Void Transfer of Membership Interests

Void Transfer of Membership Interests

 

In a recent decision of the Delaware Chancery Court, it was held that where a purported transfer of LLC interest was not made in compliance with the operating agreement, the court would enforce the agreement’s determination that the attempted transfer would be “null and void.” Absalom Absalom Trust v. Saint Gervais LLC, C.A. No. 2018-0452-TMR, 2019 WL 2655787 (Del. Ch. June 27, 2019).  

Anne Deane owned a 35.96% membership interest in Saint Gervais LLC. Anne was one of the children of Disque and Carol Deane, who had formed Saint Gervais “to pass on wealth to their children ... while maintaining control over that wealth.” Anne purported to transfer her interest to the Absalom Absalom Trust. The current dispute arose when Absalom sought to expect company books and records for a variety of reasons including a determination of the value of its interest, to determine the financial condition of Saint Gervais and investigate mismanagement and other improper conduct in connection with Saint Gervais’ management. In response, notwithstanding that certain documents had previously been provided, Saint Gervais defended on the basis that the trust was not a member of the LLC. Rather, its operating agreement, at section 5.2, provided that any disposition of an interest in the company required the prior unanimous written consent of the managers, and that failure to satisfy those requirements would render the transfer “null and void.” Specifically, it provided at section 5.2:

“[A] Member may dispose of such Member’s membership interest in the company in whole or in part only with the prior written consent of all of the Managers which consent may be given or withheld in their sole and absolute discretion. Any purported disposition of a membership interest in the company without the prior written consent of all the Managers shall be null and void.”

The agreement as well provided a comment at section 5.3:

“An assignee of a membership interest shall be admitted as a substitute Member … only with the prior written consent of all of the Managers, which consent may be given or withheld in their sole and absolute discretion. Any purported substation of a Member in the Company without such prior written consent shall be null and void.”

Holding that this case was quite similar to that recently resolved by the Delaware Supreme Court in CompoSecure, L.L.C. v. CardUX, LLC, 206 A3d 807 (Del. 2018), finding that:

The parties agree that Anne’s transfer of her membership to Absalom occurred without prior written consent. Thus, by the plain and unambiguous terms of the LLC Agreement, the transfer has no effect, meaning Absalom holds no interest in the Company. Slip op. at 9.

      From there the court rejected a number of arguments, all equitable in nature, to the effect that equitable principles cannot enforce an agreement that, by its terms, is “null and void” and therefore not subject to ex-post ratification.  In addition, the court rejected the trust’s argument that the provision with respect to limiting transfers was meant to preclude strangers from becoming members, “which is not a concern here because there is no real difference between Anne and Absalom.” Slip op. at 15. This position was rejected on the basis that, applying the words as set forth in the agreement, “whether or not an assignee is a stranger does not impact the intent as reflected in the four corners of the contract, and thus, it also does not impact Absalom’s lack of standing in this case.” Slip op. at 16.