When an LLC agreement contains contractually negotiated methods for valuation of a member’s stock upon its sale or repurchase by the company, what standard is utilized by the Court to challenge such valuation?

This question was addressed in the decision of PECO Logistics, LLC v. Walnut Investment Partners, L.P., C.A. No. 9978-CB (Del. Ch. Dec. 30, 2015), where the Court considered a challenge to an appraisal of LLC stock that was conducted by a third party valuation firm, pursuant to the terms of the operative LLC agreement.


The investors at issue (the “Walnut Investors”) acquired preferred units in PECO Logistics, LLC (“PECO” or the “Company”) and became parties to an LLC agreement that afforded them the voluntary right to sell their preferred units back to PECO three years later (the “Put Right”).  The LLC agreement provides that, upon exercise of the Put Right, the Company must retain a nationally recognized valuation firm to determine the fair market value of the preferred units in accordance with a specified formula, and that the Company must repurchase the preferred units for the determined value. The LLC agreement further provides that both the Company and the investors “shall be bound by the determination” of the valuation firm. Notably, the operating agreement was silent in terms of the standard for review of the third-party appraisal.

In May 2014, after the Walnut Investors exercised the Put Right, PECO’s board engaged Duff & Phelps to perform the valuation required under the LLC agreement.  However, after the valuation was performed, the Walnut Investors refused to transfer their preferred units back to the Company at the determined value. PECO then sought declaratory relief that the Walnut Investors were bound by the valuation. The Walnut Investors filed a counterclaim in response alleging that PECO had breached the implied covenant of good faith and fair dealing.


Chancellor Bouchard concluded, based on the reasoning in Senior Housing Capital, LLC v. SHP Senior Housing Fund, LLC, C.A. No. 4586-CS (Del. Ch. May 13, 2013), that the Court should defer to the Duff & Phelps valuation because the parties expressly agreed that its determination would be binding without providing any mechanism for review of that determination. The Court also concluded that no facts had been alleged to call into question the independence of Duff & Phelps or to suggest that the Company tainted the contractually prescribed valuation process so as to sustain a claim for breach of the implied covenant of good faith and fair dealing. Accordingly, the Court denied Walnut Investors’ counterclaim, and ruled in favor of PECO.


This decision is an important read for any party entering into an LLC agreement that places the valuation of stock in the hands of a third-party appraiser.  If no remedy to challenge such valuation is set forth in the agreement, then the parties may be bound by the appraiser’s determination without the ability to obtain judicial review.

If you would like to speak to a litigator in Fox Rothschild’s Delaware office, please reach out to Sid Liebesman (302) 622-4237 or Seth Niederman (302) 622-4238.