Watch What You Say: Disparaging Comments May Trigger Contractual Repurchase Rights Even If Shielded From A Defamation Claim

A recent Delaware decision has demonstrated the limits of the absolute litigation privilege, holding that it did not protect an LLC member from claims that his defamatory statements triggered contractual repurchase rights of his membership interests. Absolute litigation privilege, in Delaware and many other jurisdictions, protects parties from actions for allegedly defamatory statements made during a judicial proceeding that are relevant to the case. While Judge Paul R. Wallace found absolute litigation privilege served an important interest in allowing parties to speak freely once in litigation, those public policy concerns do not always apply when a party is seeking to enforce private contractual rights resulting from the alleged breach of a non-disparagement claim. In so holding, the court demonstrated that Delaware courts will continue to show caution before allowing public policy interests to obviate the obligations in sophisticated parties’ private contracts.

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Eye Doctor With Blind Spot Loses LLC Manager Position

Last month, the Delaware Court of Chancery upheld an amendment of a Limited Liability Company agreement through a merger even when it had recently struck down a similar amendment in the same LLC agreement. In Campus Eye Management Holdings, LLC v. E. Bruce DiDonato, OD, Vice Chancellor Will concluded that because the LLC agreement contained no provision explicitly forbidding amendment through merger, the amendment was valid and enforceable. The ruling might not be eye-catching, but it is an important reminder that parties to an LLC agreement, and particularly those with minority power, must have a clear vision into not only the express provisions of the contract but also the implications of any gaps that will be filled by the Delaware Limited Liability Company Act, 6 Del.C. § 18-101, et seq. (the “LLC Act”).

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(Fear) the Reaper, LLC: Court of Chancery Clarifies LLC Governance Rights Upon Member Death

A recent decision from the Delaware Court of Chancery, Gurney-Goldman v. Goldman, C. A. 2023-1124-JTL (July 12, 2024), addressed a matter of first impression: What is the power of an estate’s executor to exercise an LLC member’s corporate governance rights after that member dies or becomes disabled? The case reveals a tension between the “pick your partner” principle behind much of Delaware LLC law (members choose to enter into an agreement with the other members, and not their executors) and a policy of fairness to that member who has died or suffered a disability. After evaluating the relevant statutes, Vice Chancellor Laster reasoned that, under the default rule, the executor has seemingly broad power characterized as “a proper purpose, defined as the settlement of the estate or the administration of property.” But the decision also makes clear that parties to an LLC agreement are free to contractually define “the member rights that the executor can potentially exercise.” As the decision succinctly put it: “Let a thousand contractarian flowers bloom.”

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In Case of First Impression, Court of Chancery Awards Expenditures Incurred in Third-Party Litigation as Breach of Contract Damages

On remand from the Delaware Supreme Court, the Court of Chancery has awarded XRI more than $6 million in litigation expenses and recoupment of fees advanced to a former LLC member who breached the governing LLC Agreement.  XRI Inv. Holdings LLC v. Holifield, C.A. No. 2021-0619-JTL (July 24, 2024).  The former LLC member, Gregory Holifield, breached contractual transfer provisions in connection with loans he obtained from a third-party mezzanine lender, Assurance.  After Holifield defaulted on the Assurance loans, Assurance sued XRI in Texas, claiming that XRI had violated rights to Holifield’s XRI equity that Assurance had obtained as part of the loan transaction.  XRI spent $4.1 million defending against and ultimately settling Assurance’s claims.  The Court of Chancery awarded XRI damages reflecting those expenditures in full.  The decision marks the first time a Delaware court has awarded expenses incurred in third-party litigation as breach of contract damages.  The Court of Chancery also held that XRI is entitled to recoup all attorneys’ fees previously advanced to Holifield—approximately $2 million and counting—under the indemnification provisions of the LLC Agreement.  The latter holding marks the rare occasion on which a Delaware court has allowed a company to claw back previously advanced fees.

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Purple Rain on Non-Managing LLC Members’ Parade

Prince Rogers Nelson – better known by the mononym Prince, or for a time by a really cool symbol – was a world-famous musician, known for playing up to 27 instruments. He wrote dozens of hit songs: Purple Rain, When Doves Cry, Little Res Judicata, er, Red Corvette, the list goes on. But as discussed in McMillan v. Nelson, a recent decision from the Delaware Court of Chancery, what he did not write was a will.

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“Simplify, simplify, simplify”: Delaware Chancery Declines to Dismiss Claims Regarding a Gordian Knot of Private Equity-Related Contracts

Vice Chancellor Sam Glasscock III recently declined to grant a motion to dismiss in Paul Capital Advisors, L.L.C. et al. v. Holland, 2023 WL 5551017, C.A. No. 2022-0167-SG (Del. Aug. 29, 2023) (“Paul Capital”), which involved claims arising out of an intricate set of transactions intended to monetize certain illiquid assets. In sustaining the claims, the Court of Chancery colorfully outlined the challenges of deciphering a highly complex, “monkey’s fist of contracts” without accompanying provisions describing the purpose for such complexity in the first place, and encouraged practitioners to instead choose the path of simplicity.

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“The Context Is Different” – Court of Chancery Opinion Blesses Implied Covenant Gap Filling in LLC Agreement

The Delaware Court of Chancery’s recent opinion in Cygnus Opportunity Fund LLC et al. v. Washington Prime Group LLC et al. presents a veritable grab bag of potential blog posts, from a suggestion that an officer of an Limited Liability Company could be contractually bound by an LLC Agreement he never signed to the interesting interplay (and potential conflict) between an officer’s duty of obedience to the LLC’s board and the officer’s duty of disclosure to investors. The focus here — and we believe chief among the thorny issues addressed in Cygnus — is the Court of Chancery’s decision to sustain a claim for breach of the implied covenant of good faith and fair dealing with respect to an issue that the LLC Agreement expressly addressed. What makes it even more fascinating is the tone of the Opinion: Vice Chancellor Laster evidently came to an early conclusion that, taking the allegations as true for purposes of a pleading motion, there was some inherent unfairness in the Defendants’ conduct that needed to be set right. Left unclear is the impact of this decision, assuming it is not disturbed on appeal, on Delaware’s long-standing deference to parties’ agreements and, in particular, limitations of duties, in the LLC context. In any event, the Opinion should serve as a cautionary tale for companies considering converting to an LLC form through a non-consensual bankruptcy process.

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For Delaware LLCs, Contractual Freedom Overrides Equitable Defenses

Limited liability companies, as “alternative entities” under Delaware law, enjoy significantly greater freedom in ordering their internal affairs than do corporations.  The contractarian bent of Delaware law is at its height in both the legislative and the judicial treatment of LLCs.  Unlike corporations, LLCs may contract out of fiduciary duties on the part of their managers, and may control the nature and availability of remedies for breach of an LLC agreement.

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Caveat Emptor Still Rules The Day For MLPs

Just as a $700 million damages award and its accompanying sharp criticism of legal opinions garner headlines, so does reversal of that ruling.  The Delaware Supreme Court closed out 2022 with its decision in Boardwalk Pipeline Partners, LP v. Bandera Master Funds LP, reversing the Court of Chancery’s sizeable post-trial award on narrow contractual grounds.  The reversal is a substantial victory for the defendants.  But for non-parties, of note was the Delaware Supreme Court’s decision to leave intact the trial court’s conclusions regarding law firm opinions.  Taken together, both courts’ rulings offer meaningful guidance for parties and counsel negotiating complex transactions and considering inclusion of opinion of counsel conditions (or, attempting to satisfy such conditions in existing contracts).

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Collision Course: The Consequences of Conflicting Forum-Selection Provisions

On January 6, 2023, Vice Chancellor Laster issued an opinion in Fairstead Capital Management LLC v. Blodgett concerning a “dispute-resolution collision” between two applicable forum-selection clauses. The collision arises from the termination of a principal of an investment fund, whose partners fired him for allegedly breaching his employment agreement and also cancelled his member interests in two LLCs that owned rights to the profits generated by the fund. Unhappy with his ouster, the former principal wanted to litigate against his former partners and the LLCs. But that raised the question at the core of this Vice Chancellor Laster’s opinion: where to litigate?

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