delaware’s State and Federal courts. If you or your client have a business matter or a matter which you wish to litigate in Delaware or has a matter pending in Delaware, we would appreciate the opportunity to consult with you regarding our representation. Please remember that we do not accept representation without a written engagement letter.
TravelCenters of America, LLC is a publicly traded Delaware LLC, Alan R. Kahn is a “shareholder” in the LLC. Kahn filed a derivative action against the LLC and its “directors” alleging that the directors breached their fiduciary duties to the LLC in connection with a transaction in which the dominant director had a direct and adverse financial interest to that of the LLC. The directors moved for summary judgment based upon exculpatory language in the LLC agreement and based upon a lack of a prior demand upon the directors as required under 18-1003. The decision by Chancellor Chandler of the Delaware Court of Chancery is on the motion for summary judgment, therefore at this stage of the proceedings the well plead factual allegations of the plaintiff are taken as true, the Court will make all reasonable inferences in favor of the plaintiff and only dismiss the complaint if the Court can determine with “reasonable certainty” that there is no set of facts that can be reasonably inferred from the well pleaded allegations in the complaint upon which the plaintiff could prevail. The Court will not on summary judgment choose between competing reasonable interpretations of ambiguous contract provisions. As I have pointed out in previous posts, the LLC agreement is a contract.
The LLC agreement of TravelCenters is an example of the dangers of a poorly drafted agreement and the need for competent Delaware Counsel.
The LLC agreement provided that the “authority, powers, functions and duties (including fiduciary duties)’ of the board of directors will be identical to those of a board of directors of a business corporation organized under the Delaware General Corporation Law, unless otherwise specifically provided in the LLC agreement. The directors asserted that the LLC agreement (§ 7.5(a)) contained language which created a presumption in its favor when dealing with fiduciary duties and which created an enhanced presumption which the plaintiff must overcome. The Court found that there were two reasonable and conflicting interpretations of the paragraph in question and declined to choose which one was a more reasonable interpretation.
The Court noted that the LLC agreement explicitly imposed on the LLC corporate fiduciary duties which are the dual duties of due care and loyalty. The complaint implicates the duty of loyalty which requires that directors act in the best interest of the company and prohibits them from using their positions to further their own self-interest. The court found that the plaintiff properly plead a violation of the duty of loyalty and that the exception found in § 7.5(a) did not resolve the question as it is ambiguous.
Likewise the exculpatory provisions in the LLC agreement were found to be ambiguous and again as the exculpatory language relies on the exception found to be ambiguous, the Court declined to apply the exculpatory language.
The Court next focused on the question of demand futility. “In order to maintain a derivative suit on behalf of a LLC, a member must either (1) make a demand on the managers of the company to bring suit or (2) show that ‘an effort to cause those managers or members to bring the action is not likely to succeed'”. The complaint must allege with particularity the reasons why such demand would be futile. In evaluating futility the Court looked at corporate law. Under Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984) there are two tests which must be met. The complaint must allege particularised fact that establish a reasonable doubt that “(1) the directors are disinterested and independent [or] (2) that challenged transaction was otherwise the product of a valid exercise of business judgment.” The test is stated in the disjunctive.
The Court found that the plaintiff made sufficient well plead factual allegations of bad faith with regard to the dominant director to survive a motion for summary judgment.
Poorly drafted LLC agreements are an invitation to litigation. A LLC agreement is a Delaware contract which requires the skill and know how of an experienced Delaware attorney. I have an active Delaware business practice as well as a practice in Delaware’s State and Federal courts. If you or your client have a business matter or a matter which you wish to litigate in Delaware or has a matter pending in Delaware, we would appreciate the opportunity to consult with you regarding our representation. Please remember that we do not accept representation without a written engagement letter.
The Delaware Act, §18-305, titled “Access to and confidentiality of information; records,” sets out rules for permitting a member or manager access to company records upon a “reasonable demand for any purpose reasonably related to the member’s interest as a member of the limited liability company”. The Court commences its analysis by noting that “the basic approach of the [LLC] Act is to provide members with broad discretion in drafting the agreement and to furnish default provisions when the members’ agreement is silent”. The Court determined that the language quoted form the LLC agreement was intended by the parties to substitute for the default provisions of §18-305.
As the Court determined that the plaintiff had the right to inspect and copy the general ledger under agreement “I need not address her additional arguments for inspection rights under §18-305 or Defendants’ opposition to those arguments”. Certainly the inspection rights under §18-305 was determined by the Court to be a “default” provision which the parties had replaces with the language in the agreement.
After affirming that Delaware follows the “American Rule” “under which a prevailing party generally is expected to pay its own attorneys’ fees and costs” the Vice Chancellor stated that there are exceptions to that rule and that the Plaintiff was relying on an exception that the court could award fees to a “prevailing claimant if the loosing party acted in bad faith in opposing relief being sought in the lawsuit.” That is “if defendant’s conduct forces the plaintiff to file suit to ‘secure a clearly defined and established right'”.
In this case the defendant initially opposed the plaintiff’s claim that she was a member, even though she was listed as a member on the K-1. For the purpose of the motion the defendant stipulated that she was a member. The Court found that there was a reasonable dispute which militated against the award. Given that the defendant listed the plaintiff as a member on the K-1 it is difficult on the record presented in the decision to understand the Court’s holding.

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