In R&R Capital, LLC v. Buck & Doe Run Valley Farms, LLC, CA No. 3803-CC (Del. Ch. Aug. 19, 2008), the Delaware Court of Chancery considered the enforceability of a provision in a limited liability company operating agreement whereby a member waived its right to seek judicial dissolution or the appointment of a receiver for the company. Reinforcing Delaware's public policy in favor of the principles of freedom of contract in limited liability company operating agreements, the Chancery Court held that where a member of a limited liability company knowingly and unambiguously waives its right to seek judicial dissolution or the appointment of a receiver under Section 18-802 of the Delaware Limited Liability Company Act (the "Act"), such waiver is enforceable and violates neither the terms of the Act nor Delaware public policy.
The Petitioners in R&R Capital were members of a number of separate Delaware limited liability companies (the "Entities"). Each of the Entities was established to train and race horses. Under the terms of the operating agreements of the Entities, the manager of the Entities was granted sole and exclusive operating control of the Entities. Further, the Entities' operating agreements each contained a provision explicitly acknowledging that the members waived any right to seek judicial dissolution or the appointment of a receiver pursuant to Section 18-802.
Following a dispute between the Petitioners and the manager, the Petitioners sought judicial dissolution of the Entities (or, alternatively, the appointment of a receiver for the Entities). The Entities filed a motion to dismiss the suit on the basis that the explicit waiver contained in the Entities' operating agreements prohibited such a suit.
In determining whether the waivers were enforceable, the Chancery Court emphasized that limited liability companies are creatures of contract and that both Delaware public policy and provisions of the Act provide for giving maximum effect to the principles of freedom of contract with respect to a limited liability company's operating agreement. The Chancery Court further opined that there are reasonable business justifications why a limited liability company may wish to include a provision in its governing documents that prohibits a member from filing such a petition, including protecting the company from disaffected members. Finally, the Chancery Court noted that the Petitioners are not without a remedy for their grievances because the Act provides the unwaivable protection of an implied covenant of good faith and fair dealing that makes the remainder of the Act flexible.
The Chancery Court, in deciding an issue of first impression in the State of Delaware, ultimately concluded that the allure of the limited liability company structure would be significantly decreased if the contract-like qualities were interpreted out of the Act. In doing so, the Chancery Court reaffirmed its policy of giving maximum effect to the principles of freedom of contract in limited liability company operating agreements.
This decision gives members of Delaware limited liability companies certainty that explicit waiver provisions in their operating agreements will be upheld. In doing so, the Chancery Court has emphasized the contractual nature of an operating agreement and given entrepreneurs, businesses and practitioners further reason to select the Delaware limited liability company as a preferred entity choice.
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