Delaware Alternative Business Entities: New Opportunities With LLCs, LLPs and

Statutory Trust Vehiclespresents Statutory Trust VehiclesNavigating Recent Statutory Amendments and

Case Law Developments

presents

A Live 90-Minute Teleconference/Webinar with Interactive Q&AToday's panel features:

Ellisa Opstbaum Habbart, Partner, The Delaware Counsel Group, Wilmington, Del.Willem Calkoen, Partner, NautaDutilh N.V., Rotterdam, NetherlandsThomas E. Rutledge, Member, Stoll Keenon Ogden, Louisville, Ky.

W d d J 13 2010

A Live 90-Minute Teleconference/Webinar with Interactive Q&A

Wednesday, January 13, 2010

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Recent Developments in Delaware Statutory and CaseDelaware Statutory and Case

Law

Thomas E RutledgeThomas E. Rutledge

Stoll Keenon Ogden PLLC

Thomas.Rutledge@skofirm.com

Olson v. Halvorsen982 A.2d 286 (Del.Ch. 2008); 2009 WL 4846616 (Del. Dec. 15, 2009)

• Delaware Code Ann. tit. 6, §18-101(7) (an LLC agreement may be written oral or arise from course of conduct)written, oral or arise from course of conduct)

• Delaware Code Ann. tit. 6, §2714(a) (Delaware Statute of Frauds; agreements not able to be performed within one year not enforceable g p yunless set forth in signed writing)

•Olsen argued that a multi-year payout under an unsigned operating agreement was enforceable.

•Both Chancery and the Supreme Court held the provision f bl i f i h S f F dunenforceable as not satisfying the Statute of Frauds.

2

In re NextMedia Investors, LLC 2009 WL 1228665 (D l Ch M 6 2009)2009 WL 1228665 (Del. Ch. May 6, 2009)

• Proposed amendment to operating agreement would have extended company term.

• Agreement could not be amended “to adversely affect any member” to their consent.

• Summary judgment granted:

Th bi• The contract was unambiguous.

• Members not obligated to prove factually that there was an adverse effect; the test is not “an empirical factual assessment of whether aeffect; the test is not an empirical, factual assessment of whether a member is correct about the effect of the change”.

3

R&R Capital, LLC v. Buck & Doe Run Valley Farms2008 WL 3846318 (D l Ch A t 19 2008)2008 WL 3846318 (Del. Ch. August 19, 2008)

i f di l i ( ) i di ( )• Action for dissolution (§18-802), winding up (§18-803) or appoint of a receiver (§18-805) of numerous LLCs.

§§ 18 802 d 18 803 il bl t b d• §§ 18-802 and 18-803 are available to members and managers. Claims brought by those that are not members or managers were dismissed.

• Contractual waiver of right to seek judicial dissolution is enforceable.

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Estate of Burke v. Eric S. Burke Home Improvementp2009 WL 1130388 (Del. Ch. April 14, 2009)

• 50/50% ownership LLC; one member died and his wife succeeded to interest.

• Dissolution sought based upon deadlock.

• No summary judgment• No summary judgment

• Whether “reasonably practicable” to carry on business of LLC is a mixed question of fact and law

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Donahue v. Corning 949 A.2d 574 (Del. Ch. 2008)

b d f h ffi f i b• A member, removed from the office of managing member, brought a suit challenging that removal.

Th b ht d t f i it i t• The member sought advancement of expenses in suit against the LLC.

• The advancement was denied It extended only to expenses• The advancement was denied. It extended only to expenses incurred in defense of a “claim, action, suit or proceeding” against him.

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Maitland v. International Registries( l h )2008 WL 2440521 (Del. Ch., June 6, 2008)

• Two members 50/50% ownership of LLC• Two members, 50/50% ownership of LLC.

• The decision of a majority of the members is controlling.

• In one member’s suit against the LLC, the other member could not unilaterally hire counsel on behalf of the LLC and direct its defense.

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Responding to Twin Bridgesp g g

• Query – does the doctrine of independent legal Q y p gsignificance apply in Delaware alternative entities (fn. 47)

• YES

• Del. Code Ann. tit. 6, § 15-1201

Del Code Ann tit 6 § 17-1101 (h)Del. Code Ann. tit. 6, § 17 1101 (h)

Del. Code Ann. tit. 6, § 18-1101 (h)

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Broken-Dealers Precluded from Operating U d S i LLC St tUnder Series LLC Structure

• SEC letter dated September 1, 2009

• Proposed to report assets and liabilities of the various series on a consolidated basis.series on a consolidated basis.

9

Stoll Keenon Ogden PLLC

Lexington Louisville

300 West Vine St. Suite 2100 2000 PNC Plaza

Lexington, KY 40507 500 West Jefferson St.

859.231.3000 Louisville, KY 40202

502 333 6000502.333.6000

Frankfort Henderson

307 Washington St. 201 C. North Main St.

Frankfort, KY 40601 Henderson, KY 42420

502.875.6220 270.631.4060

www.skofirm.com

10

Delaware Alternative Business Entities: New O t iti With LLC LLP d St t t T tOpportunities With LLCs, LLPs and Statutory Trust

Vehicles

International Uses of Trusts and Alternative EntitiesInternational Uses of Trusts and Alternative Entities

13 January 2010Willem J.L. Calkoen

NautaDutilh N.V.

Trusts

Understanding of civil code continentals split legal ownership and beneficial rightsp g p g

2

Use of Trusts internationally• 20 years ago: hide assets• Now: very rich > 500 mio complicated

schemesschemesput assets in trust for 20 yearsdepart from ownership for 20 years TRUSTthen to next generation

• Also: asset protectionsometimes optional in country A or Bsometimes optional in country A or B,e.g. World War II Shell, Philips, Unileveralso rich individuals

3

Atmosphere around TrustsTax inspectors in continental Europe mistrustTrusts.Th thi k t iThey think: tax evasion.Channel Islands, Caiman: all suspecte g European directive against trusts (moneye.g. European directive against trusts (moneylaundering).Maybe: Delaware more trustworthy.y y

NB: to be trustworthy Jersey has (as common law country) copied civil law foundationscountry) copied civil law foundations.

4

Hague Treaty on Trusts

All member countries accept Trusts.Only 12 ratified including UK CanadaOnly 12 ratified, including UK, Canada, Northern Ireland, Netherlands, Switzerland etcSwitzerland etc.Why not US?

5

Trusts: families ↔Trusts: families ↔ financings

Trusts are used in rich family structures.

Also:Financings: trust bundles debenture gholders rights

The advising worlds: family ↔ finance are not close enough to each other.

6

Problem for Dutch families

Transfer assets from parent to trust can be taxed as gift to third party: 68%.g p y

Many parents move to Monte Carlo or UKMany parents move to Monte Carlo or UK for 10 years. After that no gift tax.

7

Trusts in Business

• Financing: bundling interests of debentures.

• Aircraft financings: Irish trusts.• Sale lease back: investors participation• Sale lease back: investors participation

in trust which owns power plant.P t ld h i t t T t t• Put golden share in trust. Trustee votes.

8

Business use ofBusiness use of foundations (1)

Could have been Trustsa. Keep landing rightsp g g

Board friendly to Air France

Air France Foundation

KLM

9

Business use ofBusiness use of foundations (2)

b. Protection devicefriendsfriends

H til bidd F d tiHostile bidder Foundation

Target

10

Creative

• Delaware TrustBoard of Foundation?Board of Foundation?

Business

• Foreign bank account: US Trust Co has• Foreign bank account: US Trust Co has proxy for corporation

11

Trusts in Delaware

To avoid mistrust of tax inspector + fear to lose assets.

TRUSTWORTHY DELAWARE SYSTEM WITH GOOD JUDGES.

Use of Statutory Trusts give more “official” status.

12

Contact:

Willem J.L. CalkoenNautaDutilh N VNautaDutilh N.V.Weena 750, 3014 DA RotterdamP.O. Box 1110, 3000 BC Rotterdam

T: +31 10 22 40 406F: +31 10 22 40 008M: +31 6 534 90 451E: willem.calkoen@nautadutilh.com

13

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

MARK DONOHUE, ) ) Plaintiff, ) ) v. ) C.A. No. 3733-VCS ) HENRY CORNING, JOHN A. MAYER, ) FROHMAN ANDERSON, BERNARDO ) LLOVERA, DIANA PROPPER DE ) CALLEJON, EXPANSION CAPITAL ) PARTNERS, LLC, EXPANSION CAPITAL ) PARTNERS II, LP, and ) EXPANSION CAPITAL PARTNERS II – ) GENERAL PARTNER, LLC, ) ) Defendants. ) OPINION Date Submitted: June 5, 2008 Date Decided: June 20, 2008 Raymond J. DiCamillo, Esquire, Scott W. Perkins, Esquire, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Steven M. Schatz, Esquire, David J. Berger, Esquire, Tracy Tosh Lane, Esquire, WILSON SONSINI GOODRICH & ROSATI, P.C., Palo Alto, California, Attorneys for the Plaintiff. Steven L. Caponi, Esquire, Elizabeth A. Sloan, Esquire, BLANK ROME LLP, Wilmington, Delaware; Richard E. Levine, Esquire, Alisa J. Baker, Esquire, LEVINE & BAKER LLP, San Francisco, California, Attorneys for Defendants. STRINE, Vice Chancellor.

Through this motion for partial summary judgment, plaintiff Mark Donohue seeks

advancement for this action, which he initiated to determine who is in control of

defendant Expansion Capital Partners, LLC. Donohue, who was purportedly removed for

cause by a vote of the Non-Managing Members on Expansion’s Board in conformity with

Expansion’s LLC Agreement, challenges his removal by alleging that there was no

“Cause” as defined in the LLC Agreement. Donohue bases his claim for advancement on

an advancement provision in Expansion’s LLC agreement. But I interpret that

advancement provision as only providing advancement for the defense or other defensive

disposition of an actual or threatened proceeding. Here, because the defendants did not

threaten or initiate a proceeding against Donohue, he is not entitled to advancement.

In reaching that determination, I do not accept Expansion’s argument that

Donohue is suing to determine who is in control of Expansion solely for personal reasons

and, for present purposes, assume the truth of Donohue’s assertion that he brings suit, at

least in relevant part, to protect Expansion and its investors. Nonetheless, even if

Donohue’s litigation is motivated in part by a concern for Expansion’s investors that does

not answer the relevant contractual question, which is whether the LLC Agreement

provides him with a right to advancement if he chooses to bring a suit individually to

contest his removal. In my view, the best reading of the advancement provision in

Expansion’s LLC Agreement is that it only provides advancement to a person covered by

that provision who is in a defensive posture, in the sense of responding to an action or

other proceeding relating to his official capacity. I note, however, that the LLC

Agreement as written provides an adequate incentive for members and former members

1

such as Donohue to vindicate their contractual rights by providing a mechanism for

resolving disputes arising under the LLC Agreement that requires the losing party to pay

the costs and fees of the prevailing party.

I. Factual Background

At dispute in this action is control of Expansion Capital Partners, LLC, a “clean

technology” venture capital firm that was founded in 2002. Plaintiff Mark Donohue was

the Managing Partner, Chairman of the Board, and a Managing Member of Expansion

from Expansion’s founding until April 27, 2008. On that day, Donohue was purportedly

removed from his positions for “Cause” by a “Special Board Approval” under the

requirements for removing a Managing Member contained in Expansion’s Limited

Liability Company Agreement (the “Agreement”).1 The Agreement defines a “Special

Board Approval” as “the approval of a majority of the Non-Managing Members then

seated on the Board.”2 “Cause” is defined as “engaging in fraud, misappropriation,

embezzlement, gross negligence or disloyalty in the performance of duties, or the

dereliction of all or substantially all duties, by a Managing Member.”3 Donohue disputes

that he was validly removed and seeks an order to that effect under 6 Del. C. §§ 18-110

and 18-111. Trial on that issue is imminent and Donohue has brought on this expedited

motion to have his litigation costs advanced.

1 Perkins Aff. Ex. A (“Agreement”) § 7.1(b). 2 Id. § 1.1. 3 Id.

2

Donohue seeks advancement of his fees and expenses under an advancement and

indemnification provision in the Agreement. That section, § 3.5(b) of the Agreement (the

“Advancement Provision”), states the following:

To the fullest extent permitted by law, the Company shall indemnify and hold harmless (but only to the extent of and out of Company assets) the Covered Persons from and against all liabilities and expenses (including, without limitation, judgments, fines, penalties, amounts paid in settlement, attorneys’ fees, and costs of investigation) incurred in connection with the defense or disposition of any claim, action, suit, or proceeding, whether civil, criminal, administrative, or investigative, in which the Covered Person is involved, as a party or otherwise, or with which the Covered Person may be threatened, either during the Covered Person’s incumbency or thereafter, by reason of having been, or by reason of any action taken by, the Covered Person. The Company shall advance such expenses to the Covered Person upon receipt of an undertaking from such Covered Person to repay the advanced amount if it is ultimately determined that such Covered Person was not entitled to indemnification.4

The parties have attempted to turn this advancement proceeding into a mini-trial

on the merits of Donohue’s removal. As a trial on that issue will commence in less than a

month, I avoid detailing the factual record here. The relevant facts, as I find them based

on the limited record for this summary judgment motion, are simple. The defendants

decided to remove Donohue for cause. Before actually removing Donohue, the

defendants offered Donohue the option of a reduced role at Expansion. Donohue rejected

that option and was then purportedly removed for cause.5 Throughout the time period

4 Agreement § 3.5(b). A “Covered Person” includes “the Managing Members, the Venture Members, the members of the Board, a person who, as a representative of the Company, serves as a director, officer, employee, manager or agent of any Portfolio Company or of a managing member of any Portfolio Company and their respective Affiliates.” Id. § 3.5(a). 5 The defendants with knowledge of the basis for the decision to remove Donohue for cause, Henry Corning, Frohman Anderson, and John A. Mayer, explain that he was removed “due to

3

leading up to Donohue’s removal, Donohue threatened, through his words and actions,

that he would seek an adversarial proceeding if the defendants removed him. The

defendants responded to Donohue’s threats by suggesting that he either accept their offer

of a reduced role or face removal for cause. At no point did the defendants indicate to

Donohue that they intended to initiate any type of civil, criminal, administrative, or

investigative claim, action, suit, or proceeding against him.

II. Procedural Framework

The subject of this opinion is Donohue’s motion for a partial summary judgment

declaring that he is entitled to advancement. As is trite to say by now, the use of

summary judgment is particularly appropriate in advancement disputes.6 Under the well-

known standard for Rule 56 motions, a “motion for summary judgment will be granted

only when no genuine issue of material fact is in dispute and the moving party is entitled

to judgment as a matter of law.”7 The moving party bears the burden of establishing that

there are no issues of material fact, and the court must review all evidence in the light

most favorable to the non-moving party.8

III. The Parties’ Contentions

Donohue contends that he is entitled to advancement under the Advancement

Provision because: (1) he is a Covered Person; (2) the defendants “threatened to remove

him for ‘Cause’ and accused him of . . . breach[ing] his duties to Expansion and fraud and disloyalty in the performance of his duties.” Def. Am. Ans. to Pl. First Set of Interrogs. at 3. 6 E.g., Weinstock v. Lazard Debt Recovery GP, LLC, 2003 WL 21843254, at *2 (Del. Ch. Aug. 8, 2003). 7 Scureman v. Judge, 626 A.2d 5, 10 (Del. Ch. 1992). 8 Id. at 10-11.

4

engag[ing] in malfeasance as a Managing Member of Expansion;”9 and (3) he is

“disposing” of that threatened action by bringing this suit. Thus, Donohue views this

action as fitting within the Advancement Provision’s mandate that “the Company shall

indemnify and hold harmless . . . the Covered Persons from and against all liabilities and

expenses . . . incurred in connection with the defense or disposition of any claim, action,

suit, or proceeding, whether civil, criminal, administrative, or investigative, . . . with

which the Covered Person may be threatened, either during the Covered Person’s

incumbency or thereafter, by reason of having been, or by reason of any action taken by,

the Covered Person.”10 The defendants counter that Donohue has not been threatened

with “any claim, action, suit, or proceeding” (a “Proceeding”).11 The defendants also

assert that even if Donohue’s request for advancement fit within the language of the

Advancement Provision, he would not be entitled to advancement because he is acting in

furtherance of his own pecuniary interest rather than to fulfill his fiduciary obligations to

Expansion.

IV. Legal Analysis

I start by noting that I will not decide this summary judgment motion on the basis

that Donohue is merely acting out of his personal interest. There is color to Donohue’s

argument that he is pursuing this action “to remedy the wrongful removal of a Managing

9 Donohue Op. Br. at 10 (emphasis in original). 10 Agreement § 3.5(b). 11 Although the defendants facially dispute Donohue’s characterization of disposing of a threatened action, the parties actually agree that a “Covered Person can be advanced expenses for initiating a claim, but only if he is threatened with a ‘claim, action, suit, or proceeding’ that is ‘civil, criminal, administrative or investigative.’” Def. Ans. Br. at 16 n.2 (emphasis added).

5

Member by Defendants on behalf of Expansion and its investors.”12 Although I

acknowledge that, as with many disputes, Donohue may have both corporate and

personal motivations for bringing this action, Donohue’s decision to bring this action is

consistent with the policy behind allowing companies to advance funds to and indemnify

their directors and officers. As the Delaware Supreme Court has explained:

The invariant policy of Delaware legislation on indemnification is to promote the desirable end that corporate officials will resist what they consider unjustified suits and claims, secure in the knowledge that their reasonable expenses will be borne by the corporation they have served if they are vindicated. Beyond that, its larger purpose is to encourage capable men to serve as corporate directors, secure in the knowledge that expenses incurred by them in upholding their honesty and integrity as directors will be borne by the corporation they serve.13

That policy has supported the indemnification of corporate officials in somewhat

analogous intracorporate disputes. For example, in Hibbert v. Hollywood Park, Inc.,14 a

company’s board of directors split into two factions and those factions became embroiled

in a proxy contest. One faction initiated two lawsuits in their own names to compel the

competing faction of directors to attend board meetings and make proper disclosures in

their proxy statements. The faction instituting the litigation was denied preliminary relief

in both lawsuits and thereafter voluntarily dismissed those suits. That faction also lost

the proxy contest. They did, however, succeed in obtaining a court order requiring that

12 Donohue Op. Br. at 14. 13 Stifel Fin. Corp. v. Cochran, 809 A.2d 555, 561 (Del. 2002) (internal quotations and citations omitted); see also Essential Enters. Corp. v. Automatic Steel Prods., Inc., 164 A.2d 437, 441-42 (Del. Ch. 1960) (“I believe my construction of the statute and implementing by-law tends to promote the desirable end that corporate officials will resist what they consider to be illegal removal action, secure in the knowledge that their reasonable expenses will be borne by the corporation they have served if they are vindicated.”) (emphasis added). 14 457 A.2d 339 (Del. 1983).

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they be indemnified for the costs of the lawsuits under the company’s bylaws. In

granting their request for indemnification, the Delaware Supreme Court found that

nothing in the company’s bylaws, which simply required that the indemnitee be involved

“as a party or otherwise,” prevented a director from being indemnified for a lawsuit in

which he was a plaintiff.15 In doing so, the Delaware Supreme Court rejected the

Superior Court’s conclusion that the indemnification provision “appear[s] to have been

adopted in contemplation of defensive applications.”16 The Court explained that it could

not “say that such litigation was entirely initiated without regard to any duty the plaintiffs

might have had as directors.”17

But I cannot award Donohue advancement merely because Donohue has a

plausible argument that he brought suit, at least in part, to advance the interests of

Expansion and that granting Donohue advancement in such a situation would arguably

comport with the public policy behind allowing indemnification in intracorporate

disputes. Rather, because Expansion has nearly unfettered contractual discretion in

determining whether to grant advancement,18 Donohue must establish that he is entitled

15 Id. at 343. 16 Id. 17 Id. at 344. In Shearin v. E.F. Hutton Group, Inc., Chancellor Allen interpreted Hibbert as “recogniz[ing] that permissible indemnification claims will include those deriving from lawsuits brought by directors, officers, agents, etc., only insofar as the suit was brought as part of the employee’s duties to the corporation and its shareholders.” 652 A.2d 578, 594 (Del. Ch. 1994) (emphasis in original). Thus, he dismissed the plaintiff’s claim for indemnification because the suits she sought to be indemnified for were “suits plainly sought to advance her own interest, not the interest of the corporation.” Id. at 594. 18 See 6 Del. C. § 18-108 (“Subject to such standards and restrictions, if any, as are set forth in its limited liability company agreement, a limited liability company may, and shall have the power to, indemnify and hold harmless any member or manager or other person from and against any and all claims and demands whatsoever.”).

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to advancement under the terms of Expansion’s Advancement Provision itself. The

method by which Donohue attempts to do so is telling. Instead of arguing that the

Advancement Provision contemplates coverage for directors initiating suit to fulfill their

fiduciary duties by challenging an allegedly wrongful removal of Expansion’s Managing

Partner, Donohue contends that he is responding to a threatened Proceeding.19 In other

words, Donohue implicitly acknowledges that the Advancement Provision requires that

the action taken by Donohue, although not strictly limited to defending a suit, be

defensive or responsive in nature.20

I find Donohue’s implicit acknowledgement that conduct must be responsive or

defensive in nature to give rise to an advancement right comports with the best

interpretation of that Provision. As would be expected, the defendants take the same

reading. In other words, both the company whose LLC Agreement is in dispute and the

person who was the founder of the company and directed the drafting of that Agreement

agree on this interpretive point. As such, I need not dwell on the interpretation of the “in

connection with the defense or disposition of” a Proceeding language, language that was

notably absent from the bylaw at issue in Hibbert.21 I do, however, note that that

language was likely added to the Advancement Provision precisely to contract around the

result in Hibbert, whereby the company could be liable to provide advancement and

indemnification for proceedings initiated by directors that were not responsive to an

19 Donohue Op. Br. at 9-10; Donohue Rep. Br. at 7-9. 20 That, of course, flows from the Advancement Provision’s limitation that only expenses “in connection with the defense or disposition” of any actual or threatened proceeding be advanced. Agreement § 3.5(b) (emphasis added). 21 See Hibbert, 457 A.2d at 342.

8

existing or threatened Proceeding.22 Moreover, the “defense or disposition of” language

would be rendered mere surplusage if it were not interpreted as requiring the action to be

defensive or responsive.23 In other words, without such an interpretation, one could

strike that language from the Advancement Provision without changing the meaning of

the Advancement Provision. That the remainder of the language in the Advancement

Provision is broad does not mean that I should ignore the defensive limitation nor does it

mean that the broad language cannot be reconciled with the defensive limitation. For

example, the “disposition of” language easily dovetails with the “in which the Covered

Person is involved, as a party or otherwise” to cover the situation where, in response to an

actual or threatened Proceeding, the Covered Person brings a separate lawsuit to dispose

of or negate an actual or threatened Proceeding. Likewise, the same language would

likely cover a situation in which a Covered Person retains his own counsel to protect his

22 One leading treatise on Delaware corporation law explains, after discussing Hibbert and its progeny, that corporations should consider including such limiting language in their bylaws if they do not intended to indemnify intracorporate disputes:

That indemnification under Section 145 extends to expenses incurred by a prospective indemnitee as a plaintiff in an action brought in the course of or growing out of his corporate duties is probably a fair construction of the statute’s intent. However, the standard applied by the Supreme Court in Hibbert and Roven can be viewed as unduly lenient, especially since the Court appeared to downplay the personal interests of the indemnitees being advanced in each litigation. Hence, a corporation wishing to avoid being compelled to indemnify dissidents who sue fellow directors in intracorporate disputes must place appropriate limitations upon its indemnification bylaw.

DAVID A. DREXLER, LEWIS S. BLACK, JR. & A. GILCHRIST SPARKS, III, DELAWARE CORPORATE LAW AND PRACTICE § 16.02[3] (2008). 23 See, e.g., NAMA Holdings, LLC v. World Mkt. Ctr. Venture, LLC, 2007 WL 2088851, at *6 (Del. Ch. July 20, 2007) (“Contractual interpretation operates under the assumption that the parties never include superfluous verbiage in their agreement, and that each word should be given meaning and effect by the court.”); E.I. du Pont de Nemours & Co., Inc. v. Shell Oil Co., 498 A.2d 1108, 1113 (Del. 1985) (“[A] court must construe the agreement as a whole, giving effect to all provisions therein.”).

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interests when he is deposed or required to testify before a grand jury as part of a

governmental investigation of the company or otherwise required to address civil,

criminal, administrative, or investigative Proceedings directed at him by other parties as a

result of actions taken in his official capacity but that do not involve the Covered Person

being formally named as a defendant. The Advancement Provision addresses these

situations by providing coverage for the costs Covered Persons incur responding to such

matters, although they technically do not require a “defense,” by using the term

“disposition of.”24

The problem with Donohue’s argument is that he cannot indentify the threatened

Proceeding that he is defending or disposing of by bringing this suit. The only explicit

threat by the defendants was that they would remove him for cause. The defendants

followed through on that threat and this suit is a direct response to Donohue’s removal.

But a for cause removal under the terms of the Agreement is not a Proceeding as

contemplated by the Advancement Provision. Donohue knows that and attempts to

create a threatened Proceeding by arguing that a for cause removal equates to an

accusation that he breached his fiduciary duties to Expansion. But Donohue stretches to

turn the accusation that he breached his fiduciary duties into a threatened Proceeding.

The biggest reason that Donohue must reach in creating a threatened Proceeding is that

defendants repeatedly told Donohue that they were not threatening him with a

24 AMERICAN HERITAGE DICTIONARY OF THE ENGLISH LANGUAGE 522 (4th ed. 2000) (defining “dispose of” as “[t]o attend to; settle” or “[t]o get rid of”); see also BLACK’S LAW DICTIONARY 505 (8th ed. 2004) (defining “disposition” as “[a] final settlement or determination”).

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Proceeding.25 That is, the removal of Donohue was the only consequence the defendants

intended to attach to the actions they said he engaged in that constituted “Cause.”26

The critical question therefore is whether the allegation that Donohue breached his

fiduciary duties, which was made solely to support his removal for cause, and combined

with multiple statements that the defendants were not threatening any “claim, action, suit,

or proceeding” fits within the Advancement Provision’s definition of a threatened “claim,

action, suit, or proceeding.” Looking to the dictionary is not particularly helpful because

25 E.g., Baker Aff. Ex. D (email from the defendants’ counsel stating that “[n]o such proceeding is pending, and none has been threatened”); id. Ex. C (letter from defendants’ counsel stating “[defendants] have not threatened a ‘claim,’ or any litigation”). The only statement by the defendants in the record that could arguably be read as suggesting a threatened Proceeding is a statement from Expansion’s counsel on March 7, 2008 that “[o]ur clients are prepared to engage in a mediation process in the hopes of avoiding adversary proceedings.” Perkins Aff. Ex. B at 2. But that statement is clearly a response to Donohue’s letter the day before to the other Managing Members stating that he wanted mediation, had “hired an outside legal team,” that his “team [was] awaiting the name of your attorneys and your suggestions for a mediator,” and that he was “hopeful we do not need to get legal depositions under oath, so that we can fully decipher your actions.” Propper Aff. Ex. C. Frankly, Donohue has the burden to establish that the defendants have threatened a Proceeding against him and he has been unable to point to any facts suggesting that the defendants intended to do anything other than remove him for cause under the Agreement and continue on with their business, hoping to put the issues with Donohue behind them. 26 Having made the decision not to institute or threaten to institute a proceeding against Donohue for his actions and used that decision to their advantage in what they describe as “a game of chess . . . on the issue of advancement,” the defendants are stuck with that decision. Def. Ans. Br. at 7; see also id. at 14 (“The fact is that, from the beginning, Defendants were acutely aware of the Advancement Provision and went to extraordinary lengths to make sure that it did not threaten or take any action that would trigger a right to advancement. Indeed, despite [Donohue’s behavior], Defendants made the hard decision NOT to institute and not to threaten to institute any proceedings against Donohue. No counter-claim was threatened or filed in the arbitration. No counterclaim has been threatened or filed here.”). That is, the defendants are estopped from later initiating any proceeding against Donohue for the actions at dispute in this action. See, e.g., In re Silver Leaf, L.L.C., 2004 WL 1517127, at *2 (Del. Ch. June 29, 2004) (“Judicial estoppel prevents a litigant from advancing an argument that contradicts a position previously taken by that same litigant, and that [a court] was persuaded to accept as the basis for its ruling. Judicial estoppel is an equitable doctrine designed to protect the integrity of the judicial process by prohibiting parties from deliberately changing positions according to the exigencies of the moment.”) (internal quotations and citations omitted).

11

threaten can mean “[t]o express a threat against,” which suggests an explicit threat of a

proceeding would be required, or “[t]o give signs or warnings of,” which suggests the

mere possibility of a future proceeding would suffice.27 What is informative, however, is

looking at the Advancement Provision as a whole. The Provision’s limitation that

expenses will only be advanced for defensive or responsive actions would be eviscerated

by taking an overly broad reading of threatened Proceedings. In other words, if any

cloud on the horizon could constitute a threatened Proceeding, the language specifically

included in the bylaws to limit advancement to defensive or responsive actions would

become meaningless because the Covered Person could find a threatened Proceeding to

use as a pretext in initiating whatever type of affirmative action he desired to bring. This

dispute provides an example of that. Here, Donohue wishes to dispute his removal for

cause, but the Advancement Provision does not grant advancement for such an action.

Donohue, therefore, seeks to recast this action as responsive to a threatened Proceeding

for breach of fiduciary duty that the defendants have expressly disclaimed.

Put simply, I cannot ignore that with regard to proceedings by Expansion against a

Covered Person, the Advancement Provision is best interpreted as giving Expansion

27 AMERICAN HERITAGE DICTIONARY OF THE ENGLISH LANGUAGE 1801 (4th ed. 2000); see also BLACK’S LAW DICTIONARY 1519 (8th ed. 2004) (defining a “threat” as a “communicated intent to inflict harm or loss on another” or an “indication of approaching menace”). The only relevant case cited by Donohue is unhelpful to him because the threat in that suit was much more palpable than the threat in this suit. See Schoon v. Troy Corp., 2008 WL 821666, at *8 (Del. Ch. Mar. 28, 2008) (finding that a director was threatened with a proceeding where the company unsuccessfully attempted to interject fiduciary duty claims into a § 220 action as counterclaims against the director, continued to actively investigate those claims after the counterclaims had been dismissed, and ultimately instituted a separate action based on the fiduciary duty claims); see also id. (“Troy exhibited its clear intention to raise the fiduciary duty claims against Schoon by naming him in the counterclaim.”) (emphasis added).

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discretion as to whether to institute or threaten a proceeding against a Covered Person in

a manner that would trigger that Covered Person’s right to advancement. There is

nothing invidious or unreasonable about interpreting the Advancement Provision that

way.28 Moreover, the LLC Agreement itself contains an incentive for Members or

Formers Members to bring meritorious disputes over the LLC Agreement or the actions

of other Members — the Agreement requires that the losing party bear its own fees as

well as the fees of the prevailing party.29

V. Conclusion

For the foregoing reasons, I deny Donohue’s motion for partial summary judgment

and dismiss Count II of the amended complaint. Consistent with that ruling, I deny

Donohue’s request for an award of fees on fees. IT IS SO ORDERED.

28 See Gentile v. SinglePoint Fin., Inc., 787 A.2d 102, 110 (Del. Ch. 2001) (interpreting a more restrictive limitation in an advancement provision that required the corporate official to be a named defendant or respondent in a proceeding in accordance with its plain language even though “such a bright line rule leads to some strategic behavior by the parties”). 29 Agreement § 12.2. The LLC Agreement contemplates that disputes under it will be resolved in arbitration. But the parties here agreed to forego arbitration and resolve their disputes in this court.

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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

R&R CAPITAL, LLC, a New York limited liability company, and FTP CAPITAL, LLC, a New York limited liability company,

Petitioners, v.

BUCK & DOE RUN VALLEY FARMS, LLC, a Delaware limited liability company, GRAYS FERRY PROPERTIES, LLC, a Delaware limited liability company, HOPE LAND, LLC, a Delaware limited liability company, MERRITT LAND, LLC, a Delaware limited liability company, UNIONVILLE LAND, LLC, a Delaware limited liability company, MOORE STREET, LLC, a Delaware limited liability company, PDF PROPERTIES, LLC, a Delaware limited liability company, PANDORA FARMS, LLC, a Delaware limited liability company, and PANDORA RACING, LLC, a Delaware limited liability company,

Respondents.

) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) )

Civil Action No. 3803-CC

MEMORANDUM OPINION

Date Submitted: August 7, 2008 Date Decided: August 19, 2008

Richard P. Rollo and Scott W. Perkins, of RICHARDS, LAYTON & FINGER, P.A., Wilmington, DE; OF COUNSEL: Paul Sweeney, of HOGAN & HARTSON LLP, New York, New York, Attorneys for Petitioners.

1

John C. Phillips, Jr., Brian E. Farnan, and David A, Bilson, of PHILLIPS, GOLDMAN & SPENCE, P.A., Wilmington, Delaware, Attorneys for Respondents. CHANDLER, Chancellor

2

For Shakespeare, it may have been the play, but for a Delaware limited

liability company, the contract’s the thing.1 Ultimately, it is the contract that

compels the Court’s decision in this case because it is the contract that “defines the

scope, structure, and personality of limited liability companies.”2 On June 2, 2008,

two New York LLCs filed a petition with this Court seeking dissolution of nine

separate Delaware LLCs. The respondent Delaware LLCs, some of which have

had their certificates of formation canceled by the state pursuant to 6 Del. C. § 18-

1108 for failure to pay their annual taxes, have moved to dismiss the petition. That

motion is based primarily on two arguments. First, with respect to two of the

respondent entities, the petitioners lack standing to seek dissolution because they

are neither members nor managers. For reasons explained more fully below, I

conclude that this argument is meritorious, but incomplete. Consequently, I grant

respondent’s motion to dismiss the claims against Pandora Farms, LLC and

Pandora Racing, LLC pursuant to 6 Del C. §§ 18-802 and 18-803, but cannot

dismiss the claim pursuant to 6 Del. C. § 18-805. Second, with respect to the other

respondent entities, of which the petitioners are members, the respondents argue

that petitioners have waived their right to seek dissolution in the respective LLC

Agreements. Again, for reasons explained at length below, I conclude that this 1 Compare WILLIAM SHAKESPEARE, HAMLET act 1, sc. 2, ln. 604 (“the play’s the thing”), with TravelCenters of Am., LLC v. Brog, C.A. No. 3516-CC, 2008 WL 1746987, at *1 (Del. Ch. Apr. 3, 2008) (“Limited Liability Companies are creatures of contract”). 2 Fisk Ventures, LLC v. Segal, C.A. No. 3017-CC, 2008 WL 1961156, at *1 (Del. Ch. May 7, 2008).

1

argument is meritorious and that Delaware’s strong policy in favor of freedom of

contract in the LLC Agreements requires such a result.

I. BACKGROUND

The factual background of this dispute is somewhat predictable; the

procedural background, however, is a veritable nightmare. Generally, the

respondent entities were formed years ago with capital contributions from the

Russet brothers (presumably the Rs in R&R Capital) and Linda Merritt. The bulk

of the capital (over $9.7 million) was provided by the petitioners, but Merritt had

the sole and exclusive power to manage the entities.3 These respondent entities

own land and race horses. Unfortunately, the relationship between the financiers,

the Russets, and their appointed manager, Merritt, has deteriorated, and, perhaps

predictably,4 the parties have turned to the courts.

The courts the parties have turned to, however, seemingly span the eastern

seaboard. In addition to the present case, there are related proceedings in the state

court in Chester County, Pennsylvania, in the federal district court in the Eastern

District of Pennsylvania in Philadelphia, and in the Civil Division of the New York

County Supreme Court in New York. The procedural details of those other cases

are irrelevant to the pending motion to dismiss, but the existence of those other

3 Petition at ¶ 1. 4 Justice Charles E. Ramos, before whom many of these parties are presently litigating in New York, sagely noted that race horses are a “[g]reat way to lose money.” See Transcript of Oral Argument at 6, R&R Capital v. Merritt, No. 604080 (N.Y. Sup. Ct. July 29, 2008).

2

cases has made this action a minefield in terms of comity and concerns of issue and

claim preclusion.

The June 2 petition for dissolution seeks, in the alternative, the winding up

and dissolution of the respondent entities or the appointment of a receiver. The

petitioners allege that most of the respondent entities have had their certificates of

formation canceled for failing to designate a registered agent, for failing to pay

annual taxes, or for both. They further allege that Merritt’s attempts to revive the

cancelled certificates are ineffective as a matter of law,5 that Merritt has refused to

provide an accounting of the canceled entities,6 and that Merritt—along with her

“longtime boyfriend” Leonard Pelullo—has defrauded the entities and orchestrated

self-dealing transactions.7 Neither Merritt nor Pelullo, however, is a party to this

action.

On June 12, 2008, shortly after the petition was filed, the Court entered a

status quo order to preserve the respondents’ assets in case the Court ultimately

ordered dissolution. Since that time, each side has sought modification of the

status quo order, and the respondents have moved to dismiss the petition. Briefing

on the motion to dismiss was completed on August 4, 2008, and the Court held a

status conference with counsel on August 7, 2008, at which the Court announced it

5 Petition at ¶¶ 17–18. 6 Id. at ¶ 20. 7 Id.

3

would grant the motion to dismiss in part. This is the Court’s written opinion

explaining that decision.

II. ANALYSIS

Rule 12(b)(6) directs the Court to dismiss a case when the complaint or

petition fails “to state a claim upon which relief can be granted.”8 When reviewing

a motion under this rule, the Court “‘must determine whether it appears with

reasonable certainty that, under any set of facts that could be proven to support the

claims asserted, the plaintiffs would not be entitled to relief.’”9 That inquiry is

limited to the facts alleged in the petition, which the Court must assume are true

when making its determination.10 However, the Court may also “consider the

unambiguous terms of documents incorporated by reference in the complaint when

the documents are integral to the plaintiff’s claims.”11 Consequently, because the

petition explicitly references and relies on the respondent entities’ various LLC

Agreements, the Court may consider the unambiguous terms of those contracts

without converting this motion to dismiss into a motion for summary judgment.12

8 Ct. Ch. R. 12(b)(6). 9 VLIW Tech., LLC v. Hewlett-Packard Co., 840 A.2d 606, 610–11 (Del. 2003) (quoting McMullin v. Beran, 765 A.2d 910, 916 (Del. 2000)). 10 Id. But see In re Coca-Cola Enters., C.A. No. 1927-CC, 2007 WL 3122370, at *3–4 (Del. Ch. Oct. 17, 2007) (noting that the Court will not give “any credence to conclusory allegations” and noting that “[a]n allegation is conclusory when it merely states a generalized conclusion with no supporting facts”), aff’d sub nom. Int’l Bhd. of Teamsters v. Coca-Cola Co., No. 601, 2007, 2008 WL 2484587 (Del. June 20, 2008). 11 E.g., Encite v. Soni, C.A. No. 2476-CC, 2008 WL 2973015, at *5 (Del. Ch. Aug. 1, 2008). 12 See In re Santa Fe Pacific Corp. S’holder Litig., 669 A.2d 59, 69–70 (Del. 1995).

4

A. The Pandora Entities

Before the Court need look to any contractual language, however, it must

consider the argument of Pandora Racing, LLC and Pandora Farms, LLC

(collectively, the “Pandora Entities”), which contend that the claims against them

must be dismissed on account of standing. Specifically, the Pandora Entities

dispute petitioners’ ability to seek dissolution or winding up under 6 Del. C. §§ 18-

802 or 18-803. Under section 18-802, “[o]n application by or for a member or

manager, the Court of Chancery may decree dissolution of a limited liability

company whenever it is not reasonably practicable to carry on the business in

conformity with a limited liability company agreement.” Similarly, under section

18-803, only managers or members have standing to wind up a limited liability

company’s affairs.13

The petitioners, however, are neither members nor managers of the Pandora

Entities. The sole member of the two Pandora Entities is PDF Properties, LLC.

There is no authority for the proposition that a member of an LLC which is itself a

13 6 Del. C. § 18-803 (“Unless otherwise provided in a limited liability company agreement, a manager who has not wrongfully dissolved a limited liability company or, if none, the members or a person approved by the members or, if there is more than 1 class or group of members, then by each class or group of members, in either case, by members who own more than 50 percent of the then current percentage or other interest in the profits of the limited liability company owned by all of the members or by the members in each class or group, as appropriate, may wind up the limited liability company’s affairs; but the Court of Chancery, upon cause shown, may wind up the limited liability company’s affairs upon application of any member or manager, the member’s or manager’s personal representative or assignee, and in connection therewith, may appoint a liquidating trustee.”).

5

member of another LLC can seek dissolution or the winding up of the latter LLC.

Under the plain language of the LLC Act, the petition to dissolve or wind up the

affairs of the Pandora Entities must be dismissed.

The petition, however, also seeks the appointment of a receiver for the

Pandora Entities pursuant to 6 Del. C. § 18-805. Section 18-805 permits any

“creditor, member or manager of the Limited liability company, or any other

person who shows good cause” to present an application for the appointment of a

receiver. The Pandora Entities do not challenge petitioners’ ability to seek relief

pursuant to section 18-805 and, therefore, that claim survives this motion.14

B. The Waiver Entities

Petitioners are members of the other seven respondent entities, and there is

no question, therefore, that they have statutory standing to seek relief under

sections 18-802, 18-803, and 18-805. Nevertheless, Buck & Doe Run Valley

Farms, LLC, Grays Ferry Properties, LLC, Hope Land, LLC, Merritt Land, LLC,

Unionville Land, LLC, Moore Street, LLC, and PDF Properties, LLC (collectively,

the “Waiver Entities”) contend that the petitioners cannot pursue this action

because they have waived their rights to seek dissolution or the appointment of a

liquidator. Specifically, the Waiver Entities point to provisions of their respective

14 See Respondents’ Reply Br. at 16 n.10 (“Respondents are at a loss as to why Petitioners expended so much effort and placed so much emphasis in their Answering Brief on their standing to seek relief against the Pandora Entities under 6 Del. C. § 805 [sic] as Respondents never challenged Petitioners’ standing to do so in the first place.”).

6

LLC Agreements in which the members purported to waive these rights. The

petitioners concede that the contractual language purports to effect such a waiver,

but nonetheless argue that the waiver is invalid as a matter of law.15 Because

neither Delaware’s LLC Act nor its policy precludes such a waiver, and because

the waiver of such rights would not leave an LLC member inequitably remediless,

this Court concludes that petitioners have indeed waived these rights and grants the

Waiver Entities’ motion to dismiss.

1. The LLC Agreements

The seven Waiver Entities have identical LLC Agreements and each one

addresses dissolution explicitly. Specifically, their Agreements limit the events

that shall cause dissolution to five events:

(i) an Event of Withdrawal of a Member . . .; (ii) the affirmative vote of all Members; (iii) upon the sale of all or substantially all of the Company’s assets; (iv) the conversion of the Company into a corporation or other Person; or (v) upon the entry of a decree of judicial dissolution under Section 18-802 of the Act.

The Agreements, however, further provide that the Members have waived the right

to seek dissolution under section 18-802. The seven LLC Agreements contain the

following provision:

Waiver of Dissolution Rights. The Members agree that irreparable damage would occur if any member should

15 E.g., Petition at ¶ 25 (“Although certain of the operating agreements purport to waive the members’ right to seek judicial dissolution and/or the appointment of a liquidator, the provisions are unenforceable.”).

7

bring an action for judicial dissolution of the Company. Accordingly each member accepts the provisions under this Agreement as such Member’s sole entitlement on Dissolution of the Company and waives and renounces such Member’s right to seek a court decree of dissolution or to seek the appointment by a court of a liquidator for the Company.

Although not addressed by the parties, the Court notes that there is an

apparent tension between these two provisions. Section 10.1 provides that one

means by which dissolution of the limited liability company will occur is the

“entry of a decree of judicial dissolution under Section 18-802 of the Act.” Section

13.1, however, appears to prohibit members from seeking the entry of such a

decree. If these provisions actually conflicted, the Waiver Entities’ argument

would be rendered unpersuasive by virtue of ambiguity in the Agreement. This

Court is constrained, however, by rules of interpretation that require it to attempt to

“harmoniz[e] seemingly conflicting contract provisions,”16 and these provisions

can in fact be harmonized. A “decree of judicial dissolution” may be entered by

the Court under section 18-802 upon an “application by or for a member or

manager.” Although the members and managers of the Waiver Entities have

apparently waived their rights to make an application under section 18-802, the

members and managers cannot waive the rights of others to make such applications

16 See United Rentals, Inc. v. RAM Holdings, Inc., 937 A.2d 810, 831–32 (Del. Ch. 2007); see also Counsel of the Dorset Condo Apartments v. Gordon, 801 A.2d 1, 7 (Del. 2002) (“A court must interpret contractual provisions in a way that gives effect to every term of the instrument, and that, if possible, reconciles all of the provisions of the instrument when read as a whole.”).

8

for them.17 Consequently, under the interpretive principle requiring

harmonization, sections 10.1 and 13.1 do not conflict because it is possible both

that a court could enter a “decree of judicial dissolution under Section 18-802 of

the Act” and that the members could nonetheless have waived their right to seek

such a decree.

2. Freedom of Contract and Limited Liability Companies

As this Court has noted, “Limited Liability Companies are creatures of

contract, ‘designed to afford the maximum amount of freedom of contract, private

ordering and flexibility to the parties involved.’”18 Delaware’s LLC Act leaves to

the members of a limited liability company the task of “arrang[ing] a

manager/investor governance relationship;” the Act generally provides defaults

that can be modified by contract.19 Indeed, the Act itself explicitly provides that

“[i]t is the policy of this chapter to give the maximum effect to the principle of

freedom of contract and to the enforceability of limited liability company

17 The Court assumes without affirmatively ruling that there is a difference between applications made by members and managers and those made for them. This assumption is justified by the principle of statutory construction that requires the Court to give meaning to every word. See Oceanport Indus., Inc. v. Wilmington Stevedores, Inc., 636 A.2d 892, 900 (Del. 1994) (“[W]ords in a statute should not be construed as surplusage if there is a reasonable construction which will give them meaning.”). 18 TravelCenters of Am., LLC v. Brog, C.A. No. 3516-CC, 2008 WL 1746987, at *1 (Del. Ch. Apr. 3, 2008) (quoting In re Grupo Dos Chiles, LLC, C.A. No. 1447-N, 2006 WL 668443, at *2 (Del. Ch. Mar. 10, 2006)). 19 See Myron T. Steele, Judicial Scrutiny of Fiduciary Duties in Delaware Limited Partnerships and Limited Liability Companies, 32 DEL. J. CORP. L. 1, 5 (2007) (concluding that courts should not “superimpose[e] their view ex post on how that relationship should be structured and scrutinized”).

9

agreements.”20 It is this flexibility that gives “uncorporate” entities like limited

liability companies their allure;21 “a principle attraction of the LLC form of entity

is the statutory freedom granted to members to shape, by contract, their own

approach to common business ‘relationship’ problems.”22

The members of the Waiver Entities obviously availed themselves of this

flexibility. Their respective LLC Agreements outline—often in great detail—the

governance structure the members agreed would best serve the companies.

Moreover, as noted above, the LLC Agreements also provide for the dissolution of

the entities. In those Agreements, the members agreed that the initiation of a

dissolution action would cause “irreparable damage,” and they therefore agreed to

waive their rights to seek dissolution or the appointment of a liquidator.23 To the

20 6 Del. C. § 18-1101(b); see also Sandra K. Miller, What Fiduciary Duties Should Apply to the LLC Manager after More than a Decade of Experimentation?, 32 J. CORP. L. 565, 569–70 (2007) (“The contractarian view of investors in unincorporated entities is that parties should be free to strike their own bargain free from external interference. This position has gained significant popularity, particularly in Delaware. The contractarian philosophy embraces the view that statutory business laws should be kept to a minimum, giving maximum freedom to business participants to contractually determine their legal rights and responsibilities. Based on this philosophy, several LLC statutes, including that of Delaware, expressly defer to the parties’ agreement. The Delaware statute contains few default statutory rules for the operating agreement and fails to provide the statutory remedy of a dissolution or buy-out in the event that the controlling LLC owner engages in fraudulent, illegal, or oppressive conduct.”). 21 See Larry E. Ribstein, The Rise of the Uncorporation 3 (Illinois Law and Economics Research Papers Series, Research Paper No. LE07-026, 2007) (“[U]ncorporate firms have flexible control rules and permit contractual modification or even elimination of fiduciary duties.”), available at http://ssrn.com/abstract=1003790. 22 Haley v. Talcott, 864 A.2d 86, 88 (Del. Ch. 2004). 23 Petitioners argue that the language of the purported waiver—i.e., the use of “liquidator” rather than “receiver”—precludes this Court from determining that petitioners have waived their rights under 6 Del. C. § 18-805. Indeed, section 18-805 does not use the term liquidator, but it is unambiguously clear from the language of the LLC Agreement that the term liquidator was

10

extent this waiver is enforceable under the statute and public policy, petitioners’

suit against the Waiver Entities under sections 18-802, 18-803, and 18-805 is

barred by contract and must be dismissed.24

3. The LLC Act Does Not Prohibit Waiver of these Rights

Petitioners make two distinct but ultimately unavailing arguments as to why

the LLC Act prohibits waiver of a member’s right to seek dissolution. First,

petitioners point to 6 Del. C. § 18-109(d) for the proposition that non-managing

members may not waive their rights to maintain legal actions in Delaware courts

absent an agreement to arbitrate. Because the petitioners are not managing

members and because there is no agreement to arbitrate in place, petitioners argue

that the section 13.1 waiver violates this statutory provision and is therefore void.

meant to include a receiver under section 18-805. “Liquidator” is not itself a defined term under the LLC Agreement, but “liquidation” is defined in section 1.1(s) as “the process of winding up the Company after its Dissolution.” Thus, a “liquidator” must be a person who conducts the winding up of the company’s unfinished business. A “receiver” under 6 Del. C. § 18-805 is appointed “to take charge of the limited liability company” and its property with the power “to do all . . . acts which might be done by the limited liability company . . . that may be necessary for the final settlement of the unfinished business of the limited liability company.” It is clear from this statutory language and from the LLC Agreement that the term “liquidator” as used in the Agreement is tantamount to a section 18-805 receiver. 24 Cf. CIT Comm’ns Fin. Corp. v. Level 3 Comm’ns, LLC, No. 06C-01-236 JRS, 2008 WL 2586694, at *5 (Del. Super. Ct. June 6, 2008) (noting that “party may waive the right to trial by jury in many ways, including by contract.”); Fisk Ventures, LLC v. Segal, C.A. No. 3017-CC, 2008 WL 1961156, at *11 (Del. Ch. May 7, 2008) (dismissing third-party claims for breach of fiduciary duty because such claims and duties were waived in the operative LLC Agreement); Matria Healthcare, Inc. v. Coral SR LLC, C.A. No. 2513-N, 2007 WL 763303, at *9 (Del. Ch. Mar. 1, 2007) (dismissing two counts of a complaint because the relief sought had to be brought in accordance with the parties’ arbitration agreement); Hintmann v. Fred Weber, Inc., C.A. No. 12839, 1998 WL 83052, at *10 (Del. Ch. Feb. 17, 1998) (noting that “a purchaser of preferred shares may contract away his or her right to have this Court determine the shares’ fair value”).

11

Section 18-109, however, is captioned “Service of process on managers and

liquidating trustees,” and is at most a venue provision.

In its entirety, section 18-109(d) reads:

In a written limited liability company agreement or other writing, a manager or member may consent to be subject to the nonexclusive jurisdiction of the courts of, or arbitration in, a specified jurisdiction, or the exclusive jurisdiction of the courts of the State of Delaware, or the exclusivity of arbitration in a specified jurisdiction or the State of Delaware, and to be served with legal process in the manner prescribed in such limited liability company agreement or other writing. Except by agreeing to arbitrate any arbitrable matter in a specified jurisdiction or in the State of Delaware, a member who is not a manager may not waive its right to maintain a legal action or proceeding in the courts of the State of Delaware with respect to matters relating to the organization or internal affairs of a limited liability company.25

Although petitioners emphasize the final sentence, the gist of the provision read in

its entirety is about venue and preventing members from forming an LLC in

Delaware while barring jurisdiction in the state; it has nothing to do with members’

broader ability to structure the entity and their substantive rights with respect to it.

On the whole, section 18-109 ensures that Delaware retains ultimate jurisdiction

over its limited liability companies by providing for service of process through a

registered agent in the state and for jurisdiction in the state courts or an arbitration

forum. 25 6 Del. C. § 18-109(d).

12

Petitioners’ out-of-context interpretation of the final sentence of section 18-

109(d) is untenable. If petitioners were correct, the LLC Act would conflict with

itself, and the rules of statutory construction caution this Court against such a

conclusion.26 For example, under petitioners’ reading, a non-managing member

could not waive his or her right to maintain a claim for a breach of fiduciary

obligations in the Delaware courts because fiduciary duties are an essential part of

an entity’s “internal affairs.”27 In spite of this, the LLC Act specifically permits

the members of limited liability companies to eliminate fiduciary duties.28

Because section 18-109 can (more reasonably) be construed to avoid this conflict,

the Court concludes that section 18-109 does not operate outside its plain language

and governs only service of process and venue.

26E.g., Christina Educ. Ass'n v. Del. State Bd. of Educ., No. 93A-07-015, 1994 WL 637000, at *3 (Del. Super. Ct. May 25, 1994) (“There is a rule of statutory construction that provides guidance for the interpretation of conflicting statutes. Essentially, it states: ‘If statutes appear to conflict, they must be construed, if possible, to give effect to each.’”). 27 Cf. In re Topps Co. S’holders Litig., 924 A.2d 951, 960 (Del. Ch. 2007) (“Delaware’s system of corporate law, the adjudication of cases involving the fiduciary duties of directors in new business dynamics is one of the most important methods of regulating the internal affairs of corporations, as these cases articulate the equitable boundaries that cabin directors’ exercise of their capacious statutory authority.”). 28 6 Del. C. § 18-1101(c) (“To the extent that, at law or in equity, a member or manager or other person has duties (including fiduciary duties) to a limited liability company or to another member or manager or to another person that is a party to or is otherwise bound by a limited liability company agreement, the member’s or manager’s or other person’s duties may be expanded or restricted or eliminated by provisions in the limited liability company agreement.”); Fisk Ventures, 2008 WL 1961156, at *11 (dismissing claims for breach of fiduciary duties where “the LLC Agreement, in accordance with Delaware law, greatly restricts or even eliminates fiduciary duties”); see also 3 EDWARD P. WELCH, ANDREW J. TUREZYN, AND ROBERT S. SAUNDERS, FOLK ON THE DELAWARE GENERAL CORPORATION LAW § 18-1101.6 (supp. 2007).

13

Petitioner’s second statutory argument is based on the principle that certain

provisions of the LLC Act are mandatory and non-waivable. As the Supreme

Court has explained, “[t]he Act can be characterized as a ‘flexible statute’ because

it generally permits members to engage in private ordering with substantial

freedom of contract to govern their relationship, provided they do not contravene

any mandatory provisions of the Act.”29 Generally, the mandatory provisions of

the Act are “those intended to protect third parties, not necessarily the contracting

members.”30 Finally, “[i]n general, the legislature’s use of ‘may’ connotes the

voluntary, not mandatory or exclusive, set of options.”31

Petitioners proffer a far broader rule and argue that “[s]tatutory provisions

that do not contain the qualification ‘unless otherwise provided in a limited

liability company agreement’ (or a variation thereof) are mandatory and may not

be waived.”32 Petitioners, however, offer no authority for this assertion and, in

fact, authorities they cite directly contradict it. In Elf Atochem North America, Inc.

v. Jaffari, for example, a case on which petitioners heavily rely, the Supreme Court 29 Elf Atochem N. Am., Inc. v. Jaffari, 727 A.2d 286, 290 (Del. 1999). 30 Id. at 292; see also 1 LARRY E. RIBSTEIN AND ROBERT R. KEATINGE, RIBSTEIN AND KEATINGE ON LIMITED LIABILITY COMPANIES § 4:16, 4-36 to 4-47 (“The operating agreement generally controls except to the extent that it is inconsistent with mandatory statutory provisions. Such provisions include those . . . which are intended to protect third parties.”); Id. § 4:16, 4-43 (“If an LLC statute provides that statutory rights may be varied by an operating agreement, the statute should specify that the operating agreement does not vary statutory rights of nonparties. LLC statutes do not allow the operating agreement to vary provisions that affect third-party creditors, or provide in general terms that an operating agreement governs only rights among the members.”). 31 Elf, 727 A.2d at 296. 32 Petitioner’s Answering Br. at 8.

14

held that a provision of the LLC Act not containing petitioners’ magical phrase

was nonetheless permissive and subject to modification.33 Indeed, in Elf, the

Supreme Court explicitly noted that the “unless otherwise provided” phrase was

merely one example of the means by which a court could ascertain the intent of the

General Assembly.34 Indeed, in other provisions, the General Assembly explicitly

forbids waiver. For example, the Act overtly bars members from “eliminat[ing]

the implied contractual covenant of good faith and fair dealing.”35

Sections 18-802, 18-803, and 18-805 are not mandatory provisions of the

LLC Act that cannot be modified by contract. First, the Act does not expressly say

that these provisions cannot be supplanted by agreement, and, in fact, section 18-

803 does include the “unless otherwise provided” phrase. Second, the provisions

employ permissive rather than mandatory language. Section 18-802 states that the

“Court of Chancery may decree dissolution”36 and section 18-805 states that “the

Court of Chancery . . . may either appoint” a trustee or receiver.37 Finally, and

most importantly, none of the rights conferred by these provisions that are waived

in the LLC Agreement is designed to protect third parties. This Court has

33 727 A.2d at 292–96 (concluding that 6 Del. C. § 18-109(d) is not mandatory). 34 Id. at 291. 35 6 Del. C. § 1101(c). 36 6 Del. C. § 18-802 (emphasis added). 37 6 Del. C. § 18-805 (emphasis added).

15

recognized that third parties have no interest in dissolution under section 18-802,38

and section 18-805 specifically permits creditors to petition the Court for the

appointment of a receiver for a canceled limited liability company. The rights of

third-party creditors under section 18-805 are not affected by the LLC Agreement.

In sum, the LLC Act “expressly encourages ‘made-to-order’ structuring of limited

liability companies” and “offers explicit assurance that contractual arrangements

will be given effect to the fullest permissible extent.”39 Because the waiver of a

member’s right to petition for dissolution or the appointment of a receiver does not

violate the LLC Act and does not interfere with the rights of third parties, the

waiver is valid and enforceable under the statute.

4. Public Policy Does Not Prohibit Waiver of these Rights

Finally, petitioners argue that the Court should refuse to enforce their

knowing, voluntary waiver of their right to seek dissolution or the appointment of a

receiver because such waivers violate the public policy of Delaware and offend

notions of equity. This argument too must fail. First, as discussed throughout this

Opinion and others, in treatises, and in the LLC Act itself, the public policy of

Delaware with respect to limited liability companies is freedom of contract.

Second, there are legitimate business reasons why a firm would want to set up its 38 The Follieri Group, LLC v. Follieri/Yucaipa Invs., LLC, C.A. No. 3015-VCL, 2007 WL 2459226, at *1–2 (Del. Ch. Aug. 23, 2007) (refusing to allow a putative creditor to intervene in a statutory dissolution action). 39 ROBERT L. SYMONDS, JR. AND MATTHEW J. O’TOOLE, SYMONDS & O’TOOLE ON DELAWARE LIMITED LIABILITY COMPANIES § 1.03[A][1] (2007).

16

governance structure so that its members could not petition the Court for

dissolution. Finally, the LLC Act provides protections that cannot be waived; this

Court need not exercise its equitable discretion and disregard a negotiated

agreement among sophisticated parties to allow this action to proceed.

The hunt for legislative intent with respect to Delaware’s LLC Act is rather

simple, because the General Assembly explicitly stated that the “policy” of the Act

is “to give the maximum effect to the principle of freedom of contract and to the

enforceability of limited liability company agreements.”40 The LLC Act provides

members with “the broadest possible discretion in drafting their [LLC]

agreements” and assures that “once [members] exercise their contractual freedom

in their [LLC] agreement, the [members] have a great deal of certainty that their

[LLC] agreement will be enforced in accordance with its terms.”41 One treatise

concludes that “[f]lexibility lies at the core of the DLLC Act. Rather than

imposing a host of immutable rules, the statute generally allows parties to order

their affairs, contractually, as they deem appropriate.”42

Chief Justice Steele has powerfully argued that the freedom of contract

principle must be assiduously guarded lest the courts erode the primary attraction

of limited liability companies. In his remarks on fiduciary duties and alternative

40 6 Del. C. § 18-1101(b). 41 Elf Atochem N. Am., Inc. v. Jaffari, 727 A.2d 286, 291 (Del. 1999) (quoting MARTIN I. LUBAROFF AND PAUL ALTMAN, DELAWARE LIMITED PARTNERSHIPS § 1.2 (1999)). 42 SYMONDS AND O’TOOLE, supra note 39, at § 1.03[A][1][a].

17

entities, the Chief Justice rhetorically asks, “why should courts seek to incorporate

uncertainty, inconsistency, and unpredictability into the world of negotiated

agreements?”43 Similarly, Professor Larry Ribstein, whose scholarship on limited

liability companies has been frequently cited by both this Court and the Supreme

Court, emphasizes that it is the rigor with which Delaware courts apply the

contractual language of LLC Agreements that makes limited liability companies

successful.44 Indeed, “Delaware is a freedom of contract state, with a policy of

enforcing the voluntary agreements of sophisticated parties in commerce.”45 Here,

the LLC Agreement is a contract between sophisticated parties. The business

relationships between the individuals behind the petitioners and Lynda Merritt is

extensive; clearly these were parties who knew how to make use of the law of

alternative entities. The mere fact that the business relationship has now soured

cannot justify the petitioners’ attempt to disregard the agreement they made.

Therefore, contrary to petitioners’ argument that Delaware’s public policy will not

43 Steele, supra note 19, at 30. 44 See generally Larry E. Ribstein, The Uncorporation and Corporate Indeterminacy (Ill. Law and Econ. Research Paper Series, Research Paper No. LE08-012, 2008), available at http://papers.ssrn.com/pape.tar?abstract_id=1115876; cf. Larry E. Ribstein, An Analysis of the Revised Uniform Limited Liability Company Act, 3 VA. L. & BUS. REV. 35. 67 (2008) (“In fact, detailed case analysis reveals that the courts have done a good job of interpreting and applying limited partnership agreements under the Delaware freedom-of-contract regime.”). 45 Personnel Decisions, Inc. v. Bus. Planning Sys., Inc., C.A. No. 3213-VCS, 2008 WL 1932404, at *6 (Del. Ch. May 5, 2008).

18

countenance their unambiguous contractual waiver, the state’s policy mandates

that this Court respect and enforce the parties’ agreement.46

In addition to Delaware’s general policy promoting the freedom of contract,

there are legitimate business reasons why members of a limited liability company

may wish to waive their right to seek dissolution or the appointment of a receiver.

For example, it is common for lenders to deem in loan agreements with limited

liability companies that the filing of a petition for judicial dissolution will

constitute a noncurable event of default. In such instances, it is necessary for all

members to prospectively agree to waive their rights to judicial dissolution to

protect the limited liability company. Otherwise, a disgruntled member could push

the limited liability company into default on all of its outstanding loans simply by

filing a petition with this Court. In fact, one of the petitioners here, R&R Capital,

LLC, has acted as a lender to some of the Waiver Entities and included such a

provision in its loan agreement with respondent Unionville Land, LLC.47

Finally, petitioners’ plea to this Court’s sense of equity is misplaced. The

LLC Act does not abandon petitioners with no recourse as they “sit idly by while

46 See Seidensticker v. Gasparilla Inn, Inc., C.A. No. 2555-CC, 2007 WL 4054473, at *1 (Del. Ch. Nov. 8, 2007) (“Under Delaware law, courts interpret contracts to mean what they objectively say.”). 47 This information, of course, is not included in the petition and the Court does not rely on it in reaching its decision. See In re Gen. Motors (Hughes) S’holders Litig., 897 A.2d 162, 168 (Del. 2006) (“The complaint generally defines the universe of facts that the trial court may consider in ruling on a Rule 12(b)(6) motion to dismiss”). The Court notes this merely in passing to illustrate the deficiency of the petitioners’ policy based argument.

19

Merritt (the manager) seeks to continue operating seven entities that have had their

certificates of formation canceled and two entities whose narrow purposes have

been fulfilled.”48 Instead, the LLC Act preserves the implied covenant of good

faith and fair dealing.49 The petition filed is replete with allegations about the

unbecoming conduct of Merritt, and petitioners’ brief opposing the motion to

dismiss likewise criticizes her. Petitioners, however, have not named Merritt as a

party in this action. Although, fairly construed, the petition may allege a breach of

the implied covenant, the petitioners unambiguously have failed to state a claim

upon which relief can be granted because they have not named the alleged bad-

faith actor in their petition. It is the unwaivable protection of the implied covenant

that allows the vast majority of the remainder of the LLC Act to be so flexible.50

There is no threat to equity in allowing members to waive their right to seek

48 Petitioners’ Answering Br. at 11. 49 See 6 Del. C. § 1101(c). 50 See Deborah A. Demott, Fiduciary Preludes: Likely Issues for LLCs, 66 U. COLO. L. REV. 1043, 1059–62 (1995) (noting the backstop protection of the implied covenant: “The presupposition of mutual intent to benefit, which in turn produces mutual obligation, is an inevitable offspring of founding contract doctrine in exchange-based consideration. In consequence, an agreement is not enforceable as a contract unless it contemplates mutuality of obligation. Put differently, an LLC or limited partnership agreement that completely abjured fiduciary obligation would, in the absence of a robust implied obligation of good faith, resemble a gift of members’ property to those in control of the enterprise who would be free to use the entity’s property as they saw fit. Anglo-American contract doctrine has not enforced executory promises to make gifts because such promises do not contemplate an exchange. Moreover, persons who invest or participate in business ventures lack donative intent toward those who control the venture; it strains credulity excessively to characterize membership in an LLC or a limited partnership, once formed, as indicative of intention to execute a gift transaction.”).

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dissolution, because there is no chance that some members will be trapped in a

limited liability company at the mercy of others acting unfairly and in bad faith.

III. CONCLUSION

When parties wish to launch a new enterprise, the form of the limited

liability company offers a highly customizable vehicle in which to do so. The

flexibility of such an entity springs from its roots in contract; the parties have “the

broadest possible discretion” to set the structure of the limited liability company.51

Indeed, “LLC members’ rights begin with and typically end with the Operating

Agreement.”52 The allure of the limited liability company, however, would be

eviscerated if the parties could simply petition this court to renegotiate their

agreements when relationships sour. Here, the sophisticated members of the seven

Waiver Entities knowingly, voluntarily, and unambiguously waived their rights to

petition this Court for dissolution or the appointment of a receiver under the LLC

Act.53 This waiver is permissible and enforceable because it contravenes neither

the Act itself nor the public policy of the state. Moreover, with respect to the two

other respondent entities—the Pandora Entities—the petitioners lack statutory

51 Elf Atochem N. Am., Inc. v. Jaffari, 727 A.2d 286, 291 (Del. 1999). 52 Walker v. Res. Dev. Co., 791 A.2d 799, 813 (Del. Ch. 2000). 53 See 6 Del. C. §§ 18-802, 18-803, and 18-805.

21

standing to seek dissolution or the winding up of the entities. They may, however

petition for the appointment of a receiver.54

These parties have cases pending in both state and federal courts in

Delaware, Pennsylvania, and New York. These parties, however, originally came

together and negotiated a series of agreements that led to the nine entities presently

before the Court; perhaps the most prudent resolution to their problems is once

again negotiation—a negotiated settlement. With Shakespeare this Opinion began,

and with Shakespeare it too shall end:

Recall—lest another court these parties try— “Our remedies oft in ourselves do lie.”55

An implementing Order has been entered.

54 The parties should confer regarding an appropriate revision to the Status Quo Order as it relates to the Pandora Entities. In the event the parties cannot agree on a revised order, each side should submit a proposed form of status quo order for this Court’s consideration. 55 WILLIAM SHAKESPEARE, ALL’S WELL THAT ENDS WELL act 1, sc. 1, ln. 231.

22

COURT OF CHANCERY OF THE

WILLIAM B. CHANDLER III CHANCELLOR

STATE OF DELAWARE COURT OF CHANCERY COURTHOUSE 34 THE CIRCLE

GEORGETOWN, DELAWARE 19947

Submitted: June 3, 2008 Decided: June 6, 2008

Vernon R. Proctor Proctor Heyman LLP 1116 West Street Wilmington, DE 19801 Paul A. Fioravanti, Jr. Michael Hanrahan Prickett, Jones & Elliott, P.A. 1310 King Street Wilmington, DE 19801

Srinivas M. Raju John D. Hendershot Blake Rohrbacher Richards, Layton & Finger, P.A. One Rodney Square 920 North King Street Wilmington, DE 19801

Re: Maitland v. Int’l Registries, LLC, et al. Civil Action No. 3669-CC

Dear Counsel:

Presently before the Court are two motions of plaintiff Guy E.C. Maitland. The first seeks an order striking the answer of defendant Vienna Holdings, LLC (“Vienna”) and disqualifying Vienna’s counsel, Prickett, Jones, & Elliott, P.A. (“Prickett”). The second is a motion for a commission requesting documents and deposition testimony from nonparty McGladrey & Pullen, LLP (“M&P”), the outside auditing firm of defendant International Registries (“IR”). For the reasons explained below, I grant plaintiff’s motion to strike and disqualify but deny the motion for a commission.

Maitland’s motion to strike and disqualify is based on the organizational structure of one of the defendants. Maitland is one of two members of Vienna and holds a fifty percent interest. Maitland contends that Vienna’s answer in this case was filed and counsel was retained in violation of its LLC Agreement, which requires action by majority. Because Maitland owns fifty percent of the LLC, Vienna could not possibly have validly retained counsel and filed an answer without his assent. Vienna, whose actions in the case are being directed by

2

Florigio Guida, the other fifty percent member, contends that the LLC Agreement vests both members with management rights and that Maitland’s motion is motivated by a desire for indemnification of his attorneys’ fees.1 I conclude—admittedly somewhat formalistically—that Maitland’s interpretation of the LLC Agreement is correct, and that his motion to strike and disqualify should be granted. However, I further conclude that Guida must be permitted to intervene in this case and defend on behalf of Vienna.

Because limited liability companies are organized by contract, the Court must begin its analysis with Vienna’s LLC Agreement.2 Section 7 of that document provides:

Management of the Company shall vest solely in the Members, and the decision of the Members holding a majority of all LLC Interests as to all such matters shall be controlling. The Initial Members [Maitland and Guida] are hereby granted all rights, powers, authorities, and authorizations necessary, appropriate, and advisable and/or convenient to manage the Company and to determine and carry out its affairs.

Vienna argues that the second sentence in that excerpt establishes that Guida has the power to retain counsel and file an answer on behalf of the LLC. The logic of that argument, however, is self-defeating. If Guida’s interpretation were correct, Maitland would have an equal right to appoint counsel and file an answer on behalf of Vienna; the two men are co-owners with equal ownership interests. Although the second sentence may vest in each man the power to manage Vienna when his co-owner is silent, it does not contemplate and cannot allow one owner’s

1 Although the parties devote substantial portions of their briefs to the issue of attorneys’ fees, I see no need to address this issue now. Therefore, as of now, the traditional American rule applies and each party should bear its own costs and fees. See Korn v. New Castle County, C.A. No. 767-CC, 2007 WL 2981939, at *2 (Del. Ch. Oct. 3, 2007) (“Generally, Delaware courts follow the American Rule, under which ‘prevailing litigants are responsible for the payment of their own attorney's fees.’” (quoting Goodrich v. E.F. Hutton Group, Inc., 681 A.2d 1039, 1043–44 (Del. 1996). 2 Cf. Fisk Ventures, LLC v. Segal, C.A. No. 3017-CC, 2008 WL 1961156, at *8 (Del. Ch. May 7, 2008) (“In the context of limited liability companies, which are creatures not of the state but of contract, . . . duties or obligations must be found in the LLC Agreement or some other contract.” (footnote omitted)).

3

management wishes to trump the other’s where they differ. That conclusion is mandated by the first sentence, which says that the wishes of a majority are “controlling.” So long as Vienna has only two members, neither Guida nor Maitland can unilaterally control the LLC. Where they disagree, the LLC is deadlocked.3

A deadlocked LLC cannot validly retain counsel and file an answer. In a somewhat analogous case, Engstrum v. Paul Engstrum Associates,4 Chancellor Seitz granted a motion to strike an answer filed by a corporation that had just two stockholders, each owning fifty percent, and where, as here, the complaint was filed by one of the two owners. Although “the complaint is directed against the corporation,” the Court noted that “the dispute is actually between the two stockholders.”5 Therefore, the Court “conclude[d] that the ‘other’ stockholder should be permitted to intervene as a party defendant with authority to defend on behalf of the corporate defendant.”6 I conclude that the same should occur here. Consequently, I grant Maitland’s motion to strike Vienna’s answer and disqualify Prickett as counsel to Vienna, but I do so while explicitly permitting Guida “to intervene as a party defendant with authority to defend on behalf of” Vienna.

I must, however, deny Maitland’s motion for commission. At its core, this case is an action under 6 Del. C. § 18-305 for inspection of the books and records of two limited liability companies, Vienna and IR. Section 18-305 provides for summary proceedings, and the issues in such proceedings are necessarily limited.7

3 This Court has construed similar language in an LLC Agreement before. See NAMA Holdings, LLC v. World Mkt. Center Venture, LLC, --- A.2d ---, 2007 WL 5212036, at *7 (Del. Ch. July 20, 2007) (applying a provision in an LLC agreement that vested the managing members “with both the power and the obligation to do ‘any and all things necessary, proper, convenient or advisable to manage the assets and affairs’” of the LLC). In NAMA, however, there was no dispute between the managing members in which each contended to be authorized to act by virtue of that broadly enabling provision. Id. (noting that the two managing members were working in concert against the interests of a non-managing member). 4 124 A.2d 722 (Del. Ch. 1956). 5 Id. at 723. 6 Id. 7 Cf. Meltzer v. CNET Networks, Inc., C.A. No. 3023-CC, 2007 WL 2593065, at *1 (Del. Ch. Sept. 6, 2007) (“There are few issues implicated in a § 220 proceeding.”); see also 3 EDWARD P. WELCH, ANDREW J. TUREZYN, AND ROBERT S. SAUNDERS, FOLK ON THE DELAWARE GENERAL CORPORATION LAW § 18-305.6 (5th ed. 2006) (noting that the Court’s jurisdiction under § 18-305 enables it to determine the single issue of “whether or not the person seeking information is entitled to the information.”).

4

Rule 26, of course, restricts discovery to matters “relevant to the subject matter involved in the pending action.”8 Because the issues in a books and records case are narrow, discovery is necessarily narrow as well.9 Maitland’s motion for commission, however, is anything but. In his motion, Maitland seeks thirty-two categories of documents from nonparty M&P and deposition testimony from a representative of M&P on ten different topics, one of which is the subject matter of all of the documents.

To grant this motion for commission would be effectively to grant Maitland final relief in this proceeding. The vast majority of the materials Maitland seeks through the commission overlap almost precisely with the materials Maitland sought in the demand letter he sent to Mr. Guida. As the Court held in Security First, Maitland cannot use the discovery process in a books and records case to gain access to the books and records ultimately at issue.10

Maitland contends he needs access to these materials to counter defendants’ argument that his claims were mooted when Vienna and IR turned over a substantial number of documents and records after his initial demand. Maitland intends to use the materials gathered from M&P to show that the initial production was insufficient. That is not necessary. Maitland must already have a reason to believe that the initial production was insufficient, and he is, therefore, already equipped to present this reason in response to defendants’ argument his claim is moot. It would create a perverse precedent to allow Maitland to use the discovery process as an end-run around the LLC Agreement and the statute simply because IR and Vienna attempted to comply with Maitland’s demand and produce the requested materials. Because Maitland has failed to show why the proposed commission seeks materials relevant or would lead to the discovery of materials relevant to the narrow issues in this case, his motion for commission is denied.

8 Ct. Ch. R. 26(b)(1). 9 Cf. U.S. Die Casting & Dev. Co. v. Sec. First Corp., C.A. No. 14019, 1995 WL 301414, at *3 (Del. Ch. Apr. 28, 1995) (“Because the issues created by a § 220 action are narrow and specific, the scope of discovery is restricted to these issues.”). 10 See id. (“To grant U.S. Die its complete requested discovery would obviate the need for the § 220 action because U.S. Die would obtain through discovery all of the documents requested before a determination of the scope of its rights under § 220. Customarily, plaintiffs elect to pursue an expedited, summary § 220 action understanding one price paid for the election is limited discovery because of the limited relief available.”).

IT IS SO ORDERED.

Very truly yours,

William B. Chandler III

WBCIII:ram

5

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE IN RE NEXTMEDIA INVESTORS, LLC, ) ) C.A. No. 4067-VCS a Delaware limited liability company. ) )

MEMORANDUM OPINION

Date Submitted: March 30, 2009 Date Decided: May 6, 2009

Kurt M. Heyman, Esquire, Patricia L. Enerio, Esquire, PROCTOR HEYMAN LLP, Wilmington, Delaware; David R. Evans, Esquire, EVANS LEROY & HACKETT, PLLC, Chattanooga, Tennessee; James E. Spoden, Esquire, MACDONALD ILLIG JONES & BRITTON LLP, Erie, Pennsylvania, Attorneys for Petitioners. Gregory V. Varallo, Esquire, Richard P. Rollo, Esquire, Ethan A. Shaner, Esquire, Scott W. Perkins, Esquire, Thomas A. Uebler, Esquire, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Dennis N. Ryan, Esquire, Mark A. Shoffner, Esquire, ANDREWS KURTH LLP, Dallas, Texas, Attorneys for Respondent.

STRINE, Vice Chancellor.

I. Introduction

Certain members of respondent NextMedia Investors, LLC (“NextMedia”) are

seeking summary judgment on their petition for judicial dissolution of NextMedia and for

the court to appoint a liquidating trustee.

The core dispute between the petitioners and the members of NextMedia who

oppose the dissolution is whether, under the terms of NextMedia’s Third Amended and

Restated Limited Liability Company Agreement (the “LLC Agreement”), the petitioners’

consent was needed to amend the LLC Agreement to extend NextMedia’s dissolution

date from April 17, 2008 to April 17, 2012. Under the LLC Agreement, the consent of

all members “to be adversely affected” was needed to change the dissolution date.1 The

petitioners argue that their consent was needed because an extension of their investment

horizon was an adverse effect. NextMedia responds that summary judgment is not

appropriate at this stage because the LLC Agreement is ambiguous as to when the

consent of adversely affected members is required and that there is a factual issue as to

whether the petitioners were adversely affected.

In this opinion, I grant the petitioners’ motion for summary judgment as to their

request for an order of dissolution. A contract provision is ambiguous only where it is

reasonably susceptible to multiple meanings. Here, the plain language of the relevant

terms of the LLC Agreement gives rise to only one reasonable meaning, which is that the

petitioners’ consent was required before NextMedia’s dissolution date could be changed.

And, the factual issue raised by NextMedia is not relevant because the petitioners’ right

1 Petitioners’ Joint Aff., Ex. B (“LLC Agreement”) § 17.5(a).

1

to consent turned on whether they could have reasonably been expected to be adversely

affected before the amendment was adopted in the sense that the proposed change would

alter a materially important economic term of the LLC Agreement, not on whether, as an

after-the-fact matter for judicial determination, they were actually adversely affected by

the amendment. Thus, the petitioners are entitled to summary judgment on their request

for an order of dissolution.

But, I deny the petitioners’ motion for summary judgment as to their request for

the court to appoint a liquidating trustee. Under the LLC Agreement, the NextMedia

board of managers is responsible for liquidating NextMedia in the event of dissolution,

and it cannot be removed from that role without cause. Although there is color to the

petitioners’ argument that the NextMedia board is not fit to serve as the liquidator, the

factual record is not so uncontroverted as to allow for the strong remedy of removal on a

motion for summary judgment. Rather, the petitioners should present their case for

removal after full discovery and a trial.

II. Factual Background2

NextMedia was formed in February 2000. NextMedia’s sole asset is stock in

NextMedia Group, Inc. (“NM Group”), which in turn invests in radio and outdoor

advertising assets through its subsidiaries. Next Media has four classes of membership

interests: Class A, Class B, Class C, and Class D.

2 I draw these facts from the Petition for Dissolution and from the affidavits submitted by each side, viewing the record in the light most favorable to NextMedia, the nonmoving party. See Ct. Ch. R. 56(c); United Vanguard Fund, Inc. v. TakeCare, Inc., 693 A.2d 1076, 1079 (Del. 1997).

2

In October 2000, the petitioners, James H. Hooker and Richard F. Rambaldo,

collectively invested $6 million in NextMedia in exchange for Class C membership

interests.3 When the petitioners invested in NextMedia, the company had a clear, eight-

year investment horizon. Specifically, § 13.1 of the LLC Agreement stated that “[t]he

Company shall dissolve upon the first to occur of any of the following events . . .

(a) eight years after the Original Effective Date.”4 The Original Effective Date was

defined in the LLC Agreement as April 17, 2000,5 so NextMedia’s dissolution date was

April 17, 2008. Once NextMedia dissolved, NextMedia’s board of managers was to

serve as the liquidator.6

Accordingly, in early 2008, with the dissolution date looming, NextMedia retained

two experts in the radio and outdoor advertising industries to help market NextMedia’s

assets.7 Unfortunately, the sales process was begun in the midst of a worldwide credit

crisis. Recognizing that market conditions were not favorable, NextMedia’s board of

managers and members representing a majority of the NextMedia membership interests

sought to extend the duration of NextMedia in anticipation that the radio and outdoor

advertising assets would be priced higher when the economic environment improved. In

March 2008, the board proposed an amendment to § 13.1(a) of the LLC Agreement that

3 Petitioners’ Joint Aff. ¶¶ 8-9. Rambaldo took out 10% of his original investment in 2005 through an agreement with NextMedia, but the petitioners have not otherwise received any distributions from NextMedia. 4 LLC Agreement § 13.1. When the petitioners joined NextMedia, the then-operative version of the LLC Agreement was the First Amended and Restated Limited Liability Company Agreement. But, the relevant provisions are the same in both versions of the LLC Agreement. 5 LLC Agreement at 15. 6 LLC Agreement § 13.2. 7 Neumann Aff. ¶ 4; Dinetz Aff. ¶ 3; Pryor Aff. ¶ 2; Tolliver Aff. ¶ 3.

3

would push the dissolution date to twelve years after the Original Effective Date, or April

17, 2012 (the “Extension Amendment”).

In order to amend § 13.1(a), the members and managers seeking to extend the

duration of NextMedia had to obtain the consent of the other members of NextMedia as

set forth in § 17.5(a) of the LLC Agreement:

Consent Requirements. Without the consent of each Member to be adversely affected, the Agreement shall not be amended so as to: . . . (v) amend Articles 12, 13, 14, 15 or 16 (or any defined term used in such sections) to affect adversely any Member . . . .8

The NextMedia board sought consent for the Extension Amendment from all members,

and approximately 97% of Class A and Class C holders approved the Amendment.9 The

petitioners, however, did not consent to the Extension Amendment.

In an attempt to persuade the petitioners to provide their consent to the Extension

Amendment, NextMedia’s Chief Financial Officer, Eric W. Neumann, sent the

petitioners a letter dated April 15, 2008 (the “Neumann Letter”) stating NextMedia’s

position.10 The Neumann Letter argues that dissolution would not be in the petitioners’

interest because, given the market conditions, NextMedia may choose to liquidate by

distributing its illiquid stock in NM Group to the NextMedia members, rather than by

selling the radio and outdoor advertising assets, as NextMedia planned to do if the

dissolution date was moved to 2012. The petitioners reasonably took this as a threat that

8 LLC Agreement § 17.5(a) (second emphasis added). 9 The parties have not indicated how the Class B and D members voted. But, Class B and D interests are held by NextMedia managers and employees, suggesting they aligned with the board and the rest of the NextMedia management. 10 Petitioners’ Joint Aff. Ex. F (“Neumann Letter”).

4

if the petitioners did not consent to the Extension Amendment, NextMedia’s management

would retaliate by distributing illiquid stock instead of liquidating the assets of the

operating companies. The Neumann Letter also suggests, in passing, that NextMedia

might take the position that the petitioners’ consent was not needed to adopt the

Extension Amendment because they were not adversely affected by the Amendment.

Despite the Neumann Letter, the petitioners refused to consent to the Extension

Amendment, and they requested that the board dissolve NextMedia on April 17, 2008.

According to the petitioners, § 17.5(a) of the LLC Agreement required that all members

consent to an amendment of § 13.1(a). Because the petitioners did not consent to the

Extension Amendment, the Amendment was not adopted, and the arrival of April 17,

2008 was still an event of dissolution under the LLC Agreement.

In July 2008, NextMedia informed the petitioners that NextMedia viewed the

Extension Amendment as properly adopted under § 17.5(a), and that NextMedia, while

still exploring asset sales, would not be dissolving immediately.11

This Petition for Dissolution followed. The petitioners bring two counts: Count I

seeks an order of dissolution; and Count II seeks appointment of a liquidating agent. The

petitioners have moved for summary judgment on both counts.12

11 In October and November 2008, NextMedia sold some of its radio and outdoor advertising assets for a total of $90 million. Pryor Aff. ¶ 2; Tolliver Aff. ¶ 3. These sales were necessary under the operating subsidiaries’ credit agreements. Neumann Letter at 2. 12 As explained by the petitioners, this has been styled as a motion for partial summary judgment because the petitioners are not asking the court to select a liquidating trustee, but instead to allow the parties to agree on one if the court finds the petitioners are entitled to have one appointed. But, all of the petitioners’ claims are part of this motion. Petitioners’ Op. Br. at 1.

5

III. Legal Analysis

A. Standard Of Review

The petitioners’ motion for summary judgment is governed by Court of Chancery

Rule 56. Under that familiar standard, the petitioners are entitled to summary judgment if

the record indicates “that there is no genuine issue as to any material fact and that the

moving party is entitled to a judgment as a matter of law.”13 As the moving party, the

petitioners bear the burden of demonstrating that no genuine issues of material fact

exist.14 And, in determining whether the petitioners are entitled to summary judgment, I

must view the facts in the light most favorable to the nonmoving party, NextMedia.15

B. Count I: Order Of Dissolution

The petitioners contend that they are entitled to summary judgment on Count I

because an event of dissolution under the LLC Agreement occurred, namely the passing

of April 17, 2008. This contention is based on the petitioners’ argument that the

Extension Amendment was not adopted in accordance with § 17.5(a) of the LLC

Agreement because the petitioners did not consent to the Amendment, so NextMedia’s

dissolution date was not extended to April 17, 2012. NextMedia responds that the

petitioners are not entitled to summary judgment because another reasonable

interpretation of § 17.5(a) exists under which the petitioners’ approval of the Extension

Amendment was not required.

13 Ct. Ch. R. 56(c). 14 United Rentals, Inc. v. RAM Holdings, Inc., 937 A.2d 810, 829-30 (Del. Ch. 2007). 15 United Vanguard Fund, Inc. v. TakeCare, Inc., 693 A.2d 1076, 1079 (Del. 1997).

6

Thus, to resolve this matter, the court must determine whether the petitioners’

consent was required under § 17.5(a) of the LLC Agreement in order to amend § 13.1(a)

of that Agreement. In a dispute requiring interpretation of a contract, summary judgment

is appropriate only where the contract is unambiguous.16 Ambiguity exists “when the

provisions in controversy are reasonably or fairly susceptible of different interpretations

or may have two or more different meanings.”17 In other words, to succeed on their

motion for summary judgment, the petitioners must demonstrate that their interpretation

of the LLC Agreement is the only reasonable one.18

NextMedia argues both that the petitioners’ interpretation of the LLC Agreement

is not reasonable, and that another reasonable interpretation of the contract exists.

NextMedia further argues that a question of fact exists as to whether the petitioners were

adversely affected by the Extension Amendment, precluding summary judgment. None

of these arguments is persuasive.

1. The Petitioners’ Interpretation Of The LLC Agreement Is Reasonable

The petitioners contend that § 17.5(a) of the LLC Agreement required the consent

of all members of NextMedia to the Extension Amendment because all members were

adversely affected by the extension of the company’s duration. This is a reasonable

interpretation of the Agreement. The ability to withdraw from an investment and take

16 United Rentals, 937 A.2d at 830. 17 Rhone-Poulenc Basic Chems. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1196 (Del. 1992). 18 United Rentals, 937 A.2d at 830.

7

one’s capital elsewhere is an important one.19 It is not uncommon for organizational

documents to require a unanimous vote to avoid dissolution, in recognition of the

importance investors place on the ability to withdraw.20

Moreover, NextMedia’s actions suggest that the company’s representatives

originally thought it was necessary to seek unanimous consent for the Extension

Amendment. The resolution adopted by the board authorizes the company’s officers to

execute the Extension Amendment upon “execution of the [Extension Amendment] by

the Members (as defined in the LLC Agreement) . . . .”21 The LLC Agreement defines

Members to include all members of all classes.22 Thus, the NextMedia board initially

sought unanimous consent for the Extension Amendment. Also, the heavy-handed tactics

employed in the Neumann Letter to persuade the petitioners to consent to the Extension

Amendment when the Amendment had already received the approval of an

overwhelming portion of NextMedia’s members belies the board’s current argument that

it believes that the petitioners’ consent was not required.

The convoluted argument that NextMedia now puts forth about the meaning of

§17.5(a) does not alter the reasonability of the petitioners’ unanimous consent

interpretation. NextMedia suggests that whether an amendment has an adverse effect 19 See Cont’l Ins. Co. v. Rutledge & Co., 750 A.2d 1219, 1229 (Del. Ch. 2000) (“Suspending the limited partners’ power to withdraw from the limited partnership does adversely affect the limited partners.”). 20 See, e.g., Star Cellular Tel. Co. v. Baton Rouge CSGA, Inc., 647 A.2d 382 (Table), 1994 WL 267285, at *2 (Del. June 9, 1994) (withdrawal of general partner caused dissolution unless remaining partners unanimously agreed to continue); R.S.M. Inc. v. Alliance Capital Mgmt. Holdings L.P., 790 A.2d 478, 488 (Del. Ch. 2001) (partnership agreement required unanimous vote of unitholders to avoid dissolution if one of the listed events of dissolution occurred). 21 Petitioners’ Joint Aff. Ex. G. 22 LLC Agreement at 13.

8

should be judged by whether a majority of similarly situated members approve it.

Because a majority of Class C holders approved the Extension Amendment, NextMedia

concludes that the Amendment did not have an objectively adverse effect on the class.

Therefore, if the petitioners’ consent is required, it is because the petitioners are

subjectively adversely affected. But, according to NextMedia, it would be unreasonably

burdensome to require the board to explore the subjective circumstances of each member

when seeking consents, so it is unreasonable to interpret the LLC Agreement to allow the

petitioners to defeat an amendment when the majority of their fellow Class C holders

approved it.

This argument fails for a number of reasons. For starters, NextMedia’s

interpretation would convert § 17.5(a) into a class voting provision — something the

drafters of the LLC Agreement could have elected to do,23 but instead gave individual

investors greater protection by requiring the consent of “each Member”24 on an

individual basis. And, nothing about the petitioners’ position suggests they are seeking a

subjective standard for determining when an amendment has an adverse effect. Section

23 See 6 Del. C. § 18-302(b) (“A limited liability company agreement may grant to all or certain identified members or a specified class or group of the members the right to vote separately or with all or any class or group of the members or managers, on any matter.”); see also, e.g., Elliot Assocs., L.P. v. Avatex Corp., 715 A.2d 843, 845 (Del. 1998) (considering a certificate of incorporation that required approval of preferred stockholders voting as a class to amend the certificate in a way that adversely affected the preferred stockholders); Warner Commc’ns Inc. v. Chris-Craft Indus., Inc., 583 A.2d 962, 965 (Del. Ch. 1989) (same); Watchmark Corp. v. ArgoGlobal Capital, LLC, 2004 WL 2694894, at *2 (Del. Ch. Nov. 4, 2004) (same); Benchmark Capital Partners IV, L.P. v. Vague, 2002 WL 1732423, at *1 (Del. Ch. July 15, 2002) (same); Solomon v. Armstrong, 747 A.2d 1098, 1121 (Del. Ch. 1999) (considering a certificate of incorporation that granted each class of common stock class voting rights with regard to any amendment to the certificate adversely affecting the rights, powers, or privileges of the class). 24 LLC Agreement § 17.5(a).

9

13.1(a) embodied a promise to all of NextMedia’s investors when they put their capital at

risk that they would be able to exit their investment no later than April 17, 2008. A

reasonable investor would regard this guaranteed investment end point that could not be

changed without her consent to be a material economic provision of the LLC Agreement.

NextMedia has made no credible argument that §13.1(a), which creates a terminal point

for the continuation of NextMedia in the absence of unanimous consent to extend the

company’s life, does not have substantive economic impact.

In sum, the petitioners have put forth a reasonable interpretation to the LLC

Agreement, namely that unanimous consent of all NextMedia members was required to

adopt the Extension Amendment.

2. NextMedia Has Not Offered A Reasonable Alternative Interpretation

NextMedia argues that the LLC Agreement is ambiguous because, aside from the

interpretation offered from by the petitioners, the Agreement can be reasonably

interpreted to require consent only from those members that the board intended to

adversely affect. In other words, NextMedia’s interpretation of § 17.5(a) is that a

member’s consent is only required of if the board subjectively intended to harm that

member. This interpretation is not reasonable because it is at odds with the plain

meaning of § 17.5(a).

As our Supreme Court has noted, “[c]ourts will not torture contractual terms to

impart ambiguity where ordinary meaning leaves no room for uncertainty. The true test

is not what the parties to the contract intended it to mean, but what a reasonable person in

10

the position of the parties would have thought it meant.”25 NextMedia’s proffered

interpretation of § 17.5(a), which rests on the grammatical functions of the infinitive

phrase, requires the type of awkward linguistic leap that this court will not make in giving

a practical reading to a contract.

NextMedia points to the LLC Agreement’s use of the phrase “to affect adversely”

in § 17.5(a) — “the Agreement shall not be amended so as to . . .amend Articles 12, 13,

14, 15 or 16 . . . to affect adversely any Member”26 — and argues that “to affect” can be

interpreted to require a purpose or intent.27 In making this argument, NextMedia relies

on dictionaries and two out-of-state cases involving entirely different interpretive

problems. But, although these sources support the principle that words and phrases may

have multiple meanings that vary with context, NextMedia does not explain why the

meaning of “to affect” that implies purpose or intention is a reasonable one to choose

here.

Under NextMedia’s chosen meaning of the phrase “to affect,” a NextMedia

member only has the right to object to an amendment when the board of managers

subjectively intends to harm that member. Section 17.5(a) is written very obliquely if

that is its meaning, a meaning that could have been written very directly if the drafters

intended to embrace such an unusual provision, whereby an investor only has an 25 Rhone-Poulenc, 616 A.2d at 1196 (citations omitted); see also Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728, 739 (Del. 2006) (quoting Rhone-Poulenc). 26 LLC Agreement § 17.5(a) (second emphasis added). 27 This meaning comes from the use of the infinitive phrase “to affect.” See, e.g., Respondent’s Ans. Br. at 15 n.6 (citing Wikipedia, http://en.wikipedia.org/wiki/Infinitive (last visited May 6, 2009). for the proposition that “[t]he full infinitive (or to-infinitive) is used in a great many different contexts: . . . It can be used like an adjective or adverb, expressing purpose or intent . . . .”).

11

individual veto if fiduciaries intend to do the electorate harm. Indeed, it is hard to

imagine fiduciaries making the necessary confession to trigger this voting right.

This odd construction has no reasonable basis in the text of § 17.5(a), which was

clearly meant to provide a broader protection to NextMedia investors. As NextMedia

itself points out, the non-Class A members have very few voting rights under the LLC

Agreement, and thus little control over NextMedia.28 This suggests that the matters over

which the non-Class A members do have voting rights are of particular importance, a

suggestion that is borne out by the type of rights covered by § 17.5(a), which largely

govern the members’ ability to exit their investment or their relationship with

management.29

The obvious point of § 17.5(a) was to induce investment in the LLC by giving

investors assurance that certain rights they held — including the right to exit their

investment on a specific date — could not be altered without their approval on an

individual basis, regardless of whether the board of managers sought to change them in

good faith. It would be little inducement for this protection to be available only when

NextMedia’s board of managers purposely took action that the board knew would harm

certain NextMedia members because the consequences of an amendment that the board

adopted in good faith could also be harmful to particular investors.

28 Respondent’s Ans. Br. at 13-14. 29 The rights covered by § 17.5(a) are: transfer of membership interests (Article 12); dissolution and winding up (Article 13); the Class A members’ option to purchase the membership interests surrendered by departing employees (Article 14); the power of attorney granted by the members to the board of managers (Article 15); and the terms of the managers’ engagement (Article 16).

12

Nor would a reasonable investor read § 17.5(a) as offering such a narrow and

exceedingly strange protection. The plain meaning of a contract, as it would be

understood by a reasonable person reading the contract, is controlling in disputes over

contract interpretation.30 Here, in the absence of clarifying words like “purpose” or

“intent,” the plain meaning of “to adversely affect” encompasses a situation where an

investor will be adversely affected in the sense that a material economic term of the LLC

Agreement is subject to alteration, regardless of whether an adverse outcome is intended

by the board.31 In other words, the obvious purpose of § 17.5(a) was to allow individual

investors to veto changes to specific, economically substantive terms of the LLC

Agreement if they deem those changes inadvisable, regardless of whether the board

proposed them in good faith.

Thus, the interpretation of § 17.5(a) offered by NextMedia is at odds with that

provision’s plain meaning, so it is not a reasonable interpretation and does not indicate

that the LLC Agreement is ambiguous.32

30 See U.S. West, Inc. v. Time Warner Inc., 1996 WL 307445, at *9 (Del. Ch. June 6, 1996) (“The primary rule of construction is this: where the parties have created an unambiguous integrated written statement of their contract, the language of that contract (not as subjectively understood by either party but) as understood by a hypothetical reasonable third party will control.”). 31 For example, the dictionary entries cited by NextMedia include the following definitions: Merriam-Webster, http://www.merriamwebster.com/dictionary/to (last visited May 6, 2009) (“2a —used as a function word to indicate purpose, intention, tendency, result, or end” (emphasis added)); Dictionary.com, http://dictionary.reference.com/browse/to (last visited May 6, 2009) (“8. (used for expressing agency, result, or consequence)”); The Free Dictionary, http://www.thefreedictionary.com/to (last visited May 6, 2009) (“3. Toward a given state”). 32 Because I find that the LLC Agreement is unambiguous, I need not, and therefore do not, address the petitioners’ argument that ambiguities in the LLC Agreement should be construed against NextMedia as the drafter of the document. See Levitt Corp. v. Office Depot, Inc., 2008 WL 1724244, at *6 n.37 (Del. Ch. Apr. 14, 2008) (declining to apply this principle of contract construction to corporate bylaws because the bylaws were unambiguous).

13

3. Factual Arguments About Whether The Petitioners Are Correct That Postponement Of Dissolution Is Bad For Them Are Irrelevant To The Question Of Whether The Petitioners

Had A Veto Right Under § 17.5(a)

Finally, NextMedia argues that the petitioners are not entitled to summary

judgment because they have “not provided the Court with a factual basis to conclude that

they were adversely affected by the Section 13.1(a) Amendment.”33 In other words,

NextMedia argues that the petitioners must prove to the court, as an issue of fact, that

they were adversely affected by the Extension Amendment in order to demonstrate that

their consent was required to adopt the Extension Amendment.

NextMedia, for its part, has offered affidavits from its officers indicating that, in

their opinion, a liquidation of NextMedia’s radio and outdoor advertising assets at the

time of the Extension Amendment would not have resulted in distributions to

NextMedia’s equity holders because the market prices of those assets were less than

NextMedia’s debts.34 According to NextMedia, these affidavits create a material factual

issue as to whether dissolution would have led to distributions to the petitioners, because

if the petitioners would not have received anything whether or not NextMedia dissolved

in April 2008, they were not adversely affected by the Extension Amendment.

This argument misconstrues the nature of the petitioners’ burden. The petitioners

must show only that their consent was needed to approve the Extension Amendment.

Whether they were to be adversely affected for purposes of § 17.5(a) is necessarily a

before-the-fact question — a company cannot determine who is entitled to vote on an

33 Respondent’s Ans. Br. at 23. 34 Neumann Aff. ¶ 4; Dinetz Aff. ¶ 3.

14

action by first carrying out the action and then seeing who is adversely affected. And, the

petitioners should not be required to show they were entitled to vote on the Extension

Amendment through factual evidence — that is not a reasonable way for a company to

determine whose consent is required, as NextMedia itself argued in its opposition to the

petitioners’ reading of § 17.5(a).35 Such a method would leave investors subject to ad

hoc decisions about their substantive rights, whereas the purpose of an LLC agreement,

like all agreements, is to define the rules of the game so that all parties know what to

expect.36

Thus, the question of who is entitled to vote is best judged by who can be

reasonably expected to be adversely affected. Likewise, the question of whether a

change triggers the individual approval right in § 17.5(a) depends not on an empirical,

factual assessment of whether a member is correct about the effect of a change in the

contract, but on whether the proposed contractual amendment would alter an

economically meaningful term. If it does, the individual approval right of § 17.5(a) is

implicated. A change to the lifespan of the entity like the one proposed in the Extension

Amendment is clearly such a triggering amendment.37

35 See Respondent’s Ans. Br. at 12-13 (“[I]t would be necessary for the Board to contact each of the non-consenting members to ascertain their unique circumstances before the Board would be in a position to determine whether the consent of any non-consenting Members was required pursuant to Section 17.5(a). That could not have been the intent of the drafters.” (footnote omitted)). 36 See 1 WILLISTON ON CONTRACTS § 1:1 (4th ed. 2008) (“Contract law is designed to protect the expectations of the contracting parties. . . . The goal of contract law is to hold parties to their agreements so that they receive the benefits of their bargains.”). 37 Moreover, NextMedia’s argument that NextMedia’s equity holders would receive nothing in a contractually timely dissolution is factually controverted and incomplete because it ignores, among other things, the fact that the Extension Amendment deprived the petitioners of the ability

15

* * *

In sum, the petitioners have demonstrated that that there is no genuine issue of

material fact in the record regarding the interpretation of the LLC Agreement and that

they are entitled to dissolution based on the only reasonable interpretation of the LLC

Agreement. The petitioners are therefore entitled to summary judgment on Count I.

I now turn to the petitioners’ request that this court appoint a liquidating trustee to

oversee this dissolution.

C. Count II: Appointment Of A Liquidating Trustee

The default rule for liquidating trustees is contained in § 18-803 of the Delaware

LLC Act:

Unless otherwise provided . . . a manager . . . may wind up the limited liability company’s affairs; but the Court of Chancery, upon cause shown, may wind up the limited liability company’s affairs . . . and in connection therewith, may appoint a liquidating trustee.38

NextMedia’s LLC Agreement alters this default rule in § 13.2:

to exit their investment in NextMedia any sooner than 2012, even if money was available to distribute to them sooner. The affidavits submitted by NextMedia suggest there may be money available for distribution if Nextmedia dissolved now. See Neumann Aff. ¶ 4 (NextMedia officer opining that the prices of NextMedia’s assets were likely to go up in the second half of 2008 and 2009); Dinetz Aff. ¶ 3 (same); Mimms Aff. ¶ 14 (accounting expert opining that, as of February 2009, the petitioners might receive up to $260,000 if NextMedia dissolved.) The Extension Amendment, however, would prevent the petitioners from cashing in on these gains now, as they expected they could. The liquidator could have taken advantage of the improving market because the LLC Agreement grants the liquidator one year after dissolution to dispose of NextMedia’s assets, or longer where “necessary to realize upon any material amount of property that may be illiquid.” LLC Agreement § 13.3. Instead, the petitioners would have to wait until 2012, forcing them to leave their capital at risk for far longer than they agreed. In other words, the Extension Amendment would materially alter the petitioners’ economic position even if NextMedia’s equity was valueless in April 2008. 38 6 Del. C. § 18-803(a).

16

Subject to any rights of a Member or a creditor to apply to a court of competent jurisdiction in respect of the dissolution of the Company under the Act, the Board shall serve as the liquidator of the Company unless it fails or refuses to serve . . . . If the Board does not serve as the liquidator, one or more other persons may, to the extent permitted by law, be elected to serve by consent or vote of Class A Members then representing a Majority in Interest of the Class A Members.39

Read together, these provisions require the court to decide whether the petitioners have

shown that there is no genuine issue of material fact regarding the NextMedia board’s

ability to carry out the duties of a liquidator in a loyal and careful manner. In my view,

the strong medicine of removal is not appropriate on this thin, paper record.

Although the board has so far refused to liquidate the company, that is because the

board currently does not consider NextMedia to be dissolved.40 The petitioners also take

issue with the board’s attempt to bully the petitioners into consenting to the Extension

Amendment, as evidenced by the Neumann Letter, by threatening to liquidate NextMedia

by distributing illiquid stock in NM Group rather than liquidating NextMedia’s operating

assets. But, the fact that the board took one stance while it was possible that dissolution

could be avoided does not necessarily mean that the board will not act as a capable and

fair liquidator once dissolution is made inevitable by this court’s order.

Without a trial, I feel inhibited from declaring the Neumann Letter a definitive

indication of fiduciary impropriety. Although the Letter’s tone obviously adds vibrant

color to the petitioners’ request for the board’s ouster from the role of liquidator, an

assessment about the board’s good faith is better made after full discovery and an

39 LLC Agreement § 13.2. 40 Neumann Aff. ¶ 3; Dinetz Aff. ¶ 2; McNeill Aff. ¶ 2.

17

evidentiary hearing. That is especially the case because the board is likely in the best

position to liquidate NextMedia, having already hired brokers and considered strategies

for liquidation. Under the scrutiny that will attend its actual role as liquidator, the board

may well reorient its initial perspective, and it will be expected to faithfully and selflessly

perform its contractual and fiduciary duties. For now, though, the key point is that these

issues of fitness and motive are not clearly resolved by this paper record.

Moreover, even if the board was not capable of serving as the liquidator, the

petitioners would not be entitled to a liquidating trustee appointed by the court. Rather,

the second part of § 13.2 quoted above, entitling the Class A members to appoint the

liquidator if the board does not serve that role, would be applicable. This language, read

together with the statute, requires the petitioners to at the very least show cause as to why

the Class A members should be denied their right to appoint the liquidating trustee, which

the petitioners have not done.

For these reasons, I deny the petitioners’ motion for summary judgment on

Count II.

IV. Conclusion

For the foregoing reasons, I grant the petitioners’ motion for summary judgment

with respect to Count I of the Petition for Dissolution and order the dissolution of

NextMedia Investors, LLC. But, I deny the petitioners’ motion for summary judgment

with respect to Count II. IT IS SO ORDERED.

18

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549

DIVISION OF

TRADING AND MARKETS

September 1, 2009

Ms. Susan M. DeMando Associate Vice President Financial Industry Regulatory Authority 1735 K Street, N.W. Washington, DC 20006

RE: Broker-dealers Operating Under a Series LLC Structure

Dear Ms. DeMando:

On behalf ofthe Financial Industry Regulatory Authority ("FINRA"), you have asked for interpretive guidance as to how the Securities and Exchange Commission's ("Commission") financial responsibility rules would apply to an entity formed and operated as a Series Limited Liability Company ("Series LLC") under state law.

A Series LLC consists of a Master LLC and "series" of ownership classes within the Master LLC itself. The Master LLC is the only formal legal entity and is the only entity created under applicable state statutes. Generally, under state law a Series LLC

.may create any number of series that may operate in many respects as independent entities. For example, each series may have separate assets and separate liabilities. Under state law each series is not required to absorb the financial obligations of any other series or the Master LLC, and liabilities ofthe Master LLC and each series are not enforceable against any other series or the Master LLC.

Series LLCs were first introduced in Delaware in 1996 but the concept has since spread to other states - for example, Illinois, Iowa, Nevada, Oklahoma, Tennessee, and Utah now have laws similar to the Delaware Series LLC law. You have informed us that in recent years, broker-dealers have approached the Financial Industry Regulatory Authority asking to use this structure. As one example of how a broker-dealer may wish to use the Series LLC structure you have described to us the following construct: the broker-dealer would structure the Series LLC such that the Master LLC would have no business operations, Series A would operate a retail broker-dealer and Series B would handle institutional activities. Series A and B would each have separate assets and liabilities and liabilities ofone series would not be enforceable against the other series. The Master LLC would be the only Commission registrant. Prospective FINRA members seeking to use this structure have informed FINRA that they would report the assets and liabilities of the two series in one consolidated financial statement when filing financial reports with the Commission.

Ms. Susan DeMando September 1, 2009 Page 2 of3

The Commission's financial responsibility rules include the net capital rule, l the customer protection rule,2 and the financial reporting rule.3 The net capital rule requires, among other things, different minimum levels ofcapital based upon the nature of the firm's business and whether the broker-dealer handles customer funds or securities.4 The main purpose of the net capital rule is "to protect customers and other market participants from broker-dealer failures and to enable those firms that fall below the minimum net capital requirements to liquidate in an orderly fashion without the need for a formal proceeding for financial assistance from the Securities Investor Protection Corporation."s

Generally, under the net capital rule, assets that are not available to meet any and all ofthe firm's obligations are not allowable. The Commission staffhas previously taken a no-action position that if a capital contribution to a broker-dealer is to be included in the net capital of the firm, it must be available, without limitation, for the company to use for any purpose.6 Specifically, the capital needs to be "subject to the risks of the business" in order to be included in the firm's net capital.7 Further, the rule requires that all liabilities of a company be recognized when computing the net capital of a broker dealer. Under a Series LLC structure, assets that are not available to all creditors would not be subject to the risks of the broker-dealer's business and would be treated as non-. allowable when computing net capital. Similarly, the net capital rule also requires that liabilities be deducted when computing net capital; therefore, all liabilities, whether the liability of a Master LLC or a series, would be deducted from allowable assets when computing net capital.

Rule 17a-5 requires broker-dealers to regularly file certain financial information with the Commission and the self regulatory organizations for which the broker-dealer is a member. You note that if a Series LLC reported its financial position on a consolidated basis, SRO and Commission examiners would not be able to determine the financial position and operating results of the registrant and each series without substantial effort. Indeed, a user ofthe financial statements would be unable to determine which ofthe series controlled specific assets or was obligated to satisfy specific liabilities. Therefore, the Commission's and the SRO's ability to effectively supervise the financial position of the firm would be greatly diminished..

In addition, the customer protection rule, Ru~e 15c3-3, imposes requirements on broker-dealers for the protection of customer property. Generally, Rule 15c3-3 requires a broker-dealer that carries customer accounts to compute on a daily basis its possession or control obligations, and perform a weekly computation regarding the amount required to

117 CFR240.15c3-1. 217 CFR 240.15c3-3. 317CFR240.17a-5. 4 See, e.g., Alternative Net Capital Requirements for Broker-Dealers that are Part of Consolidated Supervised Entities, Exchange Act Release 49830,69 F.R. 34,430 (June 21, 2004). 5 See 69 FR 34,428, 34,430. 6 See SEC No-Action Letter, Net Capital Treatment ofTemporary Capital Contributions, March 6,2000. 7 See, e.g., 17 CFR 240.15c3-1 d(b)(4)(as to proceeds of subordinated loan agreements).

Ms. Susan DeMando September 1, 2009 Page 3 of3

be on deposit in a special reserve bank account for the exclusive benefit of customers. Performing this possession and control requirement or a customer reserve requirement for a Series LLC would be difficult, ifnot impossible, because the assets and liabilities of each series would be in separate entities. For example, the amount required to be held in the customer reserve account must be calculated across and be available to all customers of the firm. However, under the Series LLC laws, if the amount calculated for the special reserve account for customers included credits from one series and debits from another series the account could be underfunded. Therefore, a Series LLC that receives customer cash or securities would not be able to comply with the requirements ofRule 15c3-3.

We also note that the Series LLC structure could be problematic for purposes of a liquidation proceeding under the Securities Investor Protection Act ("SIPA"). Within specified limits, SIPA contemplates equal treatment of customers, and a trustee liquidating a broker-dealer must comply with these requirements. Thus, if customer assets are missing, all customers share the pool of customer property at the firm on a pro rata basis. In contrast, if each series is treated as a separate entity it could give preferred treatment to some customers at the expense ofothers. To illustrate, if assets of only Series A customers are missing, only Series A customers would be subject to the risk ofthe loss. Series B customers would be made whole. Moreover, unsecured general creditors of Series B would be paid before customers of Series A, an outcome that is inconsistent with SIPA.

This is a staffposition on Series LLCs only and does not purport to state any legal conclusion to this issue. Any material change in circumstances may warrant a different conclusion and should be brought immediately to the Division ofTrading and Market's attention. Furthermore, this position may be withdrawn or modified if the staff determines that such action is necessary in the public interest, for the protection of investors, or otherwise in furtherance ofthe purposes ofthe securities laws.

Sincerely,

Ilj,·~i~Jl /)7'V'-­Michael Macchiaroli Associate Director