Vice Chancellor Zurn’s First Post-Trial Opinion Provides a Cautionary Tale Regarding Private Ordering Under the LLC Act

In her first true Opinion for the Court, In re Coinmint, LLC, Vice Chancellor Zurn delved deeply into the tortured relationship between the two founders (and sole members) of Coinmint, LLC, a bitcoin mining firm, and ultimately held that Delaware’s strong preference for private ordering is not unlimited where the parties fail entirely to follow the formalities set out in the founding documents to which they collectively agreed.

At issue in Coinmint was whether Coinmint, originally founded as a Delaware entity, was able to be dissolved by one of its two members, Mintvest Capital Ltd. (“Mintvest”), whose president provided “sweat equity” in the form of running Coinmint’s day-to-day operations. Mintvest contended the parties held equal ownership in Coinmint and petitioned for the entity’s dissolution. Coinmint Living Trust (“CLT”), which was owned by an individual who provided significant financial support to Coinmint, challenged the dissolution, and contended that (1) CLT owned a majority stake in the entity, and (2) Coinmint had in fact been redomesticated to Puerto Rico and was no longer a Delaware LLC subject to Delaware dissolution law.

Vice Chancellor Zurn began her legal analysis by emphasizing that the LLC Act “leaves latitude for substantial private ordering,” provided that statutory and judicially imposed parameters are honored, that the Act “contains relatively few mandates, and it explicitly assures that contractual arrangements will be given effect to the fullest permissible extent,” and that “Delaware’s LLC law is . . . explicitly contractarian” and courts interpreting LLC Operating Agreements should aim to “effectuate the parties’ intent based on the parties’ words and the plain meanin of those words.” However, in this case, Vice Chancellor Zurn found that, while Mintvest’s arguments that neither its dilution nor Coinmint’s conversion to a Puerto Rico entity were carried out according to the terms of the Operating Agreement, the parties’ clear intent, and the equitable doctrines of waiver, estoppel, and acquiescence trumped those terms.

First, the Court considered the Operating Agreement’s provisions setting out formal requirements for capital requirements and dilution, which included, among other things, notification to the Board regarding cash needs, each member’s share, and the date the capital contribution was due, and action by the Board at a minuted meeting or by written consent. It was undisputed that Mintvest and CLT did not make any attempt to follow any of those formalities. The Court nonetheless held that Mintvest’s interest in Coinmint had been significantly diluted as a result of CLT’s significant capital contributions, because the “exacting standards” of Delaware’s doctrine of waiver of contractual terms had been met in this case, and the doctrines of equitable estoppel and acquiescence also favored a finding of dilution. Among other things, the parties agreed (at Mintvest’s insistance) to forgo formal processes and to “peg” Mintvest’s interest at 18.2%. Accordingly, the Court held that Mintvest had become a minority owner of Coinmint in spite of the terms of the Operating Agreement.

Second, the Court held that the conversion of Coinmint to a Puerto Rico entity had not followed the formal procedure set out in the Operating Agreement and the LLC Act. But the Court found that the conversion had been carried out by a majority owner (CLT) and was voidable for CLT’s failure to follow formalities, not void. The conversion was accordingly subject to cure by equitable defenses, but was not ultra vires and unable to be ratified. And, similar to the Court’s decision regarding Mintvest’s dilution, the Court held that because Mintvest’s president was “intimately involved in pursuing redomestication in Puerto Rico and invoked that decision in several Company initiatives” it was estopped from asserting an equitable defense to the conversion.

Finally, as a matter of first impression, the Court held that because Coinmint was no longer a Delaware entity, the court lacked jurisdiction to adjudicate its dissolution.

The Opinion demonstrates that Delaware equitable principles can trump Delaware’s strong preference for private ordering in the LLC context, and the extreme facts required in order for it to do so.

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