In the recent Delaware Supreme Court decision of CompoSecure LLC v. Cardux LLC, C.A. No. 177, 2018 (Del. Nov. 7, 2018), the High Court found that a contract may be rendered void because it did not comply with the requirements set forth in an LLC agreement formed by the parties to the contract for the purposes of entering into such contract. Although the findings of the Court of Chancery were largely affirmed, the Supreme Court remanded the action to Vice Chancellor Laster of the Court of Chancery to review a discrete but significant issue overlooked by the trial court, as discussed below.
Appellant CompoSecure, LLC, appealed an approximately $17 million judgment obtained in the Delaware Court of Chancery for past-due commissions, legal fees and expenses, pre-judgment interest, and contract damages arising out of a sales agreement with Appellee CardUX, LLC. CompoSecure asserted on appeal that the trial court erred in holding that: (i) the Sales Agreement was not void, but rather voidable, under the LLC agreement entered among the parties, and (ii) the Sales Agreement was impliedly ratified by Appellant. In response, CardUX argued that, notwithstanding Appellant’s arguments, the Sales Agreement should be enforced based on a provision in the LLC agreement that addresses reliance by third parties on certain company actions, or based upon the doctrine of quantum meruit.
The Supreme Court largely agreed with the Court of Chancery’s conclusions that: (i) the Related Party Provision (leaving aside the Restricted Activities Provision) rendered the Sales Agreement not void, but rather voidable, and was therefore subject to equitable defenses, (ii) the parties impliedly ratified the Sales Agreement under the law of New Jersey, and (iii) the Third Party Reliance Provision did not save the Sales Agreement from failure to comply with the Related Party or Restricted Activities Provisions.
However, the Delaware Supreme Court determined that Vice Chancellor Laster should have separately considered whether the Sales Agreement falls within the Restricted Activities Provision, and did not analyze whether the Sales Agreement was “void and of no force or effect whatsoever” in the event it did apply. Per the Supreme Court, “[t]he answer to this question is important because, if the Restricted Activities Provision applies, the Sales Agreement would be void, as opposed to merely voidable, and, therefore, would be incapable of being ratified.” Slip op. at 4.
Of interest for practitioners, the Supreme Court noted that plaintiff/appellant CompoSecure LLC (“CompoSecure”) “only weakly raised the issue below, but, on appeal, elevates the issue to its lead argument.” (Slip op. at 3-4.) That said, the Supreme Court found that the argument had not been waived. Therefore, the Supreme Court affirmed in part, reversed in part and remanded for further proceedings as to this particular issue held to have been overlooked by the lower court.
This decision is significant to drafters of limited liability company agreements. The terms of such agreement should be carefully considered before entering into a contract among the parties to such agreement.
Carl D. Neff is a partner with the law firm of Fox Rothschild LLP. Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at firstname.lastname@example.org.