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,
NIMESH S. SHAH, Defendant/Counterclaim Plaintiff.
Submitted: May 15, 2018
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
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
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.
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.
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.
The Venture Capital Firm
Associates is a venture capital firm that focused on the
biopharmaceutical, diagnostic, and medical device
sectors. James Blair, Jesse Treu, and Jennifer Lobo
co-founded Domain in 1985.
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.
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,"
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.
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.
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. In general, the management company expects
to receive fees equal to approximately 2% of assets under
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
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.
The Company's LLC Agreement
Domain's principals formed the Company, it had five
members: the three founders (Blair, Treu, and Dovey) plus
Katherine Schoemaker and Arthur Klausner.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. A member also could retire voluntarily or
could be deemed to withdraw by operation of law in the event
of insanity, bankruptcy, or death.
2004, the members of the Company adopted an amended and
restated limited liability company agreement. At this point,
there were eight members: the original five, plus Robert
More, Nicole Vitullo, and Olav Bergheim. The members did
not make any changes to the withdrawal provision that are
material to this litigation.
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.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
Shah Joins Domain.
2006, Shah joined Domain as an employee. He focused on
the medical device sector. He rose through the ranks,
receiving promotions in 2008 and 2013.
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. 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.
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. After falling short on Fund VIII, Domain
cut the forecasted size of Funds IX and X from $700 million
to $500 million. In 2012, Domain deferred the projected
closing of Fund IX from 2012 until 2014. Domain also
deferred Funds X and XI by two years.
setbacks stemmed from investor dissatisfaction with the
firm's track record. Funds VI and VII performed poorly,
both on an absolute and relative basis. Fund VIII did
better on an absolute basis, but not on a relative
basis. Domain's investors worried that the
firm's core investment strategy had lost its
efficacy. They also worried that as the firm's
founders neared retirement, the generational transition posed
additional risks. With many other managers to choose from,
they began taking a pass on Domain.
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. In 2013, the
Company received $22.1 million in management fees, down more
than $3 million from 2012. 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
Shah Becomes A Member.
mid-November 2014, Domain invited Shah to become a member of
the Company. 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. Fund IX had only had six limited
partners, one of which was a retired principal of
Domain. By contrast, Fund VII had approximately
sixty limited partners, the majority of which were
January 1, 2015, the existing members and Shah executed the
Company's Seconded Amended and Restated Limited Liability
Company Agreement (the "LLC
Agreement"). Shah was allocated a 10.62% membership
time of his admission as a member, Shah made a capital
contribution of $25, 000 to the Company. 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.Domain's policy from the
outset had been not to require that new members of the firm
make a significant capital contribution. 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
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.
and Shah never negotiated the terms of the LLC
Agreement. Shah did not ask any questions; he did
not even bother to read the LLC Agreement
carefully. 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.
Domain's Financial Situation Continues To
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. 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
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. 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. This was not enough to change
anyone's mind about medical devices. Even Shah recognized
that the "opportunity set in medical devices remain[ed]
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%.
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. 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
Shah Is Asked To Leave.
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. Shah testified that when he later
learned of the decision, it came as a surprise to him,
but he seems to have anticipated it. On January 4, 2016, he
asked Blair what he would do if he were "in [Shah's]
shoes." 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. The day after the meeting, Shah began
networking in search of a job. He also emailed himself the
LLC Agreement,  and he reviewed the provisions on member
asked for a follow up meeting with Blair and Dovey for
January 19, 2016.During that meeting, Blair and Dovey told
Shah that the other members had decided he should
leave. 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. Shah also
asked Blair and Dovey not to say or do anything that
suggested he agreed with the other members'
decision. On February 4, after going back and
forth with Shah on the language, the Company sent out an
internal announcement about Shah's
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. 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.
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.
asked only that the offer stay open until the end of March so
he could discuss it with his attorneys.
March 7, 2016, Blair sent Shah a "98% final draft"
of a severance agreement.Blair and Shah agreed to let
the attorneys finalize the arrangements. 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.
Shah had found a new job. As noted, Shah began his job search
in January 2016. By early March, Shah was setting up
interviews. His first choice was Fractyl
Laboratories Inc., a portfolio company in Fund
VIII. Shah was a member of Fractyl's board
of directors and already had deep connections
reached out to Harith Rajagopalan, the co-founder and CEO,
and Allan Will, the chairman of the board. They
discussed having Shah join as Chief Business
Officer.Shah next met with the full executive
team in Boston, and he and Rajagopalan began discussing
compensation. By late March, they had reached an
agreement, but Shah said he could not sign until his
employment with Domain ended. During this period, Shah did
not mention to Domain that he was negotiating with
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. Shah did not
mention this to Domain.
April 6, 2016, the lawyers had a call. Shah's litigation
counsel told Domain's counsel what Shah believed he was
owed. Matters went downhill from there, and
Blair concluded that Shah would likely sue.
the lawyers' call, Shah made multiple demands for
information from the Company. Domain personnel resisted
giving Shah the information. Shah continued to refuse to
have any direct communications with Domain about a severance
agreement, insisting that everything go through his
The Other Members Require Shah To Withdraw.
April 13, 2016, the Company noticed a meeting of members for
April 18. The subject of the meeting was to vote
on Shah's forced withdrawal.
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. 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."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.
morning of April 18, 2016, Blair emailed Shah the deal points
that they had discussed. Shah rejected them out of hand and
without explanation. 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. Shah also claimed at trial, again
contrary to his contemporaneous messages with Rajagapolan,
that he wanted to remain a managing member at
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.
the meeting, the Company immediately stopped paying
Shah's insurance benefits. 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. Their actions were not laudable, but
they were understandable.
Shah no longer a member, the other members' percentage
interests rose.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. Domain also took the actions
necessary to replace Shah on the various portfolio company
boards of directors where he had served.
April 22, 2018, four days after his forced withdrawal, Shah
accepted the position he had negotiated with
time of his forced withdrawal on April 18, 2016, Shah owned a
12.1% membership interest in the Company. 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. Separately, Shah held fully vested
ownership positions in OPSA VII and VIII and an ownership
position in OPSA IX that was 2.72% vested.
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
returned the check. 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. Although Shah implied that he deserved
more money, he did not explain why.
Company responded by letter dated June 17,
2016. The Company offered to allow Shah to
have a CPA of his choice review the financial statements used
to calculate his payout. The Company also asked Shah
to explain why he believed he was owed more. 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.
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.
Shah's counsel offered to mediate the dispute over any
other amounts due if the Company paid Shah's capital
account balance. On July 6, the Company wired the
November 18, 2016, the mediation commenced. That same
day, the plaintiffs filed this lawsuit. That move
undercut the mediation, which proved unsuccessful. This
action proceeded through discovery and trial.
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
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.
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." The first element is easily met: the
LLC Agreement is a binding contract that includes Article
VII. The remaining elements require further discussion.
Breach Of The Contractual Obligation
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. If not,
then the next step is to look to the LLC Act.
The Plain Meaning Of Article VII
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. The Delaware Supreme Court has
explained that "[w]hen interpreting a contract, the role
of a court is to effectuate the parties'
intent." 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." "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
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
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
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
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.
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')
..... 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."
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." It does
not address a forced withdrawal.
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."
VII therefore did not specify the amount that Shah would
receive after being forced to withdraw. Under a plain
language analysis, Shah is correct.
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
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." Under those circumstances, the
doctrine of contra proferentem calls upon the court
to construe any ambiguities against the
drafter.In this case, Domain drafted the LLC
Agreement. Although Shah was told that he could
contact Domain's CFO with any questions, Shah did not
have the ability to negotiate substantive
terms. 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.
assuming for the sake of argument that extrinsic evidence
were considered, the most persuasive extrinsic evidence is
the Company's course of dealing. 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. 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. The course of dealing conflicts
with the Company's position that departing members are
entitled only to their capital accounts.
An Irrational Result
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
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.
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. 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
have broad discretion to use an LLC agreement to define the
character of the company and the rights and obligations of
its members." 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
The Default Rule Under The LLC Act
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.
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 ...