In this memorandum opinion, the Delaware Court of Chancery found that a member of a joint venture breached a limited liability company agreement, breached its fiduciary duties by usurping corporate opportunities, and violated the Delaware Uniform Fraudulent Transfer Act (“DUFTA”). In doing so, the Court rejected defenses based on laches, unclean hands, and prior material breach.
The joint venture at issue was Mobilactive Media, LLC, a Delaware limited liability company (the “Company”), which consisted of two members: Terry Bienstock (“Bienstock”) and Silverback Media, PLC (“Silverback”). Bienstock and Silverback formed the Company to take advantage of mobile marketing opportunities in North America (the “Business”). The limited liability company agreement of the Company (the “Agreement”) described the Business in detail and provided that the Company “shall be the only means through which any Member or any of its Affiliates engage in the Business and that any future opportunities for new or expanded Business . . . shall be presented to the Company as an opportunity for the Company to undertake.” In addition, the Agreement stated that “the Members as Members are fiduciaries to each other and the Company” and “shall at all times act in the best interest of the Company.”
During the Company’s existence, however, Silverback acquired five other companies, four of which engaged in activities within the Company’s Business (the “Acquired Companies”), and failed to present the opportunities to the Company. In addition, because the Company was not as successful as originally planned, Silverback wrote to Bienstock expressing its desire to get out of the joint venture and unwind the Company. Bienstock opposed this idea and filed a lawsuit in the Court of Chancery. Shortly thereafter, Silverback transferred substantially all of its assets for minimal value to Adenyo, Inc., its parent company (the “Transfer”), and Adenyo, Inc., as successor in interest to Silverback, filed a complaint seeking dissolution of the Company.
The Court of Chancery consolidated the two actions, and Bienstock consolidated his complaint naming the following parties as defendants (collectively, the “Defendants”): (1) Silverback; (2) Adenyo, Inc.; and (3) two other subsidiaries of Adenyo, Inc., Adenyo USA, Inc., a Delaware corporation (“Adenyo USA”), and Adenyo Acquisition Sub, Inc., a Delaware corporation (“Adenyo Acquisition”, and collectively with Adenyo, Inc. and Adenyo USA, “Adenyo”). Bienstock sought declaratory and injunctive relief concerning the Agreement and damages for breach of the Agreement and of Silverback’s fiduciary duties. Bienstock claimed that Silverback’s purchase of the Acquired Companies and failure to present those opportunities to the Company violated the Agreement and caused Silverback to breach its fiduciary duties by usurping corporate opportunities. In addition, Bienstock argued that the Transfer violated DUFTA. In response, the Defendants argued that they engaged in no wrongdoing and that Bienstock’s claims were barred under the doctrines of laches and unclean hands, and the principle of prior material breach of the Agreement.
In a largely fact based analysis, the Court of Chancery agreed with Bienstock and found that Silverback breached the Agreement and its fiduciary duties by purchasing the Acquired Companies and failing to present those opportunities to the Company. The Court also denied the Defendants’ motions to dismiss under the doctrines of laches and unclean hands, and the principle of prior material breach.
Also, before ultimately concluding that the Transfer violated DUFTA, the Court analyzed whether it had personal jurisdiction over Adenyo. First, the Court held that Adenyo had the requisite minimum contacts with Delaware and satisfied Section 3104(c)(1) of Delaware’s long-arm statute, which permits personal jurisdiction over an entity that “transacts any business” in Delaware, and whose transacting of business in Delaware is closely intertwined with the plaintiff’s cause of action. Adenyo, Inc. formed Adenyo USA and Adenyo Acquisition in Delaware for the purpose of acquiring one of the Acquired Companies. The Court held that this constituted the transaction of business in Delaware, was closely intertwined with Bienstock’s causes of action, and satisfied the minimum contacts requirement. As such, the Court had personal jurisdiction over Adenyo.
The Court also found that Adenyo was subject to jurisdiction under the implied consent statute. Section 18-109(a) of the Delaware Limited Liability Company Act (the “LLC Act”) authorizes service of process on the managers of limited liability companies formed in Delaware. According to the Court, by filing suit to dissolve the Company, Adenyo took part in the management of the Company and, therefore, subjected itself to personal jurisdiction. The Court also noted that service under Section 18-109(a) will be consistent with due process requirements when the action relates to a violation by the manager of a fiduciary duty owed to the limited liability company. Because Adenyo, as successor to Silverback, violated its fiduciary duties when it usurped corporate opportunities from the Company, personal jurisdiction over Adenyo under Section 18-109(a) comported with due process considerations.
Lastly, the Court denied Silverback’s request to dissolve the Company even though it was not “reasonably practicable to carry on the business” of the Company in conformity with the Agreement. Pursuant to Section 18-802 of the LLC Act, “[o]n application by or for a member or manager the Court of Chancery may decree dissolution of a limited liability company whenever it is not reasonably practicable to carry on the business in conformity with a limited liability company agreement.” According to the Court, even when the “not reasonably practicable” standard is met, the Court may decline to issue a decree of dissolution. The Court held that dissolving the Company before the Defendants paid Bienstock damages and interest could provide a windfall to the Defendants. The Court stated that the Defendants should not be permitted to use their inequitable conduct to extricate Silverback from a bad deal with Bienstock and simultaneously hinder Bienstock’s ability to recover damages owed to him.
The full opinion is available here.