In Achaian, Inc. v. Leemon Family LLC, C. A. No. 6261-CS (Del. Ch. Aug. 10, 2011), read opinion here, the Delaware Court of Chancery issued today a pithy opinion on LLC law that is destined to be cited often regarding the transferability of the interests of members in an LLC, and related interpretations of the Delaware Limited Liability Company Act (the “Act”).
Issue Addressed: The Court formulated the key issue it addressed as follows: “may one member of a Delaware limited liability company assign its entire membership interest, including that interest’s voting rights, to another existing member, notwithstanding the fact that the limited liability company agreement requires the affirmative consent of all of the members upon the admission of a new member, or, must the existing member assignee be readmitted with respect to each additional interest it acquires after its initial admission as a member?”
Holding: In its own words the Court concluded that: “When Omniglow’s LLC Agreement is read as a whole, as it must be, it allows an existing Member to transfer its entire Membership Interest, including voting rights, to another existing Member without obtaining the other Members’ consent. Thus Holland’s assignment of its 30% Interest to an existing Member, Achaian, was effective to vest all of the rights associated with that Interest in Achaian, and Omniglow now has two cooequal Members.”
Amusing Note: Footnote 54 of the opinion features a citation to a song by the Commodores, (pictured above), called Three Time a Lady. The citation was in the context of repudiating the argument of the defendant, which would have required an already admitted member to “become once, twice (or even three times)” a member each and every time that member acquired an additional block of interests in the LLC.
Short Overview of Legal Analysis
Though I expect to supplement this short blurb with commentary by some of the LLC scholars cited in the opinion, in the meantime, I will provide a few selected bullet points.
- The Court began its analysis with what it referred to as the “now mundane notion” that under the Act, the parties to an LLC agreement have substantial authority to shape their own affairs and that in general, any conflict between the provisions of the Act and an LLC agreement, will be resolved in favor of the LLC agreement”. See footnotes 10 and 11 (voluminous references to treatises and learned commentary on the topic.)
- The Court recited the primary purpose of the Act as being “to fill gaps, if any, in an LLC agreement”. In this case, because the LLC agreement addressed the issue at hand, that was the starting point in the analysis. The agreement in this case made the LLC interests of members freely transferrable to other members.
- The Court also added to the growing case law on the statutory interpretation of Section 18-802 of the Act which allows the Court to dissolve an LLC when: “… it is no longer reasonably practicable to carry on [the LLC’s] business in conformity with [the LLC agreement].”
- Based on the holding relating to transferrability, which resulted in ownership of the LLC being equally split between two 50/50 members, the Court cited to prior Chancery decisions that have applied DGCL Section 273 by analogy. Section 273 allows for one to petition the Court for what in essence is a “no fault divorce/dissolution” when a joint venture is equally owned 50/50 by two parties. In that situation, applicable by analogy in this LLC case, the three prerequisites are: (1) There must be “two 50% stockholders; (2) those stockholders must be engaged in a joint venture; and (3) they must be unable to agree upon whether to discontinue the business or how to dispose of its assets.”
SUPPLEMENT: Professor Larry Ribstein, whose treatise on LLCs was cited and relied on by the Court in the above opinion, provides his usual learned insights here and explains why he disagrees with the result reached by the Chancellor.
Postscript: Thanks to Delaware litigator Jody Pinckney for forwarding this opinion to me.