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Domain Associates, L.L.C. v. Shah

Court of Chancery of Delaware

August 13, 2018

DOMAIN ASSOCIATES, L.L.C., a Delaware limited liability company, JAMES C. BLAIR, BRIAN H. DOVEY, BRIAN K. HALAK, KIM P. KAMDAR, JESSE TREU, AND NICOLE VITULLO, Plaintiffs/Counterclaim Defendants,
v.
NIMESH S. SHAH, Defendant/Counterclaim Plaintiff.

          Submitted: May 15, 2018

          Brian M. Rostocki, Benjamin P. Chapple, REED SMITH LLP, Wilmington, Delaware; Scott D. Baker, James A. Daire, REED SMITH LLP, San Francisco, California; Attorneys for Plaintiffs/Counterclaim Defendants.

          Elena C. Norman, Tammy L. Mercer, Lakshmi Muthu, YOUNG CONAWAY STARGATT & TAYLOR, LLP, Wilmington, Delaware; Michael A. Kahn, Nathaniel P. Bualat, CROWELL & MORING, San Francisco, California; Attorneys for Defendant/Counterclaim Plaintiff.

          MEMORANDUM OPINION

          LASTER, V.C.

         Nimesh S. Shah was a member of the management company of a venture capital firm. The other members exercised their right under its operating agreement to force Shah to withdraw. They paid him the value of his capital account.

         This post-trial decision holds that Shah was entitled to receive the fair value of his member interest as of the date on which he was forced to withdraw. This decision awards him damages equal to the difference between the fair value of his interest and the amount he received, plus pre- and post-judgment interest until the date of payment.

         I. FACTUAL BACKGROUND

         Trial took place over three days. The parties submitted 344 joint exhibits and lodged seven depositions. Four fact witnesses and two experts testified live. The following facts were proven by a preponderance of the evidence.

         A. The Venture Capital Firm

         Domain Associates is a venture capital firm that focused on the biopharmaceutical, diagnostic, and medical device sectors.[1] James Blair, Jesse Treu, and Jennifer Lobo co-founded Domain in 1985.

         Like many venture capital firms, Domain encompasses a constellation of entities. Every two years or so, Domain forms a limited partnership to serve as a numerically designated investment fund. This decision refers to the funds as "Fund I," "Fund II," etc.

         For each fund, Domain forms a fund-specific limited liability company that serves as its general partner and receives carried interest in the fund. Each is called "One Palmer Square Associates" followed by a number corresponding to the fund. Taking the parties' lead, this decision refers to these entities as "OPSA I," "OPSA II," etc.

         The human principals of Domain become members of the fund-specific entity that serves as the general partner. If the investment fund does well, then the principals of Domain receive the bulk of their compensation through their share of the carried interest.

         The investment funds and their general partners are designed to have limited lives. As with many venture capital funds, the expected lifespan of a Domain fund is ten years. During the first three to five years, the fund deploys capital. Over the balance of the fund's lifespan, the fund tends to and then harvests its investments.

         The constant at the center of the Domain venture capital universe is the management company. It houses the administrative functions for the fund complex, spearheads the formation of each new investment fund and general partner entity, and acts as the investment manager for the funds. For these services, the management company receives management fees.[2] In general, the management company expects to receive fees equal to approximately 2% of assets under management.[3]

         The human principals of Domain own the equity of the management company. They receive guaranteed payments-a salary equivalent-from the management company. They also receive periodic distributions.

         When Blair, Treu, and Lobo initially founded Domain, they set up the management company as a partnership. In 1999, they converted the partnership into plaintiff Domain Associates, LLC, a Delaware limited liability company. This decision strives to use the term "Company" to refer to the management company and the term "Domain" to refer to the fund complex and its principals as a whole.

         B. The Company's LLC Agreement

         When Domain's principals formed the Company, it had five members: the three founders (Blair, Treu, and Dovey) plus Katherine Schoemaker and Arthur Klausner.[4]Domain's attorneys drafted the operating agreement based on what the members wanted. Article VII of the original operating agreement permitted the members to force any particular member to withdraw, as long as the non-withdrawing members voted unanimously in favor of forcing the member to withdraw.[5] A member also could retire voluntarily or could be deemed to withdraw by operation of law in the event of insanity, bankruptcy, or death.[6]

         In 2004, the members of the Company adopted an amended and restated limited liability company agreement.[7] At this point, there were eight members: the original five, plus Robert More, Nicole Vitullo, and Olav Bergheim.[8] The members did not make any changes to the withdrawal provision that are material to this litigation.[9]

         Blair testified that he believed from the outset, under the original agreement and every subsequent agreement, that whenever a member withdrew for any reason, the member would receive the amount of their capital account balance and nothing more.[10]There are no contemporaneous documents to support this position, and until the events giving rise to this litigation, Domain never asserted that a withdrawing member was only entitled to the value of his or her capital account. Every time a member withdrew, the member received significantly more.[11]

         C. Shah Joins Domain.

         In 2006, Shah joined Domain as an employee.[12] He focused on the medical device sector.[13] He rose through the ranks, receiving promotions in 2008 and 2013.[14]

         For much of this period, Domain was in its salad days. In 2000, Domain raised Fund V, with $464 million in committed capital. In 2003, Domain raised Fund VI, with $500 million in committed capital. In 2006, Domain raised Fund VII, with $700 million in committed capital. In 2009, Domain raised Fund VIII, with $500 million in committed capital.[15] These large funds provided the Company with a steady stream of management fees: $24.4 million in 2006, $25.4 million in 2007, $25.7 million in 2008, $26.9 million in 2009, $25.7 million in 2010, and $29.7 million in 2011.[16]

         Towards the end of this period, however, Domain's fortunes ebbed. At $500 million, Fund VIII was a substantial fund, but it came in $200 million below the firm's fundraising goal of $700 million.[17] After falling short on Fund VIII, Domain cut the forecasted size of Funds IX and X from $700 million to $500 million.[18] In 2012, Domain deferred the projected closing of Fund IX from 2012 until 2014.[19] Domain also deferred Funds X and XI by two years.[20]

         These setbacks stemmed from investor dissatisfaction with the firm's track record. Funds VI and VII performed poorly, both on an absolute and relative basis.[21] Fund VIII did better on an absolute basis, but not on a relative basis.[22] Domain's investors worried that the firm's core investment strategy had lost its efficacy.[23] They also worried that as the firm's founders neared retirement, the generational transition posed additional risks.[24] With many other managers to choose from, they began taking a pass on Domain.

         The smaller-than-expected size of Fund VIII and the deferral of Fund IX affected the Company's income stream. In 2012, the Company received roughly $25.6 million in management fees, some $4 million less than in 2011.[25] In 2013, the Company received $22.1 million in management fees, down more than $3 million from 2012.[26] With the fundraising environment not looking any better, Domain cut the forecasted size of Funds IX, X, and XI from $500 million each to $350 million each.[27]

         D. Shah Becomes A Member.

         In mid-November 2014, Domain invited Shah to become a member of the Company.[28] One month later, on December 15, 2014, Fund IX closed with $80 million in committed capital, roughly one ninth of the original target of $700 million and one quarter of the reduced target of $300-350 million.[29] Fund IX had only had six limited partners, one of which was a retired principal of Domain.[30] By contrast, Fund VII had approximately sixty limited partners, the majority of which were institutional investors.[31]

          On January 1, 2015, the existing members and Shah executed the Company's Seconded Amended and Restated Limited Liability Company Agreement (the "LLC Agreement").[32] Shah was allocated a 10.62% membership interest.[33]

         At the time of his admission as a member, Shah made a capital contribution of $25, 000 to the Company.[34] This amount did not reflect the value of his member interest. It was a token buy-in to memorialize Shah's new status as an equity participant in Domain.[35]Domain's policy from the outset had been not to require that new members of the firm make a significant capital contribution.[36] As a member of the Company, Shah also became a member of OPS A IX, the LLC that served as the general partner for Fund IX.[37]

         On January 13, 2015, Domain's CFO circulated an email to Shah and the existing members that attached the new LLC Agreement, a blackline against the previous version, a schedule of membership and sharing percentages, and a member consent that would set up Shah's guaranteed payments. She asked the members to call with any questions.[38]

         Domain and Shah never negotiated the terms of the LLC Agreement.[39] Shah did not ask any questions; he did not even bother to read the LLC Agreement carefully.[40] He correctly understood that he was being offered a promotion to what colloquially would be called "equity partner" on a take-it-or-leave-it basis. Shah signed the LLC Agreement and became a member of the Company effective January 1, 2015.[41]

         E. Domain's Financial Situation Continues To Decline.

         Soon after Shah became a member, his colleagues began questioning whether the firm should remain committed to investing in the medical device space-the area where Shah focused. During the fundraising process for Fund IX, several of Domain's primary sources of capital had criticized Domain's continued emphasis on the medical device sector.[42] In a June 2015 strategy discussion about how to invest Fund IX, all of the Company's members, including Shah, agreed that returns on medical device companies had severely lagged other sectors between 2002 and 2014.[43]

         In July 2015, Blair and Dovey began discussing whether to terminate Shah and how much to provide in severance, but they decided not to make a final decision until the end of the year.[44] In August, an acquirer purchased one of the portfolio companies that Shah had sponsored as an investment, resulting in an upfront payment of $60 million to Fund VIII.[45] This was not enough to change anyone's mind about medical devices. Even Shah recognized that the "opportunity set in medical devices remain[ed] limited."[46]

         In December 2015, Schoemaker resigned from the Company due to a terminal illness. Her withdrawal caused the remaining members' percentage interests to rise proportionately. Shah's interest increased to 12.1%.[47]

         Also during December 2015, the members approved a series of budget cuts in anticipation of considerably lower management fees. One dramatic step was an across-the-board cut in the members' compensation. Shah voted in favor of reducing the other members' compensation but against reducing his own.[48] The Company also took other steps, such as eliminating the annual holiday party, freezing staff salaries, no longer funding OPSA capital calls for OPSA participants, consolidating office space, and canceling consulting arrangements.[49]

         F. Shah Is Asked To Leave.

         As part of the budgetary restructuring in December 2015, the members other than Shah decided that the Company no longer needed a medical devices professional and that Shah should be asked to leave.[50] Shah testified that when he later learned of the decision, it came as a surprise to him, [51] but he seems to have anticipated it.[52] On January 4, 2016, he asked Blair what he would do if he were "in [Shah's] shoes."[53] Blair knew Shah had not been happy about the reduction in member compensation, and he told Shah that whenever he was unhappy in a position, he found it best to leave.[54] The day after the meeting, Shah began networking in search of a job.[55] He also emailed himself the LLC Agreement, [56] and he reviewed the provisions on member departures.[57]

         Shah asked for a follow up meeting with Blair and Dovey for January 19, 2016.[58]During that meeting, Blair and Dovey told Shah that the other members had decided he should leave.[59] Shah did not handle the news well. Blair and Dovey tried to talk about a severance package, but Shah became petulant, said he could not handle the discussion, and asked that they send him a written proposal.[60] Shah also asked Blair and Dovey not to say or do anything that suggested he agreed with the other members' decision.[61] On February 4, after going back and forth with Shah on the language, the Company sent out an internal announcement about Shah's departure.[62]

         On the four prior occasions when members had left the Company, the firm had reached agreement with the departing member on a severance package, and the resulting departure had been consensual.[63] Blair hoped to achieve the same result with Shah, and he made several attempts to follow up with Shah. Blair wanted to have a discussion in person, but each time, Shah demurred or deferred.[64]

         On February 22, 2016, after a full month of trying to have a face-to-face discussion, Blair emailed Shah the following set of "Economic Talking Points."

• Shah would convert to employee status as of March 1, 2016, and stay on the payroll through June 30, 2016.
• Shah would be compensated based on an annualized salary of $579, 000.
• Shah would be paid the balance of his capital account.
• Shah would remain fully vested in Funds VII and VIII, and would retain his partial vesting in Fund IX. Alternatively, he could elect to be bought out of Fund IX.
• Beginning on June 1, 2016, Shah would go on COBRA, with the Company paying his premiums through December 31, 2016. At his own expense, Shah could remain on the Company's health policy through COBRA through 2017.
• The Company would pay for Shah's life and disability insurance through November 2016.
• The Company would pay for Shah's car until the lease expired in August 2016.[65]

         Shah asked only that the offer stay open until the end of March so he could discuss it with his attorneys.[66]

         On March 7, 2016, Blair sent Shah a "98% final draft" of a severance agreement.[67]Blair and Shah agreed to let the attorneys finalize the arrangements.[68] That would prove to be a fateful decision, because involving the lawyers caused matters to escalate, but very little happened for the balance of the month.

         Meanwhile, Shah had found a new job. As noted, Shah began his job search in January 2016. By early March, Shah was setting up interviews.[69] His first choice was Fractyl Laboratories Inc., a portfolio company in Fund VIII.[70] Shah was a member of Fractyl's board of directors and already had deep connections there.[71]

         Shah reached out to Harith Rajagopalan, the co-founder and CEO, and Allan Will, the chairman of the board.[72] They discussed having Shah join as Chief Business Officer.[73]Shah next met with the full executive team in Boston, and he and Rajagopalan began discussing compensation.[74] By late March, they had reached an agreement, but Shah said he could not sign until his employment with Domain ended.[75] During this period, Shah did not mention to Domain that he was negotiating with Fractyl.[76]

         In April 2016, Shah began performing substantive work for Fractyl. Among other things, he helped poll investors about a potential initial public offering and worked through ideas for Fractyl's product development.[77] Shah did not mention this to Domain.[78]

         On April 6, 2016, the lawyers had a call. Shah's litigation counsel told Domain's counsel what Shah believed he was owed.[79] Matters went downhill from there, and Blair concluded that Shah would likely sue.[80]

         After the lawyers' call, Shah made multiple demands for information from the Company.[81] Domain personnel resisted giving Shah the information.[82] Shah continued to refuse to have any direct communications with Domain about a severance agreement, insisting that everything go through his lawyer.[83]

         G. The Other Members Require Shah To Withdraw.

         On April 13, 2016, the Company noticed a meeting of members for April 18.[84] The subject of the meeting was to vote on Shah's forced withdrawal.

         On April 17, 2016, Blair made one last attempt at resolving matters with Shah through a face-to-face meeting. After the discussion, Shah once again asked Blair to provide the deal points in writing.[85] That afternoon, Shah told Rajagopalan that he had reached a "handshake deal" with Blair, that the agreement was "friendly," and he had not gone "for the fully optimized deal" because he was "exhausted and want[ed] to move on."[86]He also told Rajagopalan that he had not yet told Domain about his plans to work at Fractyl and reiterated that he could not sign an employment agreement until he left Domain.[87]

         On the morning of April 18, 2016, Blair emailed Shah the deal points that they had discussed.[88] Shah rejected them out of hand and without explanation.[89] At trial, and contrary to his contemporaneous messages with Rajagapolan, Shah claimed that he asked for the terms in writing only so that there would be a written record of the Company's final offer.[90] Shah also claimed at trial, again contrary to his contemporaneous messages with Rajagapolan, that he wanted to remain a managing member at Domain.[91]

         After Shah rejected Blair's terms, the members' meeting went forward. All of the members, except Shah, voted to require Shah to withdraw from the Company.[92]

         After the meeting, the Company immediately stopped paying Shah's insurance benefits.[93] In hindsight, this seems harsh and spiteful, but Blair and his colleagues had become exasperated with Shah and the obstinate and uncooperative positions that he had taken over the preceding four months.[94] Their actions were not laudable, but they were understandable.

         With Shah no longer a member, the other members' percentage interests rose.[95]Before Shah's departure, each of the other members owned a 15.51% member interest. After reducing Shah's interest to 0%, the remaining members each owned a 17.65% member interest.[96] Domain also took the actions necessary to replace Shah on the various portfolio company boards of directors where he had served.[97]

         On April 22, 2018, four days after his forced withdrawal, Shah accepted the position he had negotiated with Fractyl.[98]

         H. The Dispute

         At the time of his forced withdrawal on April 18, 2016, Shah owned a 12.1% membership interest in the Company.[99] He also had an 11.94% interest in the Company's ownership of "Post 12/31/14 Securities," a 12.1% interest in the Company's ownership of "Post 12/31/15 Securities," and an 11.8% share of the guaranteed distributions that the Company made to its members.[100] Separately, Shah held fully vested ownership positions in OPSA VII and VIII and an ownership position in OPSA IX that was 2.72% vested.[101]

         Blair and the other members of the Company took the positon that upon his forced withdrawal, Shah was entitled to a payment equal to his capital account in return for his member interest. According to the Company's records, the balance in Shah's capital account was $438, 353.05. On May 24, 2016, the Company sent Shah a check for this amount and enclosed a letter explaining the Company's positon.[102]

         Shah returned the check.[103] He asserted that the value of his capital account belonged to him, and he rejected what he believed was an effort by the Company to put conditions on the payment.[104] Although Shah implied that he deserved more money, he did not explain why.

         The Company responded by letter dated June 17, 2016.[105] The Company offered to allow Shah to have a CPA of his choice review the financial statements used to calculate his payout.[106] The Company also asked Shah to explain why he believed he was owed more.[107] In response, Shah asserted that he was entitled to 12.1% of the Company's cash on hand as of his withdrawal date, which equaled $1, 553, 667.[108]

         On June 21, 2016, Shah's counsel sent Domain's counsel a draft complaint that Shah intended to file if he did not receive his capital account balance.[109] Shah's counsel offered to mediate the dispute over any other amounts due if the Company paid Shah's capital account balance.[110] On July 6, the Company wired the money.[111]

         On November 18, 2016, the mediation commenced.[112] That same day, the plaintiffs filed this lawsuit.[113] That move undercut the mediation, which proved unsuccessful. This action proceeded through discovery and trial.

         II. LEGAL ANALYSIS

         The central question in this case is how much Shah was entitled to receive after the other members forced him to withdraw. Procedurally, the Company and its remaining members sued first, seeking a declaratory judgment that Article VII of the LLC Agreement specified the payment that Shah was entitled to receive. They sought other declarations, but those contentions fell by the wayside. Shah counterclaimed for breach of contract, asserting that Article VII did not specify a payment and that under the Delaware Limited Liability Company Act (the "LLC Act"), the defendants owed him the fair value of his member interest. He advanced other contentions, but by the time of post-trial briefing, he had focused on his breach-of-contract theory.[114]

         Although Shah is formally the defendant, this decision structures the analysis using his counterclaim for breach of contract. This approach recognizes that Shah is the natural claimant. It also recognizes the counterclaims implicates the interpretive issues that the plaintiffs seek to resolve. Shah's counterclaim therefore provides an orderly framework for analyzing the case.

         "Under Delaware law, the elements of a breach of contract claim are: 1) a contractual obligation; 2) a breach of that obligation by the defendant; and 3) a resulting damage to the plaintiff."[115] The first element is easily met: the LLC Agreement is a binding contract that includes Article VII. The remaining elements require further discussion.

         A. Breach Of The Contractual Obligation

         Domain contends that Article VII of the LLC Agreement specified that Shah was entitled to receive the value of his capital account. Shah contends that Article VII did not specify a payout, causing the default provisions of the LLC Act to control and entitling him to the fair value of his member interest. To resolve these arguments, the first step is to examine Article VII to determine whether it addresses the issue. If it does, then the contract controls.[116] If not, then the next step is to look to the LLC Act.[117]

         1. The Plain Meaning Of Article VII

         Determining whether Article VII specified the payment that Shah was entitled to receive presents an issue of contract interpretation. The LLC Agreement is a contract governed by Delaware law.[118] The Delaware Supreme Court has explained that "[w]hen interpreting a contract, the role of a court is to effectuate the parties' intent."[119] Absent ambiguity, the court "will give priority to the parties' intentions as reflected in the four corners of the agreement construing the agreement as a whole and giving effect to all its provisions."[120] "Contract language is not ambiguous merely because the parties dispute what it means. To be ambiguous, a disputed contract term must be fairly or reasonably susceptible to more than one meaning."[121]

         Article VII states:

RETIREMENT, DEATH, INSANITY OR BANKRUPTCY
Any Member may retire from the Company upon not less than 90 days' prior written notice to the other Members. Any Member may be required to withdraw from the Company for or without cause at any time upon written demand signed by all of the other Members except for any one other such Member, so long as such demand shall have been approved at a meeting of Members held for such purpose, to which all Members shall be given written notice in advance.
Upon an adjudication that a Member is legally incapacitated or upon the appointment of a custodian, receiver or trustee of his property in any receivership proceedings or in any proceedings for relief of debtors or upon an adjudication of bankruptcy, such Member shall be deemed to have retired from the Company as of the close of business on the date of such adjudication or appointment.
The retirement, death, insanity, bankruptcy or withdrawal of a Member shall not dissolve the Company as to the other Members unless such other Members in accordance with Section 1.04 (excluding for such purpose the Membership Percentage of the withdrawing Member) elect not to continue the business of the Company. In the event that there are no remaining Members, the Company shall dissolve.
If the remaining Members continue the business of the Company, the Company shall pay to any retiring Member, or to the legal representative of the deceased, insane or bankrupt Member, as the case may be, in exchange for his entire interest in the Company, an amount equal to (A) such Member's capital account, to be determined as of the date of a Member's death or retirement, or his withdrawal from the Company (such date of death or withdrawal being referred to herein as the "Withdrawal Date"), which capital account, for purposes of such determination, shall be computed on the cash and disbursements basis of accounting, shall take into account, without limitation, the aggregate amount of cash contributed to the capital of the Company by such Member, plus the aggregate amount of such Member's share, as in effect from time to time, of the net profits of the Company through the last day of the month next preceding the Withdrawal Date, less the aggregate amount of such Member's share, as in effect from time to time, of the net losses of the Company through the last day of the month next preceding the Withdrawal Date, less the aggregate amount of distributions to such Member through the Withdrawal Date in respect of the net profits or capital of the Company, or both; less (B) the aggregate amount, if any, of indebtedness of such Member to the Company at the Withdrawal Date.
Payment of the amounts referred to in clause (A) of the preceding paragraph, less the amount referred to in clause (B) of such paragraph, shall be made in cash or in-kind, as mutually agreed between such retiring Member and the Company, to the retiring Member, or to the legal representative of the deceased, insane or bankrupt Member, as the case may be, no later than 120 days after the Withdrawal Date.
Following any such retirement, death, insanity, bankruptcy or withdrawal, such former Member (all persons who shall have ceased to be Members as contemplated by this Article VII, being hereinafter referred to as "former Members") or his estate or legal representatives, as the case may be, shall have no part in the management of the Company and shall have no authority to act on behalf thereof in connection with any matter.
The Schedule shall be promptly amended to reflect the deletion of a former Member from the Schedule as a Member, and to reflect the reallocation of Sharing Percentages of any applicable class resulting from such purchase among the remaining Members participating in such class pro rata in proportion to their respective Sharing Percentages in such class in effect immediately prior to such reallocation.[122]

         The first two paragraphs of Article VII identify five means by which a member's status as such can terminate: (i) retirement, (ii) death, (iii) insanity, (iv) bankruptcy, and (v) forced withdrawal by vote of the other members. The first paragraph of Article VII sets out the requirements for a forced withdrawal by vote of other members:

Any Member may be required to withdraw from the Company for or without cause at any time upon written demand signed by all of the other Members except for any one other such Member, so long as such demand shall have been approved at a meeting of Members held for such purpose, to which all Members shall be given written notice in advance.[123]

         The other members complied with these requirements. They gave Shah notice in advance of the April 18, 2016 meeting. All members, except Shah, voted for Shah's removal. Article VII clearly authorized the other members to force Shah to withdraw.

         Despite providing a path to force a member to withdraw, Article VII is silent about the payment to be made in that instance. Paragraph four specifies the payment to be made "to any retiring Member, or to the legal representative of the deceased, insane or bankrupt Member, as the case may be, in exchange for his entire interest in the Company." Notably, this list of scenarios does not include a forced withdrawal. Under the plain language of this provision, the payout mechanism does not apply to a forced withdrawal.

         At first blush, paragraph four potentially complicates matters by defining a payout formula that includes the concept of "withdrawal." It states that the departing member is entitled to "an amount equal to (A) such Member's capital account, to be determined as of the date of a Member's death or retirement, or his withdrawal from the Company (such date of death or withdrawal being referred to herein as the 'Withdrawal Date') .....[124] The concept of "withdrawal" in this formula, however, is used generically as a catchall for the forms of withdrawal where the payout formula applies. Notably, the formula specifies two of the triggering means of withdrawal (death or retirement) but not two others (insanity or bankruptcy). The formula therefore does not conflict with the limitation of the payout right to a "retiring Member, or to the legal representative of the deceased, insane or bankrupt Member."

         Paragraph five of Article VII provides additional details about the form and timing of the payout. It too refers to only "the retiring Member, or to the legal representative of the deceased, insane or bankrupt Member."[125] It does not address a forced withdrawal.[126]

         The references in paragraphs four and five of Article VII to a retiring member do not encompass a forced withdrawal. In paragraphs one, three, and six of Article VII, the plain language distinguishes between retirement, which is a voluntary departure, and a "required withdrawal."

         Article VII therefore did not specify the amount that Shah would receive after being forced to withdraw. Under a plain language analysis, Shah is correct.

         2. Extrinsic Evidence

         The plaintiffs contend that extrinsic evidence shows that the members intended for Article VII to specify the amount that a member would receive upon a forced withdrawal. Because the scope of Article VII is plain and unambiguous, principles of contract interpretation foreclose consideration of extrinsic evidence.[127]

         Assuming for the sake of argument that Article VII was ambiguous, looking to extrinsic evidence would not be the correct solution on the facts of this case. "[I]t is unhelpful to rely upon extrinsic evidence to determine the parties' intent in drafting the contract" when one side drafted the agreement and presented it on a take-it-or-leave-it basis, such that the extrinsic evidence "would yield information about the views and positions of only one side of the dispute."[128] Under those circumstances, the doctrine of contra proferentem calls upon the court to construe any ambiguities against the drafter.[129]In this case, Domain drafted the LLC Agreement.[130] Although Shah was told that he could contact Domain's CFO with any questions, Shah did not have the ability to negotiate substantive terms.[131] The Company admitted Shah on a take-it-or-leave-it basis. Consequently, if Article VII were ambiguous, it would be construed against the plaintiffs.

         Finally, assuming for the sake of argument that extrinsic evidence were considered, the most persuasive extrinsic evidence is the Company's course of dealing.[132] The Company has never limited a departing member to his or her capital account. The Company instead has paid every member who left the Company millions more than their capital account.[133] Admittedly, these departures ended up being consensual, but there is no indication that during any of the discussions or negotiations, anyone ever mentioned the concept of forcing a member to withdraw and limiting them to their capital account.[134] The course of dealing conflicts with the Company's position that departing members are entitled only to their capital accounts.

         3. An Irrational Result

         Domain contends that to read Article VII as not specifying the amount Shah would receive generates an irrational result. According to Domain, this outcome "favor[s] derelict managing members or members whose areas of focus are uneconomic for the firm" by giving them greater compensation than members who withdraw for other reasons.[135]

         In my view, the outcome that Article VII dictates is not irrational. Whether a particular member is derelict or failing to contribute involves a question of judgment. Humans frequently disagree about the aptitude and performance of particular individuals, and they often view others as less worthy than themselves. It is rational for sophisticated individuals to be worried about disputes and to want protection against being forced out following a legitimate disagreement over performance or due to a power struggle or personality conflict. If the forced-out member would receive only the value of her capital account, rather than the greater value of a proportionate share of the entity as a going concern, then the other members would gain by ganging up on a disfavored member. It seems rational to me that the members could have sought to protect against this outcome by excluding the forced-withdrawal scenario from the cases covered by the payout formula.

         This construct does result in a situation where a forced-out member receives more under the terms of the agreement than a member who retires or who leaves for more sympathetic reasons. But I do not regard that as irrational. The members rationally could have expected that in those situations, they would look after each other and not limit the payment that the departing member would receive to the amount specified by the agreement. In a voluntary departure, a member might expect to leave on good terms and to receive an agreed-upon severance, which happened on the three documented occasions when members retired voluntarily firm the firm.[136] In the case of sad events like death, insanity, or bankruptcy, the remaining members might well be expected to provide compassionate support to their former colleague, as happened in the one documented instance in the record where this occurred.[137]

         "[P]arties have broad discretion to use an LLC agreement to define the character of the company and the rights and obligations of its members."[138] The members could have drafted Article VII to address required withdrawals. They did not. That omission does not make its terms irrational. "Parties have a right to enter into good and bad contracts, the law enforces both."[139]

         4. The Default Rule Under The LLC Act

         Because the LLC Agreement is silent as to what payment a member receives after a forced withdrawal, the default provisions of the LLC Act come into play. Shah contends that Section 18-604 of the LLC Act governs. The plaintiffs contend that Section 18-604 does not apply, leaving the court to apply default principles of law under Section 18-1104.

         Section 18-604 does not govern this situation because it applies only to voluntary withdrawals. It states:

Except as provided in this subchapter, upon resignation any resigning member is entitled to receive any distribution to which such member is entitled under a limited liability company agreement and, if not otherwise provided in a limited liability company agreement, such member is entitled to receive, within a reasonable time after resignation, the fair value of such member's limited liability company interest as of the date of ...

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