Tuesday, April 9, 2019

Delaware Court Rejects Reformation of Operating Agreements That the Members Admit They Did Not Read

Delaware Court Rejects Reformation of Operating Agreements
That the Members Admit They Did Not Read

      In a recent decision rendered by the Delaware Chancery Court, it considered and rejected the suggestion that it should reform a trio of LLC operating agreements. Particularly noteworthy in this decision is the admission by the complaining members that they did not read the document before it was signed. In Re: 11 West Partners, LLC, C.A. No. 2017-0568 SG, 2019 WL 1300859 (Del. Ch. March 20, 2019).
      The various ventures at issue were involved in real estate, and each of the three participants had a particular skill set that they brought to the venture. In the first agreement they entered into, it was provided that a simple majority of the members could change the manager. However, when a different attorney in a different law firm prepared operating agreements to be modeled upon the first, he modified the agreements to, inter alia, require the unanimous vote of the members in order to change the manager. That member, who was as well the manager, read all of the documents and signed off on that change between the first agreement and those subsequent. In contrast, the other two members admitted that they signed the new operating agreements without reading them, even in the face of an attorney cover letter that directed them to do so. When those same members sought to reform the agreement to provide for majority (rather than unanimity) vote in order to remove the manager, their claim for reformation would fail. Rather, having never read the agreement, there was no “specific meeting of the minds regarding a term that was not accurately reflected in the final written agreement,” citing Glidepath Ltd. v. Beumer Corp, 2018 WL 2670724 at *10 (Del. Ch. June 4, 2018).
       The moral of the story is not that striking; you will be held to the terms of the agreement you sign, so it is important to read the agreement to be sure that it reflects the intent of the parties.

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