In the case of Glenn B. Showell v. William H. Pusey, et al., C.A. No. 3970-VCG (Del. Ch., Sept. 1, 2011), the Court of Chancery construed the provisions of an operating agreement of Robert M. Hoyt and Company, L.L.C. to determine what value, if any, Plaintiff was due upon his voluntary retirement from the company.
Plaintiff, who owned 29% of the company at the time of his retirement, argued that he was entitled to 29% of the fair value of the company as a going concern at the time of his retirement pursuant to 6 Del. C. § 18-604. To the contrary, Defendants asserted that Plaintiff was entitled to zero distribution, or alternatively, 29% of the liquidation value of the company at the time of his retirement.
The Court first made clear that the relationship between members of a limited liability company, and their rights and duties, are governed by the operating agreement for such a company, and also stated that limited liability companies exist pursuant to the Delaware Limited Liability Company Act, 6 Del. C. Section 18–101, et seq.
The Court next found that the Operating Agreement at issue did not allow for the withdrawal or resignation of its members, stating that “no Member shall be entitled to withdraw or resign from the Company.” However, the parties entered into a Supplemental Agreement which addressed the repurchase of a member’s interest in the company upon a “Retiring Event”. However, such a “Retiring Event” was not defined in the Supplemental Agreement to include the voluntary retirement of a member, and the parties agreed that nothing in the Operating Agreement or Supplemental Agreement allowed for, nor set forth the company’s obligation to a member upon, a voluntary retirement.
The Court declined to apply the “default” provision of 6 Del. C. § 18-604 in determining the appropriate distribution to Plaintiff, given that through the Operating Agreement and the Supplemental Agreement, the members had carefully planned for the obligations of the company upon a member’s retirement.
Despite the fact that a member’s voluntary retirement was not included as a “Retiring Event” in the Supplemental Agreement, the Court found that the members had orally agreed to amend the agreement to that effect, and therefore, the Court held that Plaintiff was entitled to the distribution provided to members who qualified for a “Retiring Event”, which was the liquidation value of their respective shares in the company, as opposed to the fair value of such shares pursuant to the default provision of section 18-604.
As is clear from this decision, it is imperative that an operating agreement for a limited liability company provide as much clarity as possible, and that ambiguity will only lead to increased litigation costs should a dispute ultimately arise between members of such company.