Similarly, in In re Seneca Investments LLC, 970 A.2d 259 (Del. Ch. 2008), the petitioner sought dissolution because the company was “functioning only as a passive investment vehicle and has conducted limited active business over the past several years.” Somewhat unusually, at the time of formation, the founders of Seneca agreed that the entity would be governed by the Delaware General Corporation Law despite the fact that it was an LLC. Therefore, Seneca had both an LLC agreement and a charter. Seneca’s charter stated that “the purpose of the Company is to engage in any lawful act or activity for which corporations may be organized under the Delaware General Corporation Law.” Given that a Delaware corporation may exist as a passive investment entity, the court concluded that the LLC’s purpose under the purpose clause had not been frustrated. Moreover, limiting itself strictly to the purpose clause when deciding the question of purpose, the court stated that it would “not attempt to divine some other business purpose by interpreting provisions of the governing documents other than the purpose clause.”
The Meyer Court Considered Information Outside the LLC Agreement to Determine the LLC’s Purpose
In Meyer, the court of chancery was again asked to dissolve an entity because its purpose could not be met. Meyer Natural Foods LLC, owned 51 percent of Premium Natural Beef LLC (PNB) and served as PNB’s managing member. Kirk Duff, Todd Duff (together the Duffs) and C.R. Freeman owned the balance of PNB. Meyer sought dissolution, claiming that PNB’s purpose could not be fulfilled.
“[T]he LLC Agreement stated that ‘[t]he purpose and business of the Company shall be limited to engaging in the PNB Business and related activities,’ which in turn ‘mean[t] the business of marketing, distributing and selling natural Angus beef and beef products under the ‘Premium Natural Beef’ brand name to the Existing PNB Customers . . . and to new customers of the Company from time to time.’” The court found this language to be unambiguous. Contemporaneously with entering into PNB’s LLC agreement, Meyer also entered into an output and supply agreement with two entities controlled by the minority owners. “[U]nder the Output and Supply Agreement, Power Plus Feeders, LLC (‘PPF’), owned by the Duffs, and Premium Beef Feeders, LLC (‘PBF’), owned by Freeman, were to supply qualifying cattle to Meyer and its subsidiaries to sell.” Pursuant to the output and supply agreement, Meyer had the exclusive right to purchase such cattle. Furthermore, under the purchase agreement by which Meyer acquired its membership interest in PNB, the Duffs and Freeman could not own or operate a business that competed with PNB. However, the non-compete covenant in the purchase agreement terminated upon termination of the output and supply agreement.
In July 2012, the Duffs and Freeman and their entities purported to terminate the output and supply agreement, and in August 2012 they sued Meyer in Oklahoma state court for breach of contract and breach of fiduciary duties. The Oklahoma court terminated the exclusive purchase and supply obligations under the output and supply agreement as of March 31, 2013. On May 28, 2014, Meyer sought judicial dissolution in Delaware, arguing that PNB’s continuation was not reasonably practicable because its purpose had been frustrated.
When Meyer moved for summary judgment on its claim for dissolution, the minority owners argued that the motion should be denied because, among other reasons, the purpose of PNB, under PNB’s broad purpose clause, was to “market, distribute, and sell natural beef.” Acknowledging the Arrow and Seneca decisions, but finding that language in Cincinnati Bell Cellular Systems Company v. Ameritech Mobile Phone Service of Cincinnati, Inc., 1996 WL 506906 (Del. Ch. Sept. 3, 1996), aff’d, 692 A.2d 411 (Del. 1997) gave the court discretion to look beyond an unambiguous purpose clause, the court stated:
There is authority that limits analysis of an LLC’s purpose to the purpose clause in an organizational document, but other authority suggests that additional evidence might inform the analysis. In Cincinnati Bell Cellular Systems Co. v. Ameritech Mobile Phone Service of Cincinnati, Inc., for example, the Court rejected an argument that the purpose of the limited partnership was to provide services that did not compete with its limited partners’ businesses, noting that the plaintiff “executed the Partnership Agreement that does not contain a non-compete clause; nor did it ever seek an amendment to the Partnership Agreement.”
It would appear that the court believed Cincinnati Bell implied the ability of the court to look beyond the purpose clause. Attempting to harmonize its interpretation of Cincinnati Bell with Arrow and Seneca, the vice chancellor in Meyer stated: “A sensible interpretation of precedent is that the purpose clause is of primary importance, but other evidence of purpose may be helpful as long as the Court is not asked to engage in speculation.” (Emphasis added.)
Meyer argued that the purpose of the LLC was narrower than the purpose stated in the LLC agreement given the mutual obligations and restrictive covenants under the various agreements. Specifically, Meyer advocated the court read “the parties’ agreements together to conclude that PNB’s purpose was not only to sell natural beef but also to partner exclusively with Respondents in a ‘joint venture business’. . . .” Agreeing with Meyer, the court found that “[l]imiting the analysis to the purpose clause of the LLC Agreement would resolve the dispute on a technicality.” Accordingly, the court found that the purpose of PNB was to market and sell beef that had been supplied by PPF and PBF. Given that PPF and PBF refused to supply PNB with cattle, the court found that it was no longer reasonably practical for the business to continue. Significantly, the court ordered the dissolution of PNB even though no deadlock existed (meaning Meyer still controlled the entity’s day-to-day operations) and PNB was profitable.
Meyer teaches several important lessons, but also leads to a question with which future decisions will grapple. First, litigators handling dissolution cases should no longer assume that the purpose of the LLC is necessarily what the LLC agreement identifies it to be. Particularly where there are contemporaneously executed documents suggesting a purpose more narrow than the purpose in the LLC agreement, there may be grounds for judicial dissolution even if no deadlock exists and the business satisfies an unambiguous purpose clause. Second, to the extent a party wishes to limit the purpose to that stated in the purpose clause, drafters should be cautious in referencing other agreements in the LLC agreement or vice versa. In Meyer, the court repeatedly noted that the output and supply agreement provided that it was made “in connection with, and as a condition to” the LLC agreement. Third, under Meyer, the purpose clause remains of “primary importance” to the court’s decision as to purpose. Therefore, drafters should continue to carefully craft purpose clauses and consider whether the broader clauses similar to those chosen by the drafters in Arrow and Seneca should be used to make it easier for the company’s purpose to change from that envisioned at the time of formation. Finally, both drafters and litigators should continue to monitor developments in the case law to see how broadly (or narrowly) Meyer is interpreted. Although the court broadly stated that “other evidence of purpose may be helpful as long as the Court is not asked to engage in speculation,” the court limited its reliance to other contemporaneous agreements to narrow the meaning of the entity’s purpose. It is yet unclear whether the court of chancery will permit “other evidence” to include material beyond contract documents that formed the parties’ overall deal.