Chancery Determines Ownership Interest in LLC and Remedy for Breach of Fiduciary Duties
Grove v. Brown, C.A. No. 6793-VCG (Del. Ch. Aug. 8, 2013)
Issues Addressed: This post-trial opinion addresses issues involved in a 4-person LLC whose members disputed: (1) what specific ownership interest each had in the LLC; (2) the impact of a member not contributing the required amount of start-up capital; (3) whether there was an usurpation of opportunity for some members to operate a separate business that engaged in the same industry as the original LLC; and (4) whether a purported merger complied with the terms of the LLC Act.
This 26-page opinion provides a helpful iteration of fundamental Delaware legal principles that should be of widespread utility for the vast number of closely held companies that constitute the largest percentage of businesses in the U.S., even if this case does not involve the multi-billion dollar disputes between publicly held companies that constitute a small percentage of U.S. business entities but often receive more press.
We provide a few bullet points with some key aspects of this opinion.
- The court determined that the membership certificates showing the percentage of ownership each member had in the LLC, which was the same percentage they represented to the bank in a loan application, was the most persuasive evidence of the parties’ intent regarding the percentage that each member owned in the LLC
- The fiduciary duty of managers was applied to the usurpation of an opportunity of the business when some members started a new and similar enterprise without satisfying the criteria to avoid liability based on this well-worn legal principle.
- The court also applied the provisions of the LLC Act that require a two-thirds vote of members to approve a merger and determined that a merger that did not meet that criteria was a nullity.
- The parties’ LLC agreement did not provide for any penalty for not providing the required capital contribution and thus the court did not impose any penalty for failure of some members to make a timely initial capital contribution.
- The remedy the court fashioned for breach of fiduciary duty and the nullified merger, was to require an accounting by all members for the usurped business opportunity and the revenue generated after the nullified merger.
- The court also suggested that the parties consider dissolution under Section 18-802 because of the dysfunctional relationships among the members.