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Hampton v. Turner

Court of Chancery of Delaware

April 29, 2015

Hampton
v.
Turner

Submitted: January 15, 2015

Dear Counsel:

Plaintiffs sought judicial dissolution of a company they founded, and the company responded by exercising an option to purchase Plaintiffs' units pursuant to its operating agreement. Defendants consequently moved for summary judgment. They argue that Plaintiffs lack standing to pursue dissolution because they are no longer members, and that the company properly paid the Plaintiffs the fair market value of their units. The action has evolved into a dispute about the purchase price to which Plaintiffs are entitled.

* * * * *

Plaintiffs David Hampton, Sorin Brull, and Richard Szymke, along with Defendant Michael Turner (individually and as trustee of the Michael E. Turner Trust under Agreement dated June 15, 1978, "Turner"), founded Defendant T4Analytics LLC ("T4" or the "Company, " and with Turner, the "Defendants") in July 2011.[1] T4 is a Delaware limited liability company ("LLC") that primarily develops a medical technology invented by Hampton and Brull. Turner, T4's Manager, Chair, and Chief Executive Officer, contributed $220, 000 from the trust and has raised $829, 000 from T4's other (non-founding) members.[2] Hampton, Brull, and Szymke have not made any capital contributions, but each of the founding parties (including Turner) was given a 23.54% interest in T4. As relevant to this action, the parties' relationship is governed by the Second Amended and Restated Limited Liability Agreement for T4Analytics LLC dated as of September 20, 2012 (the "Operating Agreement").[3]

On October 1, 2013, Plaintiffs filed a complaint asking for T4's dissolution pursuant to 6 Del. C. § 18-801 by Plaintiffs' agreement or 6 Del. C. § 18-802 "on the grounds that it is not reasonably practicable to carry on the business in conformity with [the Company's] limited liability company agreement."[4] In response, T4 expressed its intent to exercise its option to purchase Plaintiffs' units through a letter dated January 15, 2014.[5] Section 5.3 of the Operating Agreement gives T4 a ninety-day option to purchase the units of a member who seeks dissolution under 6 Del. C. § 18-801 for the "Fair Market Value" of the member's units, [6] and Section 5.4 explains (in relevant part) that "Fair Market Value shall be determined by an appraiser . . . without taking into account any illiquidity or a discount for a minority interest."[7] Also relevant to the action is Section 4.3 of the Operating Agreement addressing distributions-and particularly assigning priority to the return of capital contributions through a payment "waterfall."[8]

The mutually selected appraiser, Gregory Urbanchuck ("Urbanchuck"), determined that T4 had a Fair Market Value of $1, 886, 000.[9] However, he explained that he could not make a final determination of the value of the Plaintiffs' units because of conflicting interpretations of the Operating Agreement.[10] In October 2014, T4 issued checks to each of the Plaintiffs based on a purchase price of $197, 029.80, purporting to "close on its acquisition" of Plaintiffs' membership interests.[11]

* * * * *

Defendants have moved for summary judgment, asking the Court to dismiss Plaintiffs' complaint because (1) with T4's purchase of their units, Plaintiffs lack standing to seek dissolution, (2) Plaintiffs' complaint is moot now that they are no longer members, and (3) T4 paid Plaintiffs the appropriate price pursuant to Section 4.3 of the Operating Agreement-the only provision expressly addressing distributions. According to Defendants, failing to account for capital contributions and debts before compensating Plaintiffs would violate the parties' "basic business deal"[12] and result in a windfall for Plaintiffs with "no textual, legal or common sense basis."[13] They liken the valuation exercise to a "theoretical arms-length sale, " adding that the price Plaintiffs received was more favorable than that to which they are otherwise entitled or could have earned through a sale.[14]

Plaintiffs, on the other hand, contend that Section 5.4 requires a payment of 23.54% of $1, 886, 000 and, as such, T4 has not purchased their membership interests.[15] More specifically, Plaintiffs believe that they are entitled to a purchase price of $443, 964.40 each because Section 4.3 applies to "distributions of excess cash" and to distributions upon dissolution-not the case here.[16] Rather, Section 5.3 refers to Section 5.4, which discusses fair market value without any minority or illiquidity discount.

* * * * *

A. The Summary Judgment Standard

Pursuant to Court of Chancery Rule 56, the Court grants summary judgment when "there is no genuine issue as to any material fact and . . . the moving party is entitled to a judgment as a matter of law."[17] The Court views the facts and makes reasonable inferences "in the light most favorable to the non-moving party."[18] The meaning of a ...


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