The Importance of Contractual Precision: “Void” vs. “Voidable”

Gail Weinstein is senior counsel, and Warren S. de Wied and Andrew J. Colosimo are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. de Wied, Mr. Colosimo, Mark H. Lucas, Matthew V. Soran, and Maxwell Yim, and is part of the Delaware law series; links to other posts in the series are available here.

In Absalom Absalom Trust v. Saint Gervais LLC (June 27, 2019), the Court of Chancery held that the transfer of an LLC interest that was prohibited under the LLC Agreement would have been subject to equitable defenses if the transfer restriction provision had stated that a prohibited transfer would be “voidable”—but that, in this case, no equitable defenses are available because the LLC Agreement provides that a prohibited transfer would be “void.” The LLC Agreement provides that any disposition of an interest in the LLC without the written consent of the managers is “null and void.” An LLC member had assigned her interest to the plaintiff without the managers’ written consent. In this action, the plaintiff sought to inspect books and records of the LLC to investigate possible mismanagement by the managers. The managers argued that the plaintiff has no inspection right as he is not a member given that the transfer to him is void. The plaintiff argued that the LLC is estopped from asserting that the transfer is void given that the LLC had provided him with some books and records, had issued Schedule K-1 tax forms to him, and had referred to him as a member in some trial papers, all without reserving the right to contest his status as a member.

Vice Chancellor Tamika Montgomery-Reeves held that, based on the LLC Agreement language, the transfer is void and the plaintiff is not a member. The Vice Chancellor stated that equitable defenses can validate “voidable” acts but not “void” acts. While the transfer likely would have been only “voidable” (not “void”) under the common law and thus would have been subject to equitable defenses, the “clear and unambiguous language” of the LLC Agreement “trumps the common law.” She cited CompoSecure L.L.C. v. CardUX, LLC (2018), where the Delaware Supreme Court considered an LLC Agreement that defined “Restricted Activities” as “void and of no force or effect” and held that such acts were therefore “ultra vires and generally cannot be ratified.” As the Supreme Court held in CompoSecure, she wrote, “by using the word ‘void’ in [the] LLC agreement, the parties to the agreement adopted the common law rule and foreclosed the application of equitable defenses.”

Practice Points

(i) LLC managers generally should seek to define restricted activities as “void” (rather than “voidable”) to limit the availability of equitable defenses. (ii) Where an LLC member agrees to transfer her LLC interest and there are restrictions in the LLC Agreement that may be applicable, the transferee may wish to seek a contractual commitment from the transferor that she will enforce any member rights that she retains and that are not available to the transferee. At the same time, an LLC may wish to specify in the LLC Agreement that, in the event of a prohibited transfer, the transferor cannot act on behalf of the transferee (for example, by sharing with the transferee information obtained in a books and records inspection).

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