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In re NextMedia Investors, LLC, C.A. No. 4067-VCS (Del. Ch. May 6, 2009)

May 6, 2009

Certain members of respondent, NextMedia Investors, LLC (“NextMedia” or the “Company”), sought summary judgment on their petition for judicial dissolution of NextMedia under Section 18-802 of the Delaware Limited Liability Company Act, 6 Del. C. §§ 18-101, et seq. (the “LLC Act”). The petitioners also asked the Court to appoint a liquidating trustee in connection with the dissolution.

NextMedia’s LLC Agreement (the “LLC Agreement”) provided in Section 13.1 that the LLC would be dissolved on April 17, 2008. In a 2008 amendment to Section 13.1(a), NextMedia’s board sought to delay NextMedia’s dissolution until April 12, 2012 (the “Amendment”). In order to amend Section 13.1(a) and change the dissolution date, the board, under Section 17.5(a), was required to obtain consent from all NextMedia’s members who would “be adversely affected.” NextMedia was able to gain 97% approval for the Amendment from the members, but was unsuccessful in obtaining the petitioners’ consent.

NextMedia’s Chief Financial Officer then sent a letter to the petitioners stating that the dissolution would not be in the petitioners’ best interest. He informed the petitioners that with dissolution, NextMedia may choose to liquidate by distributing illiquid stock rather than by selling assets, since the current economic conditions were so unfavorable. The petitioners considered the letter a threat, refused to consent to the Amendment and requested that the board dissolve NextMedia on April 17, 2008. In July 2008, NextMedia informed the petitioners that the Extension Agreement had been properly adopted and that NextMedia would not be dissolving at this time.

The petitioners immediately filed a petition for judicial dissolution, sought appointment of a liquidating agent and then moved for summary judgment on both counts. The petitioners argued that NextMedia should have been dissolved on April 17, 2008, since the respondents did not have their consent to the Extension Amendment. The petitioners claimed that under the LLC Agreement, their consent was necessary, since “the extension of their investment horizon was an adverse effect.”

The respondents asserted that summary judgment was not appropriate. They argued that because a majority of the members of Class C holders approved the Extension Amendment (the petitioners’ class), the Amendment did not have an “objectively adverse effect” on the class. The respondents asserted that if the petitioners’ consent was required, it was because the petitioners were “subjectively adversely affected.” Because it would be burdensome for the board to investigate the subjective circumstances of each member, the respondents contended that it was unreasonable to interpret the LLC Agreement as permitting members to defeat an amendment when the majority of their class approved it. Further, the respondents argued that Section 17.5(a) of the LLC Agreement was ambiguous, as it could be reasonably interpreted “to require consent only from those members that the board intended to adversely affect.” Finally, the respondents argued that the petitioners did not provide a factual basis to conclude that they were adversely affected by the Amendment.

With regard to the petition for dissolution, the Court rejected all the respondents’ arguments. First, the Court held that the respondents’ interpretation of the adverse effect to be “subjective” implied a class voting provision in the LLC Agreement, which was improper. The Court stated that if a class voting provision was what the drafters had intended, the LLC Agreement would have included a class voting provision. Instead, the drafter intended for each member to have greater protection by requiring the consent of “each Member.” Additionally, the Court found that the petitioners were not using a “subjective” standard for determining the adverse effect, but an objective one. The Court held that a reasonable investor would find that the “guaranteed investment end point” that could not be altered without his approval would be a “material economic provision” of the LLC Agreement, and, therefore, the deprivation of this right would create an adverse effect for its member(s).

Further, the Court held that the respondents’ interpretation of Section 17.5(a) conflicts with the plain meaning of the language of the provision and is not a reasonable interpretation. The Court, therefore, found that the respondents were unsuccessful in illustrating that the provision was ambiguous. Finally, the Court held that respondent’s factual basis argument was "irrelevant" as the respondents misconstrued the petitioners’ burden. The Court held that the petitioners’ only needed to demonstrate that their consent was necessary to approve the Extension Amendment. The petitioners were not required “to show that they were entitled to vote on the Extension Amendment through factual evidence.” Since the vote was for an amendment that "change[d] the lifespan of the entity," the Court held that this Amendment would “alter an economically meaningful term” and trigger the full member consent required by Section 17.5(a).

The Court ultimately granted the petitioners’ motion for summary judgment with respect to the petition for dissolution. The Court, however, denied the petitioners’ motion for summary judgment with respect to the appointing a liquidator, since the LLC Agreement provided for the Board to serve as liquidator. The LLC Agreement also stated that if the Board failed or refused to serve as liquidator, the Class A Members were to appoint a liquidator.

The full opinion is available here