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Olson v. Halvorsen, et al. C.A. No. 1884 (Del. Supr. Dec. 15, 2009), affirming Olson v. Halvorsen, et al., C.A. No. 1884-VCL (Del. Ch. May 13, 2009) & Olson v. Halvorsen, et al., C.A. No. 1884-VCL (Del. Ch. October 22, 2008)

December 15, 2009

In this case, the Delaware Supreme Court affirmed an earlier Delaware Court of Chancery ruling that: 1) a court will not apply a provision of an unsigned limited liability company (“LLC”) agreement when an executed prior LLC agreement between the parties exists that contains a provision on the same subject and the parties to the existing agreement did not clearly agree to the proposed provision in the subsequent unsigned agreement; 2) an interest holder in an entity is not entitled to receive the fair value of its interest upon withdrawal pursuant to the default provisions of the Delaware Limited Liability Company Act (“DLLCA”) or the Delaware Revised Uniform Limited Partnership Act (“DRULPA”) where the entity’s governing agreement explicitly provides the methods of determining the amount that the interest holder is entitled to receive upon withdrawal; and 3) the statute of frauds applies to Delaware LLC agreements and, therefore, provisions in an LLC agreement that violate the statute of frauds may not be enforceable.

Brian T. Olson (the “Appellant”), Andres Halvorsen (“Halvorsen”), and David C. Ott (“Ott”) (collectively, the “Founders” and individually, a “Founder”) formed an investment management firm and hedge fund (“Viking”). The Founders conducted the business of Viking through several Delaware LLCs and a Delaware limited partnership (collectively, with Halvorsen and Ott, the “Appellees”). An overarching provision governed the Founders’ compensation and provided that a Founder would be entitled only to his accrued compensation and capital account balance upon leaving Viking (the “Cap and Comp Provision”). The Appellant later drafted and proposed an LLC agreement that substantially modified the Founders’ compensation policy and the Cap and Comp Provision. At trial, all of the Founders, including the Appellant, testified that they never agreed upon nor executed the proposed change in compensation. The Appellant’s personal financial records also did not indicate the proposed change.

Upon leaving Viking, the Appellant sought to enforce the proposed change in compensation and filed this case in the Delaware Court of Chancery, claiming, among other things, breach of contract. In the alternative, the Appellant argued that he was entitled to receive the fair value of his interest in each of the Viking entities pursuant to Section 18-604 of DLLCA and Section 17-604 of DRULPA. The Court of Chancery granted Appellees’ motion for summary judgment on Appellant’s breach of contract claim on October 22, 2008 and held a six-day trial on the remaining claims in early 2009. The Court of Chancery entered judgment in favor of the Appellees as to the fair value claim on May 13, 2009, finding that the Cap and Comp Provision effectively supplanted the default fair value determination and entitlement, as permitted by the relevant statutes. The Appellant appealed the Court of Chancery’s grant of summary judgment and the judgment on the fair value claim.

In this decision, the Delaware Supreme Court affirmed the Court of Chancery decision that the Founders overrode the default provisions of Section 18-604 of DLLCA and Section 17-604 of DRULPA by the Cap and Comp Provision, that the Founders never departed from the original Cap and Comp Provision, and that the Appellant was therefore not entitled to be compensated under the proposed modified compensation provision nor to receive the fair value of his interest in Viking. In so holding, the Supreme Court stated, among other things, that because the parties had not agreed, even orally, to the proposed modified LLC agreement provision regarding compensation, the Cap and Comp Provision continued to govern the Appellant’s compensation upon leaving Viking.

Most notably, the Supreme Court then decided, as a matter of first impression, that the statute of frauds applies to LLC agreements and that, as a result, even if the proposed modified compensation plan had been agreed to orally, by its nature it could not have been performed within a year and consequently would have been unenforceable because violative of the statute of frauds, which would require it to be evidenced by a signed writing. In so deciding, the Supreme Court rejected the Appellant’s argument that the statute of frauds was irreconcilable with the DLLCA because the DLLCA, by expressly permitting LLC agreements to be oral or implied, precludes application of the statute of frauds to LLC agreements. Therefore, the Supreme Court upheld the Court of Chancery’s application of the statute of frauds to the LLC agreement in this case. The Supreme Court stated that the history of the DLLCA in all its versions does not explicitly preclude the application of the statute of frauds to agreements governed by the DLLCA. Rather, while the DLLCA permits written, oral or implied LLC agreements, whether or not executed, such agreements are nonetheless contracts to which the statute of frauds could still apply. According to the Supreme Court, had the General Assembly intended to preclude the application of the statute of frauds to LLC agreements by permitting such agreements to be oral or implied, it could have done so clearly and expressly.

The Supreme Court similarly rejected the Appellant’s argument that when the General Assembly enacted Section 18-1101 of the DLLCA (which gives “maximum effect” to LLC agreements), the General Assembly precluded application of the statute of frauds. The Supreme Court stated that according to the rules of statutory interpretation, a court must assume that laws are “cumulative, not destructive of other laws” and that “when the General Assembly enacts a later statute in an area covered by a prior statute, it has in mind the prior statute.” As such, a court must read the later statute in conjunction with the earlier statute, unless the later statute expressly precludes application of the prior statute or the two statutes irreconcilably conflict. The Supreme Court stated that the General Assembly, in enacting Section 18-1101, sought to grant entrepreneurs and business persons more flexible governance terms than those permitted under the corporate paradigm and thus the grant of “maximum effect” of LLC agreements does not preclude application of the statute of frauds to LLC agreements.

The Supreme Court also quickly rejected the Appellant’s claim that the Court of Chancery erred in refusing to apply the multiple writing exception to the statute of frauds to the facts of this case. The Supreme Court found that the Appellant failed to show an essential element of the multiple writing exception, namely that that the Founders superceded the Cap and Comp Provision in a later signed document that clearly referred to and adopted the provisions of another, unsigned document (i.e., the proposed, unsigned LLC agreement).

The full opinion is available here