Achaian, Inc. v. Leemon Family, LLC, et al., C.A. No. 6261-CS (Del. Ch. Aug. 9, 2011) (Strine, C.)
In this opinion, the Court of Chancery granted a declaratory judgment in favor of the plaintiff (Achaian, Inc., on behalf of itself, and derivatively on behalf of Omniglow, LLC) and denied defendants’ (Leemon Family LLC and Ira Leemon and Omniglow, LLC) motion to dismiss, granting the judicial dissolution of a limited liability company, at the plaintiff’s request, under 6 Del. C. § 18-802. The issue was whether one member of a limited liability company could assign its membership interest, including voting rights, to another member of the same limited liability company, even though the limited liability company agreement required the consent of all members, for the admission of new members, or whether the existing member/assignee must be readmitted with respect to the new membership interest it acquired. The Court held that, when “read as a whole”, Omniglow’s LLC Agreement allows one member to transfer its entire membership interest to another member without obtaining the consent of the other members and, therefore, the assignment of membership interests to the plaintiff was effective. Because this now vested the plaintiff with a 50% interest, and there is a sufficient deadlock between the plaintiff and the defendant, the Court judicially dissolved Omniglow, LLC.
Omniglow, LLC, a manufacturer of chemiluminescent items such as “glowsticks”, was founded in 2005. As of 2006, Omniglow, LLC (“Omniglow”) had three members: Leemon Family LLC (“Leemon”) (holding a 50% interest), Randye M. Holland and Stanley M. Holland Trust (“Holland”) (holding a 30% interest) and Achaian, Inc. (“Achaian”) (holding a 20% interest). For two years following, Holland and Leemon, together holding 80% of the membership interests of Omniglow, managed the business. At some point in 2008, Leemon began managing the business without Holland over the objections of Holland and Achaian. Having had enough of the controversy, Holland transferred its 30% membership interest in Omniglow to Achaian in 2010.
Achaian filed suit in the Court of Chancery alleging that Achaian and Leemon were deadlocked as to the management of Omniglow (since Achaian now alleged that it owned 50% of Omniglow), and that Omniglow should be judicially dissolved under 6 Del. C. § 18-802. Leemon moved for dismissal, arguing that Holland was not permitted to transfer its membership interests without the consent of all members under the LLC Agreement. Ultimately, the Court held in favor of Achaian.
The Court of Chancery looked to two sources in rendering its opinion: the Delaware Limited Liability Company Act (the “Act”) and Omniglow’s LLC Agreement. Under the Act, the assignee of a member’s membership interest has no right to participate in the management and business affairs of the LLC, unless the LLC agreement states otherwise. Also, the Act stipulates that conflicts between the Act and the provisions of an LLC agreement are resolved in favor of the LLC agreement. Therefore, the Court turned to the terms of Omniglow’s LLC Agreement.
In interpreting the language of the LLC Agreement, the Court looked specifically at two sections of the Agreement: the “Transfer of Interest” and “Admission of New Members” sections. The Court noted that membership “Interest” is defined by the LLC Agreement as including “the entire membership interest” of any member, including voting rights, and that the LLC Agreement separates the concept of admitting a new member from the concept of transferring the interest of a member to an existing member. The admission of a new member, under the LLC Agreement requires the consent of the existing members, while the transfer of a membership interest to an existing member does not. Also, according to the Court, nothing in the LLC Agreement required an existing member to be readmitted as a new member if they acquire new membership interests. Such an admission scheme, according to the Court, is not supported by the Act, the Uniform LLC Act or any learned commentaries or treatises. To the contrary, the Court stated that the Act contemplates singular admission for LLC members, as governed by the specific terms of the LLC agreement.
Following this reasoning, the Court held that the transfer by Holland of its 30% Interest in Omniglow to Achaian, combined with Achaian’s 20% Interest in Omniglow vested Achaian with a 50% Interest, and that this transfer did not require the consent of the members.
Finally, the Court held that Achaian has sufficiently pled facts demonstrating that a deadlock exists between the two remaining members of Omniglow and the court granted declaratory judgment in favor of Achaian on that issue.