2025 Case Law Developments and Updates to Delaware’s LLC Act

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Annie: Hello, everyone, and welcome to today's webinar, "2025 Case Law Developments and Updates to Delaware's LLC Act." My name is Annie Triboletti. I will be kicking things off today. So joining us today are Mike Maxwell and Alyssa Frank from Potter Anderson and Helena Ledic from CSC.

Helena: Thank you so much, Annie. It's a pleasure to be able to be talking about what's happening with Delaware case law and LLC trends, and being joined by Mike and Alyssa, who are our true experts and our very good friends at Potter Anderson.

So let's talk a little bit about what our agenda is going to be today. We've gotten into our introduction. We're going to do a couple of really quick slides on the Delaware Court of Chancery statistics. Mike is going to walk us through the 2025 case law developments, knowing full well that we're still only in mid-November, but what's been happening out there. Alyssa is going to take us through the LLC Company Act and the amendments there. And then we'll get into our conclusions and Q&A. And feel free to pop questions into the Q&A. If there is enough time, we will make sure that we get to them.

So with that, let's jump into our statistics over here. So we've got two slides for you. And the first slide that we've got over here is we're talking about the general Court of Chancery 10-year trend. So this is the civil, the miscellaneous, and the estates. And so 2025 numbers are not out yet, and they probably won't be until probably later into Q1 for 2026.

What you can see is that, for 2024, it's looking pretty active. I mean, as Mike said to me, Delaware is still really pretty busy. So you can see that's the combined filings over there. We have both the filings and then the dispositions. The filings are in purple. The dispositions are in red.

And then our next slide that we've got over here is what we've actually done is we've broken it out for civil actions over here, so isolating just the civil actions. And you can see that the filings over there are over a thousand for 2024. The dispositions were just about there, and maybe a touch below normal maybe, or I should say the 10-year average. But certainly not any kind of a big dip whatsoever.

And then with that, I am now going to turn things over to our expert on what has been happening with the case law developments in Delaware. So Mike, please go ahead and take it away.

Mike: Thanks. Thanks, Helena, and thank you, everyone, for joining us. It is worth noting, as Helena mentioned, we're in November. So our case law review today is going to cover certainly some 2025 cases, but also a few from 2024 that we thought were interesting. So we've tried to put together a mix of cases that have some interesting points on LLC topics, implied covenant, membership, what it takes to be a member, books and records, as well as fiduciary duties. So all things that you'll find relevant as you practice and deal with these LLC entities.

Keeping in mind that as most of you likely know already that LLCs are creatures of contract, and so in addition to the cases, there's certainly a statutory default overlay. But a lot of times, the outcomes of these cases, the outcomes of when you're dealing with these types of entities, whether you're structuring them for transactions or dealing with them in cases, are really going to be dependent upon the operating agreement or the governing agreement.

Now, with that said, our first case is actually going to be a partnership case. Again, even though it's a partnership case, because of the similarity between the limited partnership statute and the LLC statutes and the way these provisions are interpreted, we thought this was a very relevant case in particular because it highlights a few points in particular about freedom of contract, forfeiture for competition, putting in specified consequences pursuant to some specific statutory provisions in both the partnership statute and the LLC Act.

So with that, we'll get started with this Cantor Fitzgerald v. Ainslie case. So this is a Delaware Supreme Court case, from last year, that essentially found that a limited partnership can enforce a forfeiture-for-competition provision in its partnership. So Cantor Fitzgerald operated under a partnership agreement containing several provisions that were designed to restrict former partners from competing, soliciting clients or employees, or using the partnership's confidential information. And that restriction applied for four years after the partner left or would leave.

The partnership agreement discouraged those competitive activities in a few different ways. The first was that it contained a more traditional non-compete or non-solicit provision that would require the partnership, Cantor Fitzgerald, to seek to enforce that restriction by an injunctive relief and damages.

The second means by which they tried to discourage competition allowed the partnership to withhold payments that were otherwise owed from the partners' capital account and some additional earned compensation. So, for example, under the operative partnership agreement, a former partner was to be paid a base amount within 90 days of ceasing to be a partner, and then certain other amounts, that were conditioned, were going to be paid in equal annual installments over a period of four years. And those conditioned amounts would be forfeited if the partner undertook competitive activity within that four-year period. And the forfeiture provisions would be triggered by either a partner breaching a restrictive covenant in the partnership agreement or a partner engaging in competitive activity for four years, even if doing so was not technically a breach of any restrictive covenant.

So at issue in these cases, and again we'll talk a little bit about the Chancery Court and then the Supreme Court decision, was this forfeiture-for-competition provision and whether those triggers were enforceable. So in this case, six former partners withdrew from the partnership. They took positions at other brokerages. Cantor Fitzgerald determined that the former partners were engaged in competitive activities in their new roles and that they forfeited their future distributions.

So the partnership asserted these breaches, and by asserting these breaches meant that they owed no duty to pay any of the conditioned amounts. So essentially, these partners were not going to be paid the additional amounts that would have been paid normally over that four-year period. The former partners sued to obtain the withheld payments by attacking both the forfeiture-for-competition provisions and the restrictive covenants as unreasonable restraints of trade.

And so on a motion for summary judgment, the Delaware Chancery Court weighed the policies favoring enforcing private agreements on the one hand and the disfavoring restraints of trade and allowing individuals to freely pursue their professions of choice on the other. Cantor Fitzgerald did not seek to enjoin the partners from competing. So this is important. They didn't seek injunctive relief, but they rather only invoked and sought to enforce the forfeiture-for-competition provision.

So in the Chancery Court, the Chancery Court granted the former partners' motion for summary judgment. The Court relied on precedent involving restrictive employment covenants, reasoning that like non-compete provisions forfeiture-for-competition provisions should be scrutinized for reasonableness. And so according to the Court, the partnership's competitive activity condition failed the reasonableness test and thus was unenforceable.

So in arriving at that conclusion, the Court first found that the conditional payment was a valid mechanism to conditional payments and not a penalty. That was fine. But the Court noted that it must look at the underlying conditions that trigger the forfeiture. And on the breach of the restrictive covenant trigger, the Court reasons those provisions had to be enforceable in order to be breached. And so the Court found that they were not.

And just by a little bit way of background, courts, as you may be aware, do not mechanically enforce non-compete or non-solicit agreements. And that's true as well in the partnership agreement setting. So they carefully review non-compete and non-solicit agreements to ensure that they're reasonable in geographic scope and temporal duration, so time and scope, and that they advance in a legitimate economic interest of the party. So there's this underlying evaluation that you normally undergo for a restrictive covenant.

So on the forfeiture-for-competition provision, the Court relied on the precedent involving restrictive employment covenants, reasoning that just like non-compete provisions, the forfeiture-for-competition provisions should also be scrutinized for reasonableness. So it weighed two approaches, one where these types of provisions should be scrutinized for reasonableness, and the other that it considered was called the employee choice doctrine.

And so what does that mean? So jurisdictions that adopt the view of determining if a forfeiture-for-competition provision is an unreasonable restraint on trade conclude that the threat of economic loss from a forfeiture provision operates as a restraint on trade. So because the purpose is to deter competitive employment, it's identical to a typical restrictive covenant. So again, going back to that reviewing the underlying covenant for geographic scope, or for time, the duration of the covenant as well as the valid purpose. Right? So because of those similarities, the courts found it appropriate or find it appropriate to evaluate a forfeiture provision for reasonableness using the same lens through which they would a traditional non-compete. So that's one approach.

The other approach is called the employee choice doctrine, and that reasons that unlike the restraint prohibiting competition, in like a contract, an employment contract or an employment agreement, the forfeiture does not prohibit the employee from engaging in competitive work, but really merely denies her the right to some financial benefit if the employee chooses to engage in competitive activity, and thus they're not a restraint on trade.

The Chancery Court, however, found, as I mentioned earlier, it applied the reasonableness approach and found that the restrictions were unreasonable and therefore couldn't trigger this condition for the forfeiture-for-competition provision.

So now we go to the Supreme Court. The Supreme Court held that the forfeiture provision was valid in view of Delaware's strong policy favoring freedom of contract in the alternative entity setting among sophisticated parties. So the Court essentially said that when sophisticated actors avail themselves of the contractual flexibility that's embodied in the Limited Partnership Act, a statute that is expressly designed to give maximum effect to the principle of freedom of contract and to the enforceability of partnership agreements and agreed that a departing partner will forfeit a specified benefit should he or she engage in competition with the partnership, a court should, absent unconscionability, bad faith, or other extraordinary circumstances hold them to their agreements.

So the Court weighed competing public policies, unreasonable restraint on trade and giving maximum effect to the freedom of contract and the enforceability of the partnership agreements, and it came out that the freedom of contract, at least in the alternative entity space and so the LLC's partnerships should outweigh that other policy, absent some extraordinary circumstance.

So the Delaware Supreme Court agreed with the Court of Chancery's conclusion that the conditioned payment device comprised two conditions. So there are two ways to breach it, the no breach condition and the competitive activity condition. And it also agreed that the conditions for breach were disjunctive, meaning that meeting either of those conditions relieved Cantor Fitzgerald of its duty to pay.

So as to the no breach condition, so this is where the Court of Chancery had held that because restrictive covenants were unenforceable, the plaintiffs could not have breached them so as to trigger the no breach condition. And the Supreme Court agreed with that. But this left Cantor Fitzgerald or the partnership with the competitive activity condition, and that condition essentially said that notwithstanding the restrictive covenants, if there are other conditions that were not met or other competing activities that were engaged in, you've forfeited your right to those payments.

So the Court first analyzed the enforceability of the conditioned payment device to the extent that it was triggered by competitive activity. So the no breach condition, not the no breach condition that relied on breaches of a restrictive covenant, but were outside of the restrictive covenant breaches which they found were unenforceable, but really on what are the other actions that were taken that triggered the competitive activity condition. And the Court discussing the competing policy interests of, as I mentioned, the restricting restraints on trade versus allowing contracts and freedom of contract, they found that the forfeiture-for-competition provision did not implicate the public policy disfavoring restraints on trade because it did not prevent the former partners from competing.

So unlike previous non-compete cases that sought injunctive relief and prevented a former employee from working, the Court noted that the provision at issue here is not a penalty enforced against an employee based on the breach of a restrictive covenant. It's a condition precedent that excuses the partnership from its duty to pay if the former partners failed to satisfy a condition to which they agreed to be bound in order to receive a deferred financial benefit. And the Court also noted that it was the former partner suing to receive this deferred financial benefit and not the partnership suing to stop competition. So again, this goes back to that point where they were not seeking injunctive relief. They were not seeking to keep them from competing. They were just saying, "Look, you triggered this. By going to compete, you've triggered the forfeiture of these additional benefits that would have been paid out over four years."

The Supreme Court addressed these competing policy rationales and recognized that freedom of contract as a matter of fundamental public policy in the context of contract that is voluntarily undertaken by sophisticated parties is really going to outweigh, in this context, the restrictive covenant restrictions or the reasonableness. The Supreme Court also found that the forfeiture-for-competition provision did not implicate public policy disfavoring restraints of trade, as I mentioned before, because it did not prevent the partners from competing. It allowed them to choose whether to compete and essentially suffer the consequences.

The Court also favorably addressed the employee choice doctrine, which again recall that the Chancery Court kind of went the other way and went to the reasonableness review, which is a minority of jurisdictions. There's a jurisdictional split among the states and among different courts. But the Chancery Court went with the reasonableness doctrine, and the Supreme Court favorably viewed the employee choice doctrine, which allows the employee to choose between a restraint on employment or losing a financial benefit.

And so the other the other point here that's interesting to make is that the common law doctrine disfavoring forfeitures does not extend to limited partnership agreements. So the Supreme Court reasoned that the Limited Partnerships Act and its mandate to honor freedom of contract puts a forfeiture provision in a partnership agreement on equal footing with any other provision in that agreement.

And a couple things to note here in particular, and this is true for both the partnership statute and the LLC Act, is there's a statutory provision in the partnership statute. It's 17-1101(c). It's a policy of the act, of this chapter to give maximum effect to the principle of freedom of contract and to the enforceability of the partnership agreement. There's a similar provision or statute in the LLC Act. And then 17-306 provides that you can enforce a penalty or consequence, including a forfeiture, for breaches of the partnership agreement. And a similar provision is in 18-306 of the LLC Act.

So again, there are statutory provisions that allow you to have specified penalties, specified consequences, including forfeitures, if you provide those clearly in your partnership agreement. And so the court here is saying that effectively we're going to give effect to those types of provisions, and the common law doctrine disfavoring forfeiture is not going to extend to those agreements, again absent some fraud or some of the extenuating circumstances that we mentioned previously, so some egregious situation. But for the most part, among parties that are sophisticated and entering into a contract or a partnership agreement, a LLC agreement, whatever it may be, there the courts are going to enforce those agreements as written and give effect to those specified penalties or consequences. And so the Court reasoned that the forfeiture provision did not offend public policy because it allowed the former partners to choose whether to compete and accept the consequences.

So again, an interesting case. I think that the main takeaway here is, as most practitioners in Delaware here thought, that these types of provisions, these penalty or consequence provisions would be given effect and would be enforced, the Court essentially upheld that. And the takeaway here also is that alternative entity agreements, again, you're dealing with contractual rights, and they're going to be enforced as drafted. And so the policy of freedom of contracts is significant and can trump certain other what you might think of as other public policy arguments, in this case, the common law that disfavored forfeitures. Again, not a differentiating between restricted covenants because I think those are still subject to reasonableness, even in a partnership agreement.

But when you're talking about a forfeiture-for-competition provision, that's slightly different and the Court treated it as such. One thing to note though, if you're drafting those types of provisions and you are going to try and override, the common law doctrine that disfavors forfeitures, you want to be clear and unambiguous about those types of penalties and consequences in your partnership agreement or operating agreement.

All right. So that was our first case, Cantor Fitzgerald. Again, a partnership case, but it has application to the LLC context.

The next case we're going to talk about is another chapter in this continuing saga of XRI. This is a case that started in 2023 and had some interesting decisions that came out of that, including a Supreme Court decision that reversed and remanded for further proceedings. The original case addressed the effect of voidable actions and the effects of not complying with a requirement in an LLC agreement and then requiring the action to be treated as void. It also because of that void versus voidability had some effects on what kinds of equitable defenses, including acquiescence, that the parties could put forth.

So in this case, XRI Investment Holdings, it was a Delaware LLC operating in the water recycling midstream infrastructure space. The defendant, Holifield was a co-founder and member of XRI and of an entity called GH Blue Holdings, LLC, which was a single-member LLC formed by Holifield. In June of 2018, Holifield transferred a number of units in XRI to this SPV entity Blue. And critically here, the LLC agreement contained no transfer provision that prohibited certain transfers of membership units and stated that unauthorized transfers, and this was critical to the original decisions and case that came out that unauthorized transfers would be void. Now the dispute here is whether the transfer of membership units violated the LLC agreement's no transfer and no encumbrance provisions, and whether XRI could even recover damages or recoup litigation advances.

In the prior proceedings, as I mentioned, the trial court found that there was a breach of the no transfer provision, characterizing the transfer void under the LLC agreement. The Supreme Court affirmed that in part and reversed in part and remanded for some further determinations.

And again, the findings here was that, just as a quick recap, partly why this transfer was made and why there's this question about void versus voidable and acquiescence is that Holifield in transferring the members, he essentially structured this transaction, this transfer so that you could take out a loan and encumber the units without violating . . . Well, it violated the no transfer provision, but he was trying to keep the other side, so Morgan Stanley was another party in this, and he was essentially trying to keep them on a separate side of the ledger so to speak.

So his understanding at the time was that they were okay with it, the loan. They had a priority interest, and he was okay with the way he had structured this transaction in order to gain additional liquidity and do a loan and without affecting the LLC's priority as a creditor secured by these units. And so this other member essentially received benefits from the transaction and took no action for two years after learning of the violation. So there's this argument or this principle the LLC is, a few years later, asserting that the transfer is void, only after the LLC member defaulted on his earlier loan and sought to foreclose. So the LLC sought to foreclose on the units by serving a strict foreclosure proposal. And the LLC argued that equitable defenses cannot be asserted against legal claims.

And so the prior ruling, the Court ruled in favor of the LLC, finding that the transfer did violate the LLC agreement. And although the Court found that the defendant could assert acquiescence of the defense and proving the LLC acquiesced to the transfer, it concluded that it was bound by a line of cases called CompoSecure, which essentially said that if you contractually provide for a void ab initio under an LLC agreement provision stating that a transfer shall be void by contract, acquiescence among other equitable offenses would be unavailable as a defense.

So here, in its initial, the Chancery Court proposed reconsideration of CompoSecure discussion or decision and alternative approach to assessing incurable voidness. The Supreme Court declined that. They affirmed the Chancery's ruling that the term "shall be void" meant "incurably void" but declined to adopt these "magic words" formulation of "void." Again, rejected this proposal.

So on the remand, and this brings us to the case where we're at now, the Court of Chancery was required to assess damages. And this post-remand opinion found that the plaintiff was entitled to damages for the defendant's breach of the LLC agreement. And the Court also found that the breach was willful, entitling the plaintiff to recoup the amount of expenses it advanced for the litigation.

So even though presumably this would have been acquiescence or inequitable defense, because they essentially didn't complain about the transfer until two years, I think it was two years after they had found out about it, when things went south, because the LLC agreement established a general right of indemnification that was subject to a proviso foreclosing indemnification to any otherwise indemnified party who engaged in "disabling conduct," the Court found that the member had engaged in disabling conduct and was therefore not entitled to indemnification.

So what is the disabling conduct here? The LLC agreement defined "disabling conduct" as a "gross negligence or willful breach of this agreement." The LLC agreement did not define "gross negligence" or "willful breach" however. And so the Court, in this third iteration of this case, determined and addressed what constitutes "willful breach" in a scenario where the parties haven't defined that term.

And they recognized that there's debate over what it means to be willful, including a view that the breaching party need only have acted knowingly and intentionally, without having known that the conduct would cause a breach. Under a stricter view, the breaching party would have known that the conduct would constitute a breach and acted purposefully to breach the contract. And under an even stricter view, that the breaching party must have specifically intended to harm the counterparty, such the breach constitutes an intentional tort.

The Court found that the LLC agreement did not seem to be targeting willful misconduct in the sense of voluntary action. It seemed to be ratcheting the required mental state up one level by requiring the counterparty both to have acted intentionally and known that its actions would cause a breach. And so that's what the Court held here, is that willful breach in this context meant that the counterparty acted intentionally and knew that the action would cause a breach of the LLC agreement.

And so the Court noted in this decision, in the post-trial opinion, it did not find that Holifield and his lawyers believed that the Blue transfer and Assurance loan complied with the no transfer provision. So this goes back to the original decision. Even though they thought the other side didn't care, they knew that it did not comply with the no transfer provision. They just believed that the LLC would not object to those transactions as long as there was no direct pledge of units and that Holifield kept all the risk that was associated with this transaction structure.

So for purposes of the "disabling conduct" proviso in the indemnification provision, the Court found that Holifield breached the no transfer provision willfully because he knew the terms of the LLC agreement. He knew that the transfer and the loan that would violate the no transfer provision, not only because it failed, there was a dispute about consideration, but also because he was not complying directly with the express provisions set forth in that transfer restriction. They noted that the lawyer who helped him document this transaction also knew that the transaction violated no transfer provision. They just did not believe and banked on their understanding that the other parties were aware of it, what they were doing and were not going to object.

Again, it's a complicated history trying to distill it down for this, but I think what's critical for this most recent opinion, what's interesting here is that how the courts are interpreting what it means to engage in willful breach for purposes of indemnification advancement. And again, going back to this equitable defense awareness. So when you've got this void versus voidable context and you've got a conduct by the company that seems to acquiesce or might suggest estoppel or ratification, because of this contractual language that limited the relevance of those defenses, that meant that it was not an option for the defendant here.

Another point is for transactions, being aware of the requirements and actions when you're dealing with transfer restrictions, being aware of what are the actual contractual provisions that trigger compliance, or I guess that would put you in to safely comply versus would trigger a violation or a breach of that, and is there a contractual void provision? So saying that it's void ab initio or the transfer will be void and treated as if it didn't happen can take away those equitable defenses and put you in a tough situation.

So when you're drafting these types of provisions, it's important, I think, to be aware of clearly trying to provide what it is that you need to do as a transferor or transferee to comply with these types of provisions. And then on the indemnity and advancement provisions, again it helps you understand if you're not defining what willful misconduct means or gross negligence. Gross negligence typically is similar to recklessness or a duty of care violation. But for willful misconduct or willful breach, understanding what that means in the context of the agreement. And this case gave some helpful discussion about that point.

One other point I'll make on this is when you're dealing with indemnity and advancement, unlike corporations, it's contractual. So you've dictated by the terms of the LLC agreement. So it's important to understand what meanings may be imputed to terminology when dealing with these entity agreements, including something like this where you're talking about willful breach or willful misconduct.

All right. This next case is interesting because there are a couple of things that come out of this. This is the DiDonato v. Campus Eye Mgmt. And a couple of interesting points that arise from this case really relate to understanding your default, and we'll circle back to this a little bit at the end, but default, what are the default rules under the LLC Act and understanding what those are and drafting to provide for them and in a couple of different ways, including in this case it deals with removal of a manager and then amending the LLC agreement. So we'll circle back a little bit on that, but let's talk about the facts in this case.

So DiDonato was an optometrist. He sold a majority interest in his New Jersey practice to a private equity firm. And as a part of the sale, the business was restructured into a parent company and a wholly-owned subsidiary. DiDonato retained a 35% interest in the parent and one of three parent-level board seats. And the private equity firm gained a 65% interest in the parent and appointed the other two board members.

DiDonato served as the subsidiary's initial manager. After closing, the private equity-affiliated members of the board tried to amend the LLC agreement to remove him from that role, and DiDonato sued in the Court of Chancery and prevailed because he was never consulted about the amendment despite a provision in the LLC agreement requiring his involvement.

And what's relevant here and why they had to amend to remove him is partly because the LLC agreement was silent as to removal. My recollection of this case, the original case, it was silent as to removal, and because it was silent as to removal, the only way that you could provide and the LLC Act itself does not provide a default removal of a manager. So again, critical to understand your default rules. And so the LLC agreement had to be amended to provide for the removal of DiDonato as a manager.

The LLC agreement provided expressly that it could be amended, modified, waived, or supplemented by the manager with the written consent of all the members. So it required involvement of the manager. And so in the original case, the first case, the plain terms of the LLC agreement supported judgment in DiDonato's favor. So he sued, and the Court found that, look, the manager has to be involved in the amendment, and DiDonato, the sole manager, played no role in that amendment. So it was invalid. And because it didn't grant them the power to remove him, that had to be carried out by the amendment.

So it brings us to the second case or the second line is the private equity directors then changed tactic and merged the subsidiary with a newly formed entity and in doing so amended this subsidiary's LLC agreement to make it member-managed rather than manager-managed. And as such, DiDonato lost his manager position.

And so again, relevant here is there's a provision in the LLC Act that provides that unless you otherwise provide in your amendment provision in your LLC agreement, you can amend your LLC agreement by merger. And so here, the parent LLC was able to unilaterally cause the subsidiary LLC to merge into a new LLC, and by doing so adopt a new LLC agreement, change the management structure, and provide by doing so that DiDonato was no longer the manager.

And the Court upheld this. The Court noted that if an LLC agreement lacks an applicable provision that does not foreclose the application of a default rule, then the statutory provision fills the void and resolve the matter. The parent LLC agreement permitted the parent board to act by majority written consent. And the act permitted the majority members of an LLC to approve a merger and adopt a new or amended LLC agreement in connection with the merger. And so nothing in the original LLC agreement provided otherwise. And as a result, the parent maintained that DiDonato was validly removed to the LLC agreement, and the Court agreed with that, partly because the operative agreement at the time of the merger was silent on whether a merger can be brought about by a majority of the members. And so, by doing so, the majority members were able to remove DiDonato as a manager pursuant to this other provision under the statute, which expressly allows you to amend by merger.

Again, this just goes back to and I would say most Delaware practitioners that work with LLCs, work with partnerships are aware of these types of provisions. And so, again, I don't think anybody was surprised that that would be upheld. But this is one of the first cases, at least that I'm aware of, where this was expressly, this amendment by merger essentially to structure a transaction for the purpose of amending by merger was upheld.

And this goes just back to those rules, right? Be aware of the default rules. What does the LLC agreement say or not say about something? In this case, there were two kind of default rules that were critical, I think. One is manager removal. They didn't have anything in the LLC agreement that provided for manager removal, and there's no default rule that provides for manager removal. So they were stuck with amending the LLC agreement. Well, amending the LLC agreement pursuant to a provision that requires manager involvement was not possible. So a straight amendment was not going to be permitted.

However, the next default rule is that you can amend an LLC agreement by merger, notwithstanding whatever the restrictions are in the LLC agreement on amendment unless it expressly disclaims amendments by merger, which it didn't do here. And then that permitted them to find a way to work around that restriction on the amendment and remove the manager. So when you're dealing with these, whether you're drafting for the majority, or in particular if you're a minority member or a manager and you're trying to think about what rights and protections you need, you've got to keep these default rules in mind and make sure that you're drafting or considering these things appropriately.

The final thing, he had challenged that he was owed a fiduciary duty and that they breached a fiduciary duty. And the Court found that he was owed no fiduciary duty to remain as a manager. He was owed no duty at the parent level, much less a duty to perpetuate him as the manager. So given the absence of any fiduciary duty owed to him in this regard, his argument that entire fairness applied was irrelevant.

All right. I'll touch on our next couple of cases. This Khan v. Warburg Pincus case was interesting. In this case, the plaintiffs were Faiz Khan and Ralph Finger. They're physicians, minority investors in the urgent care company. The defendant was a majority owner. It was the private equity firm Warburg Pincus and owned a majority through several affiliated funds. So these are the WP Investors. The operating entity was this TopCo entity. It's a Delaware LLC that resulted from an earlier consolidation of an urgent care provider.

So after the earlier transaction, the governance structure here featured the Warburg Pincus investors holding approximately 60% of the entity through Class A units. And the minority investors were these physicians, including the plaintiffs here, held approximately 17% via Class B units. The company's LLC agreement included minority protections, so rights for class of unitholders, including tag-on rights that allowed minority holders to participate on equal terms in certain sales, and a requirement that on an extraordinary transaction, such as a change of control, the class would receive the same form and amount of consideration on a pro rata basis. It had an amendment provision that the LLC agreement allowed amendments that could adversely affect the class of unitholders, but only if those unitholders, i.e., the class whose rights were to be affected, approved by a majority of that class.

Then it also critically here included a fiduciary duty waiver. So they expressly eliminated fiduciary duties and other duties and permitted them to act in their own interests so long as they complied with the agreement.

So here, in 2022, the company negotiated a merger with Village Practice Management and Village MD, the primary care provider. Under terms of the merger, the Class A unitholders would receive all cash consideration, and Class B unitholders would receive a mix of cash and rollover equity. But because the form and amount of consideration differed by class, the LLC agreement's same form and amount requirement and tag-along rights were in tension with this proposed structure.

So to proceed, the merger was going to be conditioned on an amendment to the LLC agreement that would eliminate or modify the minority protections, essentially this tag-along rights, same form and amount clause, so that this consideration could be permitted or would be permitted. And this amendment was submitted to the Class B unitholders for their vote. It included an information statement and a letter of transmittal and the merger agreement. The minority unitholders, including the plaintiffs here, voted in favor of the amendment and the merger.

So post-merger, the value of the equity rolled by the minority holders significantly declined. They then were having some buyer's remorse or deal remorse and filed a class action complaint, asserting among other claims that there's a breach of the implied covenant of good faith and fair dealing, which adheres to every contract. And we'll get to that in a little bit here, where there's a distinction. Just keep in mind the implied contractual covenant of good faith and fair dealing is not a fiduciary duty. That is just a contractual duty that fills gaps. And then they also brought claims for tortious interference and unjust enrichment. So here, in the background, the key governance documents expressly permitted the very amendment mechanism that was used to allow disparate consideration, and the structure reflected this, that the minority members could amend the LLC agreement, even an amendment that adversely affected them, so long as they as a class voted to do so.

So the Court dismissed the complaint for failure to state a claim. It held that there was no gap in the contract that would allow the implied covenant to fill it. The LLC agreement expressly permitted amendments impacting the minority class and expressly waived fiduciary duties. So the implied covenant would not be used to inject fiduciary duties or protect the minority from a differential treatment.

So on the waiver of fiduciary duties, the LLC agreement expressly stated they owned no fiduciary duties. And so the Court held that where fiduciary duties are eliminated by contract, one cannot use an implied covenant as a back door to impose the fiduciary obligations.

The LLC agreement also included minority protections, but it also included this amendment clause. And so there was no gap to be filled, the Court found, because the amendment expressly addressed the provisions that were adversely affecting them and they voted as a class to do that.

On the disclosure obligations, so they also brought forth this claim that there were disclosure obligations and coercion claims, and this is partly why they didn't bring a breach of fiduciary duty, but structured it as an implied covenant claim is that they were coerced, that they didn't expect there was an implicit agreement that the majority members would not have negotiated a deal that got rid of their tag-along rights. But it all comes back down to there was an amendment provision that expressly addressed, including amendments that would have an adverse effect on a separate class, and that separate class approved it and they also eliminated fiduciary duty.

So one of the other arguments that the plaintiffs made here is that the amendment vote was coerced and that the disclosures were inadequate. The Court rejected those arguments because the LLC agreement only required reasonable and sufficient notice of the members meetings. There's no express contractual term requiring that they provide full fiduciary duty style disclosures beyond the agreement. And so without the fiduciary duties, the coercion claims tied to fiduciary behavior were also unsupported.

Now I think the Court also noted that there was a pretty fulsome information statement in any event. But critically here, by eliminating fiduciary duties, they essentially disclosed the ability to bring disclosure or coercion claims for not fully disclosing all the material facts and information that the minority investors would have maybe normally been required to receive as part of their consideration of a vote. Now I think had there been fiduciary duties, it seemed like the information statement was pretty fulsome. But the Court really didn't address that.

So a couple takeaways here. One is the implied covenant. So when you're a minority investor, try not to eliminate fiduciary duties. Maybe it's a modification of duties. But it's helpful to have those fiduciary duties. And then you can't use the implied covenant. It's a hard claim to bring and a hard claim to win. And so you really want to have contractual protections. And if you wanted more substantive disclosures on amendments or things that were going to take away the negotiated tag-along rights or disparate consideration rights in a merger or sale transaction, they could have provided for those. What they did here was essentially the Class B Investors approved that amendment and allowed the merger transaction to go forward. So a couple things to keep in mind when you're when you're negotiating these types of deals, in particular if you're negotiating or representing a minority investor.

All right. And we're going to go to the last case, and we'll just touch on this really quickly because I know we're pushing time here, the Mack Brothers v. Keypoint Intelligence case. So really on this one, this goes to the issue of who's a member and the importance of being admitted as a member versus just holding an LLC interest or an economic interest.

So in this case, the defendant, KPI, it's an LLC. In 2019, the plaintiff, Mack Brothers, entered into an employment agreement with KPI, or I think it was an affiliate. It included participation rights in a profits-incentive pool. The pool referenced a portion of KPI's equity interest via a parent entity, which is allocated I think up to 4%, which could be retained by this individual personally. The recruiter described the profits interest as a form of equity ownership, like membership interest instead of shares, like a C corporation.

So the plaintiff signed the agreement, served as CEO for a period. But KPI subsequently terminated his employment. After termination, he made a demand under 18-305 for inspection of the books and records, asserting that as a member of KPI, he had the statutory right to inspect. He sought several categories of records, and KPI responded by offering limited access. But the inspection did not proceed.

Brothers filed a complaint to compel the inspection and sought declaratory relief for indemnification. KPI moved to dismiss for lack of standing. The court deferred that ruling and held a one-day trial on whether he was a member in status. And critically here, there was an arbitration that had occurred previously, that had determined that he was entitled to this profits interest. But the LLC agreement did not provide for the profits interest. The LLC agreement didn't have any provisions providing for units, additional members. It had not been amended.

So the question here was, was Brothers a member under the books and records statute, that he could compel inspection of books and records? So did his profits interest arrangement make him a member, or only give him an economic rights without membership status? And keep in mind that in an LLC in Delaware, you can be a member without having any economic interest, or you can hold an economic interest and not be admitted as a member with the full panoply of rights and obligations that go with being a member.

So here, the LLC agreement, there was nothing that indicated that he had been admitted as a member. The LLC agreement didn't provide that. He was listed on a ledger list that included it, but it had a notation, and it was treated more as a capitalization table for the economic interest, not as a formal admission of members.

And so anyways, the term profits-incentive pool profits interest did not clearly correspond to a membership interest. It did not grant voting rights or management rights. So because there's no express amendment or formal admission of Brothers as a member, he was not treated as a member and therefore didn't have rights to the books and records under 18-305 of the statute.

So again, key takeaway here is profits interest or economic incentive participation in an LLC, even when described by the employer as a membership interest, remember it does not necessarily confer full member status unless you've taken the steps to be admitted as a member separately.

Alyssa: Hi, everyone. So we're just going to run through the 2025 legislative amendments to the Delaware LLC Act pretty quickly. There were not a ton of amendments this past year, and they were more sort of like clarifications of past amendments, and just some new things that we'll run through. But here is an overview of the things that were amended.

There was an amendment that prohibits registered agents in the state of Delaware from operating solely via virtual offices. There's an amendment that explicitly authorizes certificates of correction to both nullify or to correct as desired previously filed filings. There were amendments that require the full payment of annual taxes for the calendar year to be made before a certificate of cancellation may be filed or before a non-Delaware LLC can cancel its registration in the state of Delaware. There were amendments that expand the statutory safe harbor rules for ratification or waiver of void or voidable acts. And I think that that's the full list of what was amended. So we'll go ahead and move into those in particular.

So the first one we're going to talk about is the amendment to section 18-104(e) of the Delaware LLC Act. So a new subparagraph (2) was added to specify and clarify that a registered agent for a Delaware LLC may not perform its duties or its functions solely through the use of a virtual office. And the statute now defines "virtual office" to mean the performance of duties or functions solely through the internet or solely through other means of remote communication. And really like the bottom line here is that registered agents have to maintain a physical office or designated location in Delaware, rather than relying exclusively on remote or virtual only operations.

The next amendment that we're going to discuss are the amendments to Section 18-106(e) of the Delaware LLC Act. So Section 18-106 provides for ratification of void or voidable acts or transactions that are taken by or in respect of an LLC and for the waiver of a failure to comply with the requirements of an LLC agreement. So just to provide some background here, in 2021, Section 18-106 was amended to add the new subsection (e) to create a safe harbor procedure for ratifying acts or transactions that were void or voidable when taken or for waiving failures to comply with the LLC agreement that caused such acts to be void or voidable.

And then that section was added because of some recent, at the time, Delaware Chancery Court decisions. So for example, in CompoSecure and in Absalom Trust, the court held that acts that were void were generally not capable of ratification under the LLC statute. So in 2021, the Delaware General Assembly adopted amendments to the LLC Act that provided for safe harbor, that expressly apply when the LLC itself has taken a void or voidable act.

So now fast-forward to present day, these 2025 amendments further clarify and expand the scope of Section 18-106(e) by explicitly applying not only to acts or transactions taken by the LLC itself, but also to acts or transactions that are taken by any member, manager, or other person in respect of the LLC. And the updated language here also provides that the ratification or waiver may be either expressed or implied.

So now we're going to talk about the amendments to Sections 18-203(b) and 18 211(a). And I would say the basic impacts of these amendments are to clarify that in addition to correcting previously filed certificates with a certificate of correction, an LLC can also file a certificate of correction to nullify a previously filed certificate. So the amendment to 18-203(b) is specific to correcting or nullifying a previously filed certificate of cancellation. And then the amendments to 18-211(a) are a little bit broader. They expressly authorize the use of a certificate of correction to nullify a previously filed certificate under the Delaware LLC Act in addition to correcting a previously filed certificate.

And I think just the distinction to be aware of here is that people were filing certificates of correction to nullify previously filed certificates, but they weren't sure if that was permissible because the statute didn't actually talk about nullification. It just talked about certificates of correction. So now it's been clarified that you can indeed nullify a previously filed filing with or by using a certificate of correction. And something that the drafters of the legislation noted in their synopsis about the 18-211(a) amendments is that you can specify the nullification in the certificate of correction, and it's sufficient if that provision states that the previously filed certificate is nullified or void, or if you use language that has similar meaning.

The next amendment we'll talk about is to 18-209(c) of the Delaware LLC Act. And the amendment states that when a consolidation under Section 18-209 results in a Delaware LLC, the certificate of consolidation that has to be filed with the Delaware Secretary of State must attach the certificate of formation of the resulting Delaware LLC. So this amendment just clarifies the filing requirements for consolidations and not just for mergers under the LLC Act to ensure that the public record in connection with the consolidation includes the resulting LLC's formation document as part of the consolidation filing. And including the resulting LLC certificate of formation with the consolidation filing creates a public record for the post-consolidation entity's legal identity.

And just as a practical note, this means that any entity that's involved in a consolidation that's going to result in a Delaware LLC will need to have the certificate of formation finalized at the time that it files the certificate of consolidation with the Delaware Secretary of State. So if you're involved in a consolidation transaction, you just want to make sure that you essentially have all of your ducks in a row if you're going to have a Delaware LLC result from the consolidation.

So this next amendment is to Section 18-302 of the Delaware LLC Act. And the 2025 amendment formally recognizes that an LLC agreement may be amended in connection with a division of an LLC or a merger of a registered series of an LLC under Sections 18-217(f) and 18-221(e) respectively. And so this amendment, I guess like it's not a new thing that you can amend an LLC agreement in connection with a division or merger of a registered series. It's just that this section has been updated to reflect that that is possible.

And just as some quick background, 18-217(f) of the Delaware LLC Act addresses LLC divisions, and this is not new in 2025, to already provides that an LLC agreement may be amended to effect a division, and that such amendments may be adopted in connection with approving a plan of division. And basically, it just makes clear that an LLC agreement can be modified as needed to carry out or reflect the division.

And likewise, Section 18-221(e) relates to mergers or registered series of a Delaware LLC. And similarly, it has already allowed an LLC agreement to be amended in connection with approving or implementing a merger of a registered series. So that's not new to 2025. It's just that 18-302 was amended in 2025 to sort of reflect that ability to amend.

All right. So our last slide here just has to do with the timing of paying taxes. And so the amendment to 18-1107(c) clarifies that when the existence of a Delaware LLC or a registered series of a Delaware LLC, or the registration of a foreign LLC will cease by the filing of a certificate, at that time, the full amount of the annual tax for that calendar year in which the certificate becomes effective must be paid before the certificate is filed. So if it's a Delaware LLC, it would be a certificate cancellation. And just as a practical note there, if you have an LLC or a registered series of an LLC that's being cancelled or dissolved, or if it ceases to register to act in the state of Delaware, that entity has to ensure that the annual tax for that entire calendar year is fully paid before it can file the certificate of cancellation or the equivalent for a foreign LLC. I think some people think that perhaps the tax will be prorated depending on the time of year that the certificate is filed. That is not the case. The state of Delaware wants to get its revenue. So if you are planning on having an entity cease its existence in the calendar year, you just need to factor in that full year's tax obligation upfront when you're scheduling the filing of the certificate of cancellation.