Walsh v. White House Post Productions, LLC, C.A. No. 2019-0419-KSJM (Mar. 25, 2020) (McCormick, V.C.)
In this memorandum opinion, the Delaware Court of Chancery granted in part and denied in part a motion to dismiss claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and specific performance, finding that a buyout provision in an LLC agreement constituted a call option and that once the defendants exercised the option, they could not withdraw from the process of purchasing the plaintiffs’ membership units.
In 2009, plaintiffs Kieran Walsh and Francis Devlin (“Plaintiffs”), and defendant White House Post Productions, LLC (“White House”) founded defendant Carbon Visual Effects, LLC (the “Company,” and with White House, “Defendants”), with White House as the majority unitholder.
The operative limited liability company agreement (the “LLC Agreement”) contained a buyout provision (the “Buyout Provision”) that enabled the Company to purchase its members’ units if the members ceased employment with the Company. The provision stated, in relevant part, that “[i]n the event a Member ceases to be employed by the Company for any reason, the Company shall have the right to purchase such Member’s Units, and such Member shall be obligated to sell such Units to the Company….” If the Company invoked these rights, the LLC Agreement established an appraisal process for the purchased units. First, the Company would select an appraiser to value the units pursuant to certain conditions outlined in the LLC Agreement. If the departing member disagreed with that first appraisal, the member could identify their own appraiser. In the event the member’s appraisal was more than ten percent higher than the Company’s appraisal, the two appraisers would jointly designate a third appraiser, whose appraisal would bind the parties.
In 2018, the Company elected not to renew Plaintiffs’ employment, notified Plaintiffs of its intent to purchase their membership units, and obtained an appraisal of Plaintiffs’ units. In response, Plaintiffs informed the Company they intended to seek their own appraisal. The Company then changed course, informing Plaintiffs it was no longer exercising its right to purchase their units. Plaintiffs, however, proceeded with the second appraisal, which returned a value more than ten percent higher than the first appraiser’s value, and requested the Company assist in identifying a third appraiser. The Company did not respond.
Plaintiffs then sued in the Court of Chancery for breach of the LLC Agreement, breach of the implied covenant of good faith and fair dealing, and specific performance of the Buyout Provision. Defendants moved to dismiss all counts for failure to state a claim.
The Court first addressed the breach of contract claim. The Court rejected Defendants’ argument that the Company’s notice of its intent to purchase was a revocable offer to purchase, reasoning that the Buyout Provision was a common law call option, which consists of two parts: (1) an offer to enter an underlying agreement for the sale of property, and (2) a collateral promise to hold that offer open. Here, the Court reasoned, the underlying agreement was the Company’s right to purchase Plaintiffs’ units, and the collateral promise was Plaintiffs’ obligation to sell their units to the Company. While the Company had unfettered discretion to either accept the offer or not, the Company was bound to the underlying agreement to purchase Plaintiffs’ units once that offer was accepted. The Court held that because the LLC Agreement did not identify how the Company was to accept Plaintiffs’ offer and, under Delaware law, an acceptance may be by words or symbol of assent or implied by conduct, it was reasonably conceivable that the Company accepted Plaintiffs’ underlying offer to sell their units by notifying them of its intent to purchase and by subsequently undertaking the appraisal process. The Court also rejected Defendants’ textual argument that the Buyout Provision was not a call option because it was not expressly identified as such in the LLC Agreement. The Court found no support for this argument under Delaware law. Accordingly, the Court found that the complaint stated a claim for breach of the LLC Agreement.
The Court next granted the motion to dismiss the implied covenant claim and denied the motion as to the specific performance claim. In granting the motion with respect to the implied covenant claim, the Court held the Buyout Provision wholly addressed the Company’s ability to withdraw from the transaction; thus, there was no contractual gap giving rise to a need for the implied covenant. In denying the motion with respect to the specific performance claim, the Court rejected Defendants’ argument that Plaintiffs were not willing to perform the contract, as written, because the complaint sought an appraisal process that would ignore conditions that could result in a lower valuation. While noting that Plaintiffs’ interpretation of the contract was a reach, the Court reasoned that, by seeking specific performance of the contract, Plaintiffs demonstrated they were willing to perform the contract.
Lastly, the Court granted the motion to dismiss all claims against majority unitholder White House because it did not have any rights or obligations under the Buyout Provision.