Showell v. Pusey, C.A. No. 3970-VCG (Del. Ch. Sept. 1, 2011) (Glasscock, V.C.)
In this memorandum opinion, the Court of Chancery held that a retiring member of a limited liability company was entitled to his proportionate share of the liquidation value, rather than the going concern value, of the company.
In 2000, the plaintiff, Glenn B. Showell (“Showell”) and one of the defendants, William H. Pusey (“Pusey”), formed an accounting firm, organized as a Delaware limited liability company (the “Company”). In 2007, following a period during which Showell decreased the amount of time he devoted to the Company, Pusey and Showell agreed that Showell should retire from the Company and that the Company would pay Showell for his membership interest in the Company (the “Departure Agreement”). However, the parties were unable to agree on the amount to which Showell was entitled to receive in connection with his retirement from the Company. Therefore, Showell petitioned the Court of Chancery to construe the provisions of the Company’s operating agreement (the “Operating Agreement”) to determine what amount, if any, he was entitled to receive. At the time of Showell’s retirement, Showell held a 29% interest and Pusey held a 61% interest in the Company.
Showell argued that, under Section 18-604 of the Delaware Limited Liability Company Act (the “LLC Act”), his retirement entitled him to 29% of the value of the Company as a going concern. The defendants argued that, because the Operating Agreement did not permit Showell to retire, he was due no compensation. In the alternative, the defendants argued that Showell should receive his proportionate share of the liquidation value of the Company.
To determine Showell’s rights in connection with his voluntary retirement from the Company pursuant to the Departure Agreement, the Court turned to the language of the Operating Agreement. Although the Operating Agreement specifically provided that members were not entitled to withdraw or resign from the Company, the Operating Agreement provided that issues regarding transfer or repurchase of membership interests could be addressed by supplemental agreement. Showell and Pusey previously agreed to such a supplemental agreement (the “Supplemental Agreement” and together with the Operating Agreement, the “Agreements”). In the Supplemental Agreement, Showell and Pusey agreed that, for certain specified “Retiring Events,” a member was entitled to an amount representing the member’s proportionate share of the liquidation value of the Company. The Supplemental Agreement also provided for the schedule of payments of the amount due in connection with Retiring Events. However, the Departure Agreement did not constitute a Retiring Event under the terms of the Supplemental Agreement. The Operating Agreement provided for amendment with the consent of members holding at least 75% of the Company’s membership interests.
The Court first found that, since Pusey and Showell held greater than 75% of the membership interests of the Company, the Departure Agreement was a modification of the Operating Agreement permitting Showell’s retirement from the Company. Next, the Court interpreted the Agreements in their entirety in light of the Departure Agreement. The Court found that, read as a whole, the Agreements evidenced careful planning for the Company’s obligations upon a member’s retirement. Since the default provision of Section 18-604 of the LLC Act, which provides that a retiring member of an LLC is entitled to his proportionate share of the “fair value” of the LLC, applies only if an operating agreement fails to provide otherwise, the Court rejected Showell’s contention that Section 18-604 of the LLC Act should apply. Because the Company permitted Showell to retire and an agreement existed to purchase Showell’s interest in the Company, the Court held that Showell was entitled to his proportionate share of the liquidation value of the Company as set out in the Supplemental Agreement as though a Retiring Event had occurred.