Showell v. Pusey, C.A. No. 3970-VCG (Del. Ch. Sept. 1, 2011).
This opinion interprets an LLC Agreement in order to determine what value, if any, a member is due for his interest in an accounting firm, formed as an LLC, in connection with his departure from the firm. The Court determined that the member was entitled to receive the liquidation value of his ownership interest as of the date of his “retirement” from the LLC.
The LLC at issue was an accounting firm operating in southern Delaware. The petition in this case was filed in order to determine the value of the interest of the departing member in the LLC. However, the LLC Operating Agreement does not provide for the withdrawal or resignation of its members but does allow for the transfer of membership interests, as well as for the “dissociation” of a member in certain situations. It specifically provides that other than the transfer of an interest, “no member shall be entitled to withdraw or resign.” See footnote 12, referring to Section 18-603 of the Delaware LLC Act which provides that when an LLC Agreement is silent as to withdrawal, it is construed as prohibiting withdrawal. The Operating Agreement was subsequently amended to provide for the “retirement” of a member but that is a defined term that did not encompass the retirement by plaintiff, Showell.
The Court found, based on trial testimony and the actions of the parties, that the parties agreed that the LLC would pay Showell for his interest in the LLC. However, the parties did not reach an agreement on the exact amount that Showell would receive for surrendering his membership.
Showell argues that his “retirement” should entitle him to the value of his interest in the LLC as a “going concern” based on his argument that Section 18-604 provides for the “fair value” of an interest in an LLC if an LLC Agreement allows resignation of a member without specifying the right to reimbursement upon resignation. The Operating Agreement originally did not allow for retirement or resignation. However, the majority of the members agreed to modify the agreement to allow for the retirement.
A supplement to the agreement provided for a retiring member to receive an amount for his membership interest equal to the “net equity” as defined in the supplemental agreement. That equity was defined in the supplemental agreement as the amount to be distributed to a member upon the liquidation of the LLC.
The Court began with “first principles” that LLC agreements are contracts whose provisions are to be interpreted using the basic rules of contract law. See footnote 25. The Court next proceeded with the interpretation of the Operating Agreement that led to the holding that the agreement did not allow for the voluntary withdrawal or retirement of a member, however, the members had agreed to modify that provision to allow for the retirement of the petitioner. The Court reasoned that the value to be paid for the departing member’s interest should be as defined in the supplemental agreement in connection with a retiring member, which is based on the liquidation value of the LLC. The experts for each party at trial were in general agreement as to the liquidation value of the membership interest involved.
SUPPLEMENT: Peter Mahler provides his characteristically insightful analysis here, while comparing this case to a similar New York decision on his New York Business Divorce Blog.