New Delaware Decision on LLCs

On August 8, the Delaware Court of Chancery issued a post-trial decision regarding a series of disputes among the owners of a closely-held Delaware LLC.  Grove v. Brown (http://courts.state.de.us/opinions/download.aspx?ID=193130).  The decision is significant because there is relatively little law about internal disputes in limited liability companies.  Delaware is a popular jurisdiction for organizing LLCs as with C corps so the decision from Delaware's Chancery Court carries extra weight. A number of issues were raised, making the case a useful read.  Here, we'll touch on one:  the parties disputed ownership.  The Operating Agreement and other documents stated that there were four equal partners.  The parties' actions were not consistent and not all of the four owners put up all of the initial capital implied by their ownership shares.  Faced with whether the contract or practical actions controlled, the court held that the unambiguous contract controlled.  LLCs are peculiarly creatures of contract, and this decision emphasizes that in the LLC context, the operating agreement will control in most all circumstances.  In this case, the owners who fully performed, assumed and acted as though they owned a larger share commensurate with their greater performance.  Those actions based upon their belief that they held a majority interest, including effecting a merger premised on their position that they owned more than 50% of the LLC, were rendered void as they were inconsistent with the Operating Agreement.  Where a party does not meet his or her obligations under that agreement, Grove suggests that the other parties need to force compliance or sue -- rather than assuming that the underperforming owner will be assumed later to have fewer rights in the LLC.  All too often disputes in a closely held company or LLC are swept under the rug and not addressed -- until litigation ultimately erupts, leaving a multitude of the type of challenging issues raised in Grove.