Seokoh, Inc. v. Lard-PT, LLC and Process Technologies and Packaging, LLC ( 2021 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
SEOKOH, INC., )
)
Petitioner, )
)
v. ) C.A. No. 2020-0613-JRS
)
LARD-PT, LLC, )
)
Respondent, )
)
and )
)
PROCESS TECHNOLOGIES AND )
PACKAGING, LLC, a Delaware )
Limited Liability Company, )
)
Nominal Respondent. )
MEMORANDUM OPINION
Date Submitted: January 15, 2021
Date Decided: March 30, 2021
Jacob R. Kirkham, Esquire of Kobre & Kim LLP, Wilmington, Delaware and
Robin J. Baik, Esquire, Leif T. Simonson, Esquire, S. Nathan Park, Esquire of
Kobre & Kim LLP, New York, New York, Attorneys for Petitioner Seokoh, Inc.
John G. Harris, Esquire and Peter C. McGivney, Esquire of Berger Harris LLP,
Wilmington, Delaware and Stuart Kagen, Esquire and Russell Bogart, Esquire of
Kagen, Caspersen & Bogart PLLC, New York, New York, Attorneys for
Respondent Lard-PT, LLC.
SLIGHTS, Vice Chancellor
When conjuring an image of compromise, many invoke King Solomon, or
Jedidiah, the proverbial source of the classic aphorism, “split the baby.” 1 But
according to the Book of Genesis, Abraham and Lot were equally adept at
compromise.2 When a dispute over the division of territory arose between these two
wealthy men, they devised a process for fair division that eventually was employed
by others in the region to divide all manner of tangible things, from real property to
food.3 The process, called “divide-and-choose” or “I cut, you choose,” was elegantly
simple: one person (the cutter) would divide the disputed matter into two pieces and
then allow the other (the chooser) to choose which piece she would take for herself. 4
The incentives for fair partition are obvious: the cutter is incented to divide in equal
pieces knowing she will be left with the piece the chooser leaves behind.
Parties planning to enter a joint business venture are wise to consider the story
of Abraham and Lot. On a clear day, when relationships are strong and visions for
the joint venture are aligned, chary business planners will consider the best strategy
to address the prospect that the joint venturers might one day confront intractable
1
Kings 3:16–28.
2
Genesis 13:5–18.
3
Id. United Nations Convention on the Law of the Sea annex III, art. 8, Dec. 10, 1982,
1833 U.N.T.S. 397.
4
Steven J. Brams, Alan D. Taylor, Fair Division: From Cake-Cutting to Dispute
Resolution, (Cambridge Univ. Press 1996).
1
gridlock in the management of their business. One effective strategy is to agree in
advance to divide-and-choose.
The parties to this dissolution proceeding, Petitioner Seokoh, Inc. (“Seokoh”)
and Respondent Lard-PT, LLC (“Lard”)—joint venturers in Process Technologies
and Packaging, LLC (“PTP” or the “Company”)—attempted to do just that. They
employed a version of divide-and-choose to resolve deadlock among the members
of PTP’s board of directors (the “Board”) for certain issues requiring unanimous
Member approval (“Reserved Matters”). At Section 10.2 (titled “Member
Deadlock”) of PTP’s Third Amended and Restated Limited Liability Company
Agreement (the “Operating Agreement”),5 the parties agreed that, in the event a
Member (as defined) materially breaches the Operating Agreement’s terms or the
Members cannot resolve a Reserved Matter (both defined as a “Deadlock”), the chief
executive officers of the two Members’ parent companies—Kolmar Korea Co., Ltd.
(“Kolmar”) and WLM Holdings (“WLM”)—will meet within twenty days to
attempt to resolve the matters giving rise to the Deadlock in good faith. 6 If the
5
Verified First Am. Pet. for Judicial Dissolution Pursuant to 6 Del. C. § 18-802 (“Pet.”)
Ex. A (“OA”) (D.I. 10).
6
Id. § 10.2(a).
2
Deadlock is not resolved, either party may give notice (the “Deadlock Notice”) to
the other that it intends to implement the Deadlock procedure.7
To commence the Deadlock procedure, the initiating Member must state in
the Deadlock Notice the price at which the receiving Member can choose either to
buy the initiating Member’s interest in PTP or sell its own.8 The receiving Member
then has thirty days from receipt of the Deadlock Notice to choose whether it will
be a buyer or seller at the designated price, failing which the receiving Member is
deemed to have accepted the initiating Member’s offer to sell.9 As incentive for
Members to abide by the negotiated Deadlock procedure, the Member Deadlock
provision states that if a Member breaches the obligation to buy or sell, or otherwise
materially breaches the Operating Agreement, the non-defaulting Member has
“the option” either to buy or sell its interests to the defaulting Member at a 30% price
adjustment in its favor (i.e., at a discount or premium, respectively).10
7
Id. § 10.2(b).
8
Id. § 10.2(c).
9
Id. § 10.2(d). A version of this approach is referred to by some as a “Texas Shoot Out.”
See In re Shawe & Elting LLC, 2015 WL 4874733, at *32 n.326 (Del. Ch. Aug. 13, 2015),
aff’d sub nom. Shawe v. Elting, 157 A.3d 152 (Del. 2017) (“A ‘Texas shoot out’ format is
an auction process in which either [owner] would specify a price for his/her interest in the
Company and the other would have the option either to buy the other’s interest at the
specified price or to sell his/her own interest at that price.”).
10
OA § 10.2(e).
3
Seokoh and Lard are in Deadlock. Unfortunately, in this instance, PTP’s
Deadlock procedure has not delivered the parties to the intended destination and they
remain in Deadlock, a state that has existed for two years and has caused PTP to
hemorrhage cash and lose key personnel. To stop the bleeding, Seokoh filed suit in
New York, claiming Lard was in breach of the Deadlock procedure and seeking a
decree of specific performance that would require Lard to honor Section 10.2 by
selling its PTP stake to Seokoh at a 30% discount. Lard denied Seokoh’s allegations
of breach and counterclaimed that Seokoh has breached the Operating Agreement
and must now buy out Lard’s interest at a 30% premium. Lard’s showcase argument
was that Section 10.2(e) contemplated an irrevocable option that either Lard or
Seokoh exercised upon seeking specific performance in New York. According to
Lard, all that is left for decision is the price at which Seokoh must consummate the
buyout.
On July 23, 2020, Seokoh filed its Verified Petition for Judicial Dissolution
with this Court, in which it seeks a decree that PTP should be dissolved under
6 Del. C. § 18-802 (“Section 18-802”) because it is no longer “reasonably
practicable” for PTP to carry on its business in conformity with the Operating
Agreement. 11 In response, Lard sought a temporary restraining order (“TRO”) from
11
See D.I. 1; Pet. ¶¶ 82–86.
4
the New York court to restrain Seokoh from prosecuting this dissolution action while
the New York court adjudicated Lard’s claim for specific performance of
Section 10.2(e). That motion was granted but later vacated after the New York court
determined on summary judgment that Lard’s option contract theory was flawed and
could not support its demand for specific performance. The parties have since
agreed to stay the New York proceedings in favor of this one. 12
Lard has moved to dismiss Seokoh’s petition for dissolution on two grounds.
First, Lard argues that Seokoh has not well pled that PTP is in fact deadlocked.
Second, Lard recycles the same option theory thrown out in New York, arguing that
the Deadlock procedure provides a viable means by which Lard can exit the
Company after Seokoh buys out Lard’s stake. For reasons explained below,
I disagree on both points and deny Lard’s motion in full.
I. BACKGROUND
The background facts are drawn from the Petition and the documents it
incorporates by reference.13 For purposes of this motion only, I accept as true the
12
D.I. 52.
13
See Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 860 A.2d 312, 320 (Del. 2004) (noting
that on a motion to dismiss, the Court may consider documents that are “incorporated by
reference” or “integral” to the complaint).
5
Petition’s well-pled factual allegations and draw all reasonable inferences in the
Petitioner’s favor. 14
A. Parties
Petitioner, Seokoh, is a Delaware corporation with its principal place of
business in Pennsylvania.15 Seokoh is a wholly-owned subsidiary of Kolmar Korea
Co., Ltd. (“Kolmar”). 16 Kolmar designs and manufactures cosmetic products for
other companies.17
Respondent, Lard, is a Delaware LLC owned and operated by Alan and David
Wormser (together, the “Wormsers”), who also own and operate non-party,
Wormser Corporation (“Wormser Corp.”). 18 Lard is the successor-in-interest of
WLM Holdings, LLC (“WLM Holdings”), the original signatory to PTP’s Operating
Agreement. 19
14
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002).
15
Pet. ¶ 4.
16
Id.17
Pet. ¶ 10.
18
Pet. ¶ 5.
19
Id.6
Nominal Respondent, PTP, is a Delaware LLC formed in 2010. 20 In 2016,
Seokoh and Lard became 51% and 49% Members in PTP, respectively, intending to
operate the Company as a joint venture engaged in the development and
manufacturing of cosmetics.21
B. The PTP Joint Venture
As noted, Kolmar was founded in 1990 as a South Korean manufacturer of
cosmetics, among other products.22 It found success as an original design
manufacturer, producing cosmetic products for other consumer-facing firms to re-
brand for sale. 23
To expand its operations into the United States, Kolmar entered into a joint
venture with the Wormsers, acquiring through its wholly-owned subsidiary, Seokoh,
a 51% stake in PTP, a company that develops and manufactures cosmetic products
in the United States.24 The transaction was consummated on September 19, 2016.25
Three weeks later, on October 13, 2016, the parties executed the Operating
20
Pet. ¶ 6.
21
Id.22
Pet. ¶ 10.
23
Id.24
Pet. ¶ 12.
25
Id.7
Agreement, with Kolmar and the Wormsers listing their holding companies, Seokoh
and WLM Holdings, respectively, as Members. 26 Eventually, Lard assumed the
interest of WLM Holdings, becoming a Member of PTP and the Wormsers’
designated counterpart to Kolmar’s Seokoh. 27
C. The Operating Agreement
The Operating Agreement memorializes the terms by which Seokoh and Lard
would conduct their joint venture. The Company is to be managed, operated and
controlled by the Board. 28 The Board, in turn, is comprised of six Directors: three
designated by Kolmar (the “Kolmar Directors”) and three designated by WLM
(the “WLM Directors”). 29 The Chairman of the Board is chosen by Kolmar, while
day-to-day operations are conducted under the supervision and direction of the
WLM-designated Directors.30 Section 7.10(a) provides that the Company’s officers
26
Id.; see also OA at 1.
27
Pet. ¶¶ 5, 12.
28
See Pet. ¶¶ 13–17 (citing OA §§ 2.3, 7.2, 7.8).
29
OA § 7.2(a). During the time leading up to this dispute, the Board comprised five
directors: three appointed by Kolmar, and two appointed by the Wormsers—David and
Alan Wormser. Pet. ¶ 14. Under Section 7.8(e), however, voting at the Board level
remained equal, as each of the two Wormser directors were given “one and a half votes in
connection with any action taken by the Board or any Committee.” See OA § 7.8(e).
30
OA §§ 7.2(b)–(c).
8
are to be “approved by the Board.” 31 Management and control are thus divided
equally between Kolmar and WLM.
Under Section 8.6 of the Operating Agreement, PTP can only take certain
actions, defined in the Operating Agreement as “Reserved Matters,” with the consent
of both Seokoh and Lard. 32 Reserved Matters include capital expenditures or new
indebtedness in excess of $100,000 and the dissolution of PTP, among others. 33
As both parties well understood, the equal division of directors on the Board
created the threat of deadlock should the two factions disagree on the Company’s
direction. In Section 10.2, the parties contemplated a procedure to break Board
“Deadlock,” a term defined in Section 10.2(a) as “(i) a Reserved Matter . . . not
agreed upon (that, if not resolved would result in a material adverse effect to the
Company) at three consecutive meetings of the Members of the Company,” or
(ii) when “either Member materially breaches the terms of this Agreement.”34
If Deadlock occurs, the Chief Executive Officers of Kolmar and WLM are required
to meet and attempt to resolve the matter in good faith.35 But if they fail to reach a
31
Id. § 7.10(a).
32
Id. § 8.6.
33
Id. §§ 8.6(d), 8.6(k), 8.6(n).
34
Id. § 10.2(a).
35
Id.
9
resolution within the contractually allotted time, either Member can serve the other
with a Deadlock Notice. 36 Service of a Deadlock Notice triggers the Deadlock
procedure set forth in Sections 10.2(c), (d) and (e). 37
The Deadlock procedure was intended to break the Deadlock by facilitating
the buyout of one or the other Member’s stake in PTP.38 In this regard,
Section 10.2(c) stated: “The Initiating Member may serve a notice on the Other
Member which requires the Other Member to either, at the price specified in the
notice, (i) purchase the Initiating Member’s entire Interests or (ii) sell the Other
Member’s entire Interests to the Initiating Member.”39 Under Section 10.2(d), the
receiving Member must notify the Initiating Member whether it agrees to purchase
the offered interest or to sell on those terms in same day funds paid at closing within
thirty days of receiving a Deadlock Notice. 40
Section 10.2(e) then states:
If a Member breaches any of the provisions of Section 10.2(d) above,
the non-defaulting Member shall have the option to (i) buy (if such
Member was required to sell its Interests pursuant to Section 10.2(c))
the defaulting Member’s Interests at a proportionate price determined
36
Id. § 10.2(b).
37
Id. §§ 10.2(c)–(e).
38
See id. § 10.2(c).
39
Id.
40
Id. § 10.2(d).
10
in accordance with Section 10.2(c), discounted by 30% or (ii) sell
(if such Member was required to buy the defaulting Member’s
Interests) its Interests to the defaulting Member at a proportionate price
determined in accordance with Section 10.2(c), increased by 30%. 41
In Section 14.5(a), the parties selected Delaware law to govern “all questions
concerning the construction, validity and interpretation of this Agreement . . . .” 42
And Section 14.5(b) states that any “suit, action or proceeding seeking to enforce
any provision of, or based on any matter arising out of or in connection with, this
Agreement . . . whether in contract, tort or otherwise, shall be brought exclusively
in the state or federal courts located in New York, New York.”43
D. The Parties Become Deadlocked
By mid-2017, the two Members came to disagree on PTP’s strategic direction:
Kolmar and Seokoh favored aggressive expansion while WLM and Lard favored a
more gradual growth strategy. 44 Disputes also arose over PTP’s facilities.45 Seokoh
41
Id. § 10.2(e).
42
Id. § 14.5(a).
43
Id. § 14.5(b). The parties agree that, notwithstanding the New York forum selection
clause, only a Delaware court can adjudicate a petition to dissolve PTP, a Delaware LLC.
Seokoh’s Answering Br. in Opp’n to Resp’t’s Mot. to Dismiss (“Pet’r’s Answering Br.”)
at 29 n.136 (D.I. 40); Lard’s Reply Br. in Further Supp. of its Mot. to Dismiss
(“Resp’t’s Reply Br.”) at 1 (D.I. 44); see also 6 Del. C. § 18-802. As discussed below, that
agreement is well-founded.
44
See Pet. ¶ 22.
45
Pet. ¶ 24.
11
wanted to purchase the real estate on which PTP’s facilities are currently located, in
addition to an adjacent lot; Lard favored relocating PTP to a cheaper, unidentified
location.46
In November 2017, Seokoh moved unilaterally to purchase PTP’s current
location and the adjacent property under its own name, keeping in place the terms of
PTP’s lease.47 Seokoh then proposed a joint capital call so that PTP could purchase
from Seokoh the property PTP was currently renting.48 Lard rejected the proposal,
notwithstanding the fact that it had no viable alternative location for PTP. 49
The discord between PTP’s two Members began to take a toll on PTP’s
business, despite good market conditions for cosmetics. 50 By the end of 2018, PTP
faced a severe cash shortage, prompting Seokoh and Lard each to loan PTP
$750,000.51 In January 2019, PTP’s CEO resigned. 52 David Wormser wrote a letter
on behalf of Lard addressed to Kolmar purporting to designate Michael Lorelli as
46
Pet. ¶¶ 25–26.
47
Pet. ¶¶ 26–27.
48
Pet. ¶ 28.
49
Id.
50
Pet. ¶ 29.
51
Id.
52
Pet. ¶¶ 30, 33.
12
the interim CEO, with Alan Wormser to oversee PTP’s operations until Lorelli could
be installed.53
Around the same time, apparently sensing trouble brewing, PTP’s financial
comptroller, Shawnna Giumento, sought guidance from the Company’s outside
counsel regarding the proper procedure for appointing a new CEO. 54 That guidance
came on January 19, 2019, when counsel advised the Company that Section 7.10 of
the Operating Agreement required that “the CEO appointed by WLM Directors []
be approved by Kolmar,” and therefore, “absent a meeting of the Board of Directors,
I presume a unanimous consent in lieu of a meeting will be circulated for signature
identifying the WLM designated new CEO which [] will [then be] approved by all
of the Directors.”55 Acting on this advice, Giumento emailed the Wormsers and
Kolmar to obtain written consents for (1) the acceptance of former CEO Levine’s
resignation; and (2) the appointment of Alan Wormser (not Lorelli) as the successor
CEO.
On January 22, 2019, Kolmar responded by consenting to the acceptance of
Levine’s resignation, but rejecting the appointment of Alan Wormser as CEO given
53
Pet. ¶ 34.
54
Pet. ¶ 35.
55
Id.
13
his conflict of interest, as Wormser Corp. is a PTP competitor.56 Two days later,
David Wormser emailed the Kolmar Directors claiming that “PTP’s governing
document is very clear that the Kolmar directors have no consent rights over CEO
appointment.”57 Five days later, on January 29, the Wormsers had Lorelli appear at
PTP’s offices as the interim CEO. 58 The Members’ competing positions on the
validity of Lorelli’s appointment as PTP’s interim CEO caused significant internal
confusion among PTP’s staff and outside counsel. 59 In the midst of this confusion,
Lorelli abruptly left PTP soon after he had arrived, and the Company has been
without a legitimately appointed CEO since January 2019.60
E. The Failed Deadlock Procedure
The Members’ disagreement on the CEO appointment process led each to
accuse the other of breaching the Operating Agreement, declare a Deadlock under
Section 10.2 and initiate the Deadlock resolution procedure.61 As required in
Section 10.2(a) of the Operating Agreement, both Lard and Seokoh requested to
56
Pet. ¶ 37.
57
Pet. ¶ 38.
58
Pet. ¶ 39.
59
Pet. ¶ 40.
60
Pet. ¶ 43.
61
Pet. ¶¶ 44–45.
14
meet with the other side’s CEO to resolve the Deadlock in good faith. 62 That
meeting occurred on February 27, 2019.63 Ultimately, the parties could not resolve
their disagreements on topics running the gamut, including business philosophy,
facility expansion, the appointment process for the interim CEO and issues relating
to PTP’s location and lease on its current facilities.64
On March 19, 2019, Seokoh issued a Deadlock Notice to Lard under
Section 10.2(b) of the Operating Agreement (the “March Deadlock Notice”),
in which it declared that Lard had the option of either (i) buying out Seokoh’s 51%
interest for $10,408,163.27, or (ii) selling Lard’s 49% interest for $10,000,000.65
In its reply on April 15, 2019, Lard elected to buy out Seokoh’s interest, but
conditioned its purchase upon Seokoh’s acceptance of several additional terms. 66
Seokoh agreed to several of Lard’s additional conditions but refused to accept
Lard’s demands that Seokoh extend PTP’s lease and that the Kolmar Directors vote
62
See Pet. ¶ 46; OA § 10.2(a).
63
Pet. ¶ 46.
64
Id.
65
Pet. ¶ 47; see OA § 10.2(b).
66
Pet. ¶¶ 49–50. For example, Lard demanded that Seokoh extend the lease for PTP’s
facilities for up to 12 months, and that the Kolmar Directors either resign effective
immediately or vote in accordance with Lard’s direction prior to closing. Id.
15
under Lard’s direction while the buyout transaction was pending. 67 The disputes did
not end there. In preparing to exit PTP, Seokoh sought to restructure PTP’s lines of
credit totaling $20.5 million for which Kolmar was the sole guarantor. 68 With one
of the lines of credit scheduled to mature soon, Seokoh demanded that Lard replace
Kolmar as the guarantor. Lard refused.69 Lard countered that Kolmar should
continue to guarantee 51% of PTP’s outstanding lines of credit even though it was
to sell its 51% stake in PTP to Lard. Kolmar refused. 70
By mid-May 2019, the Members had exchanged a basic term sheet for Lard
to purchase Seokoh’s interest in PTP. 71 But the negotiations broke down once again
by July 30, as the Members could not agree on basic buyout terms, including when
the deal would be closed and whether PTP’s lease needed to be extended. 72 Seokoh
requested that the deal close by the end of August 2019, and for PTP to leave the
67
Pet. ¶ 50. In a letter dated April 24, 2019, Seokoh informed Lard that Lard’s addition of
extra-contractual conditions to its buyout election rendered the entirety of the election
ineffective under the Operating Agreement. Id.
68
Pet. ¶ 51.
69
Pet. ¶ 52.
70
Id.
71
Pet. ¶ 54.
72
Id.
16
premises (now owned by Kolmar) before November 30, 2019. 73 Lard, however,
demanded that the lease be extended for six months after closing.74
On June 28, 2019, Kolmar’s CEO wrote to Lard stating Lard was in breach of
the Operating Agreement and declaring, “we hereby exercise our option to buy out
Lard-PT’s 49% ownership in the Company at US $10,000,000 in accordance with
Section 10.2(e) of the LLC Agreement” (the “June Letter”).75 While Kolmar pointed
out that Section 10.2(e) gave it the “right to buy Lard-PT’s Interest at a 30%
discount,” it offered “to pay the full price . . . out of good faith and in the interest of
swift transition of ownership.” 76 Kolmar made clear, however, that its offer to pay
full price was “on the express condition that the deal be closed by July 31, 2019.” 77
That deadline came and went with no deal.78
73
Id.
74
Id.
75
Pet. Ex. B (“New York Op.”) at 15 (D.I. 10).
76
Id. at 15–16.
77
Id. at 16; see also Pet. ¶ 54.
78
Pet. ¶ 54.
17
F. Litigation Ensues
On August 21, 2019, Seokoh initiated eviction proceedings against PTP under
the lease between Seokoh and PTP (the “Eviction Litigation”). 79 The Eviction
Litigation is active and ongoing.80
After the Wormsers made no effort to secure new financing, PTP defaulted on
its $20.5 million lines of credit, forcing Kolmar as the sole guarantor to forfeit its
collateral.81 On September 24, 2019, and again on October 25, 2019, Kolmar
initiated legal proceedings as guarantor against PTP for indemnity (the “Indemnity
Litigation”).82 The case was voluntarily dismissed without prejudice on May 26,
2020, but refiled on June 10, 2020.83
In January 2020, Kolmar and Seokoh invited the Wormsers to make an offer
to resolve the situation at PTP amicably.84 After receiving the Wormsers’ offer on
January 23, 2020, Kolmar and Seokoh came to believe Lard was incapable of
mustering the financial resources necessary to consummate a buyout of Seokoh’s
79
Pet. ¶ 57.
80
Id.
81
Pet. ¶ 58.
82
Id.
83
Id.
84
Pet. ¶ 61.
18
51% interest.85 Accordingly, on January 31, 2020, Seokoh expressed its willingness
to explore a purchase of Lard’s 49% interest at $10,000,000, in line with the previous
offer made to Lard under the Deadlock procedure. 86 Seokoh viewed this offer as
generous, given that Section 10.2(e) entitled the non-breaching Member to purchase
the breaching Member’s interest at a 30% discount.87 Lard declined the offer.88
In response, on February 12, 2020, Seokoh brought an action in the New York
Supreme Court seeking specific performance of the Deadlock provision under
Section 14.3 of the Operating Agreement, based on Lard’s breach of the Operating
Agreement (the “Seokoh New York Action”).89 Lard responded by filing its own
complaint in the New York Supreme Court seeking specific performance against
Seokoh and Kolmar (the “Lard New York Action” and, together with the Seokoh
New York Action, the “New York Litigation”). 90 Both Members alleged the other
had breached the Operating Agreement and that the Members could not agree on the
85
Id.
86
Id.
87
Pet. ¶ 62.
88
Id.
89
Pet. ¶ 63.
90
Pet. ¶ 64.
19
price, structure, or enforcement of any buyout transaction in accordance with the
Deadlock provision.91 And both Members filed counterclaims. 92
On July 16, 2020, with the emergence of COVID-19 as a global health crisis,
Seokoh proposed to Lard a Member resolution to dissolve PTP in accordance with
the Operating Agreement at a special Board meeting proposed for July 27, 2020.93
Lard declined, demanding Seokoh buy out Lard. 94
On July 23, 2020, Seokoh filed with this Court its Verified Petition for Judicial
Dissolution, seeking to dissolve PTP under 6 Del. C. § 18-802. 95 Lard sought a
limited TRO in New York the same day to enjoin prosecution of this action, which
the New York court granted on July 27, 2020.96 Lard then sought summary
judgment, arguing Seokoh must buy out Lard’s interest in the Company for at least
$7.75 million because Seokoh’s filing of the Seokoh New York Action constituted
an irrevocable acceptance of an option contract. 97
91
Pet. ¶ 65.
92
Pet. ¶¶ 64–65; see also Lard’s Opening Br. in Supp. of its Mot. to Dismiss
(“Resp’t’s Opening Br.”) Ex. D. at 1–4 (D.I. 34).
93
Pet. ¶ 68.
94
Id.
95
D.I. 1.
96
Pet. ¶¶ 64–65, 71–72, 74.
97
Pet. ¶¶ 72–74; see Pet’r’s Answering Br. Ex. B.
20
The New York court issued its written opinion on the motion for summary
judgment on October 20, 2020 (the “New York Opinion”). 98 It rejected most of
Lard’s arguments, denied the motions for preliminary injunction and for summary
judgment, and dissolved the TRO against Seokoh.99 Relevant here, the New York
court held the following: (1) Lard breached the Operating Agreement by purporting
to appoint a CEO without Board approval; 100 (2) during the Deadlock process, Lard
again breached the Operating Agreement by interposing commercially unreasonable
terms not required or anticipated by the Operating Agreement, causing the Deadlock
process to fail; 101 (3) Lard breached the Operating Agreement for (at least) the third
time when it refused to proceed with the reverse buyout transaction, in which Seokoh
would buy out Lard’s interest under Section 10.2(e) of the Operating Agreement;102
and (4) Seokoh was not, as a matter of law, obligated to purchase Lard’s interest by
98
New York Op. at 1.
99
Id. at 34–35.
100
Id. at 18–19.
101
Id. The court concluded that Lard “fail[ed] to act commercially reasonably by, among
other things, refusing to hold a Board meeting to consider dissolution” as “the value of
[PTP] . . . decreased significantly,” making “Lard’s 49% interest . . . now worth
substantially less than even the discounted price of $7 million.” Id. at 18.
102
Id. at 25–26.
21
virtue of its having commenced a lawsuit against Lard to enforce its rights under
Section 10.2(e).103
G. PTP’s Status Quo
In the two years since the Deadlock process began, PTP has struggled to
maintain senior management. 104 It has been operating without a CEO since
January 2019, a Chief Operating Officer since September 2018, and a Sales Director
since October 2019.105 On October 9, 2020, PTP’s East Coast Director of Sales and
the last senior officer overseeing customer relations, Robin Fritz, left the company,
citing in her resignation letter the “absence of a CEO” and “ownership dispute/lack
of stability” as among the main reasons for her departure.106
PTP is being evicted from its current facilities without having identified an
alternative facility to which it will relocate.107 It has no financing and no prospects
of finding alternative financing.108 Its current assets barely exceed its current
103
Id.
104
See Pet. ¶ 78.
105
Pet. ¶ 78(a).
106
Pet. ¶ 75. Fritz explained, “[t]he ownership dispute has been ongoing for almost two
years and employees have no idea what the end goal is.” Pet’r’s Answering Br. Ex. D
(Fritz Email dated Oct. 9, 2020) (D.I. 40).
107
Pet. ¶ 78(b).
108
Pet. ¶ 78(c).
22
liabilities; 109 it has been operating at a loss since 2018; 110 and it is dependent on
government subsidies to make payroll. 111 Further, it is facing a $65 million lawsuit
brought by L’Oreal USA (“L’Oreal”) against PTP and Wormser Corp., in which
L’Oreal alleges breach of contract by Wormser Corp. for failure to provide an
adequate product. 112
H. Procedural History
Seokoh initiated this action on July 23, 2020, petitioning for a court-ordered
dissolution and appointment of a liquidating trustee of PTP. 113 It moved on the same
date to expedite proceedings.114 After the New York TRO was lifted, on
November 20, 2020, Lard filed its motion to dismiss. 115 Oral argument was held on
January 15, 2021, and the motion was submitted for decision that day.116
109
See Pet’r’s Answering Br. Ex. G (Balance Sheet and Profit & Loss Statement as of
Sept. 30, 2020) (D.I. 40); Pet. ¶ 78(c).
110
Pet. ¶ 78(d).
111
Id.
112
Pet. ¶ 55.
113
D.I. 1; Pet. ¶ 69.
114
D.I. 1.
115
D.I. 34.
116
D.I. 50 (“Oral Arg. Tr.”).
23
II. ANALYSIS
Lard’s motion requires the Court to determine whether Seokoh’s allegations,
taken as true, support its petition for judicial dissolution. For reasons that follow,
I am satisfied Seokoh has alleged a reasonably conceivable basis upon which judicial
dissolution would be warranted.
A. Standard of Review
“The pleading standards governing a motion to dismiss are minimal.”117
When considering a motion to dismiss under Chancery Rule 12(b)(6) for failure to
state a claim upon which relief may be granted, the Court must:
(1) accept all well pleaded factual allegations as true, (2) accept even
vague allegations as ‘well pleaded’ if they give the opposing party
notice of the claim, (3) draw all reasonable inferences in favor of the
non-moving party, and (4) [not dismiss the claims] unless the plaintiff
would not be entitled to recover under any reasonably conceivable set
of circumstances. 118
B. Judicial Dissolution of an LLC Under 6 Del. C. § 18–802
The Operating Agreement allows for the entry of a decree of judicial
dissolution under Section 18-802, which provides that “[o]n application by or for a
member or manager the Court of Chancery may decree dissolution of a limited
117
Matthew v. Laudamiel, 2012 WL 605589, at *12 (Del. Ch. Feb. 21, 2012).
118
Cent. Mortg. Co. v. Morgan Stanley Mortg. Cap. Hldgs. LLC, 27 A.3d 531, 535
(Del. 2011); see also Ct. Ch. R. 12(b)(6).
24
liability company whenever it is not reasonably practicable to carry on the business
in conformity with a limited liability company agreement.” 119 In this regard, a
petitioner seeking judicial dissolution in Delaware on the ground that it is no longer
reasonably practicable to carry on the LLC’s business need not “show that the
purpose of the [LLC] has been ‘completely frustrated.’”120 Rather, “[t]he standard
is whether it is reasonably practicable for [the LLC] to continue to operate its
business in conformity with its [Operating Agreement].”121
“Our law provides no blueprint for determining whether it is ‘not reasonably
practicable’ for an LLC to continue,” 122 but several factual circumstances indicative
of a lack of “reasonable practicability” have “pervaded the case law: (1) the
members’ vote is deadlocked at the Board level; (2) the operating agreement gives
no means of navigating around the deadlock; and (3) due to the financial condition
of the company, there is effectively no business to operate.”123 None of these factors
119
6 Del. C. § 18-802; OA § 10.1.
120
Fisk Ventures LLC v. Segal, 2009 WL 73957, at *4 (Del. Ch. Jan. 13), aff’d, 984 A.2d
124 (Del. 2009).
121
Id.122
In re GR Burgr, LLC, 2017 WL 3669511, at *5 (Del. Ch. Aug. 25, 2017).
123
Fisk Ventures, 2009 WL 73957, at *4.
25
is “individually dispositive; nor must they all exist for a court to find it no longer
reasonably practicable for a business to continue operating.” 124
While it is true, as Lard emphasizes, that judicial dissolution of an LLC is a
“limited remedy that this court grants sparingly,”125 dissolution may be warranted
even where an LLC is “technically functioning” and “financially stable” if the
petitioner can demonstrate that the entity is otherwise stuck within a “residual,
inertial status quo” that prevents it from “operating or from furthering its stated
business purpose.”126 In the alternative entity context, dissolution is warranted
where “the LLC’s management has become so dysfunctional or its business purpose
so thwarted that it is no longer practicable to operate the business, such as in the case
of a voting deadlock or where the defined purpose of the entity has become
impossible to fulfill.” 127 Whether the deadlock is operational or purpose-driven, this
court has emphasized that a judicial decree of dissolution is typically inappropriate
124
Id.125
In re Arrow Inv. Advisors, LLC, 2009 WL 1101682, at *2 (Del. Ch. Apr. 23, 2009).
126
Fisk Ventures, 2009 WL 73957, at *4 (citing Haley v. Talcott, 864 A.2d 86, 91, 96
(Del. Ch. 2004)).
127
Arrow Inv. Advisors, 2009 WL 1101682, at *2; see also Donald J. Wolfe & Michael A.
Pittenger, Corporate and Commercial Practice in the Delaware Court of Chancery,
§ 10.07[c][2], at 81–87 (2019) (collecting cases).
26
when the entity’s constitutive documents provide an equitable and effective means
of overcoming the deadlock.128
Lard contends Seokoh has failed adequately to plead a basis for judicial
dissolution under Delaware law because Seokoh has majority control of the Board.
Accordingly, Lard argues the purported deadlock is a product of Seokoh’s litigation-
driven imagination. Moreover, says Lard, even if Seokoh has adequately pled
deadlock, the Operating Agreement provides for a deadlock procedure that
comprehensively resolves the dispute. By Lard’s lights, Section 10.2(e) sets forth
an option that was irreversibly exercised by both parties when they initiated their
respective actions in New York. While the New York court has yet to determine
who, as between the Members, is entitled to exercise that option, or what price
should be paid in the exercise of the option, the option contract must, in all events,
be specifically performed. Dissolution would, under Lard’s “option theory,”
be unlawful.
Seokoh responds that the New York court has already rejected Lard’s “option
theory” on summary judgment, and Section 14.5(b) of the Operating Agreement
128
See Fisk Ventures, 2009 WL 73957, at *4; Vila v. BVWebTies LLC, 2010 WL 3866098,
at *7–8 (Del. Ch. Oct. 1, 2010); Lola Cars Int’l Ltd. v. Krohn Racing, LLC, 2010
WL 3314484, at *23–24 (Del. Ch. Aug. 2, 2010); cf. In re Arthur Treacher’s Fish & Chips
of Ft. Lauderdale, Inc., 386 A.2d 1162, 1166 (Del. Ch. 1978) (holding that the General
Assembly’s use of the word “may” in 8 Del. C. § 273(b) clearly indicates that the remedy
of judicial dissolution is discretionary).
27
makes clear that questions concerning the interpretation or enforcement of the
Operating Agreement are to be decided exclusively in New York. Even if this Court
elects to disregard the forum selection clause because it needs to construe the
Operating Agreement as it adjudicates the petition to dissolve PTP, Seokoh
maintains the Court should find persuasive the New York court’s rejection of Lard’s
option contract theory.
Because Seokoh’s invocation of the Operating Agreement’s forum selection
clause raises a threshold issue, I address that question first. I then turn to whether
Seokoh has well pled a claim for judicial dissolution.
C. The New York Forum Selection Clause and the New York Opinion
Both parties agree this Court has exclusive authority to dissolve PTP under
Section 18-802.129 Seokoh argues, however, that the Court lacks authority to
adjudicate Lard’s option theory because the Operating Agreement contains a clause
designating New York as the exclusive forum in which “any suit, action or
proceeding seeking to enforce any provision of, or based on any matter arising out
of or in connection with” the Operating Agreement must be brought.130 And the
New York court has already spoken on the issue. Thus, while Seokoh acknowledges
129
Pet’r’s Answering Br. at 29 n.136 (“[T]his Court is vested with exclusive jurisdiction
over the judicial dissolution of Delaware limited liability companies.”); Resp’t’s Reply Br.
at 1; see also 6 Del. C. § 18-802.
130
OA § 14.5(b).
28
“this Court may consider the adequacy of the Deadlock procedure with regard to
dissolution as a part of its jurisdiction over dissolution proceedings,” it asserts I must
not revisit the rulings in the New York Opinion because the parties agreed to
“have claims regarding the interpretation of the LLC Agreement heard before a New
York court.”131
With all respect for my colleague in New York, I cannot agree with Seokoh
that the New York Opinion is controlling in this statutory dissolution proceeding.
“Although the Court generally will respect the parties’ choice of forum, the parties
cannot contract for jurisdiction where it otherwise is unavailable.” 132 It is well-
settled in New York that New York courts do not have subject matter jurisdiction to
order dissolution of a foreign business entity; instead, that question is rightfully
addressed to the courts of the state in which the entity was created. 133 The New York
131
Pet’r’s Answering Br. at 29–30.
132
Sun Life Assurance Co. of Can. v. Gp. One Thousand One, LLC, 206 A.3d 261, 263
(Del. Super. 2019).
133
Raharney Cap., LLC v. Cap. Stack LLC, 25 N.Y.S.3d 217, 217–18 (N.Y. App. Div.
2016) (“[C]onsistent with decisions from the Court of Appeals, this Court, and our sister
departments of the Appellate Division, . . . the courts of this state do not have subject matter
jurisdiction to judicially dissolve a foreign business entity. Instead, the decision as to
whether dissolution is appropriate lies with the courts of the state in which the entity was
created.” (emphasis added)); see also Peter B. Ladig & Kyle Evans Gay, Judicial
Dissolution: Are the Courts of the State That Brought You In the Only Courts that Can
Take You Out?, 70 BUS. LAW. 1059, 1059, 1061 (2015) (arguing persuasively that “a court
cannot judicially dissolve an entity formed under the laws of another jurisdiction because
dissolution is different than other judicial remedies,” noting that “[j]ust as a state regulates
29
court, therefore, lacks jurisdiction to issue a decree of judicial dissolution for PTP.134
Seokoh opted to bring this judicial dissolution action in Delaware. To decide
whether dissolution is appropriate, it is appropriate for the Court first to consider
whether a viable exit mechanism exists in the event of Board deadlock. 135 According
to Lard, Section 10.2(e) functions as a viable exit mechanism for both Members and
has, in fact, been invoked as an irrevocable option: either Seokoh irrevocably
exercised its option to buy Lard’s interests in PTP when it filed the Seokoh New
York Action, or Lard exercised its option to sell its interests when it counterclaimed
in the Lard New York Action.136 Either way, Lard’s theory of the case is that Seokoh
has sealed its fate; it must buy out Lard and has no right, therefore, to seek to dissolve
PTP. By raising this defense to dissolution as a matter of law, Lard has effectively
placed at issue before this Court the Operating Agreement’s Deadlock procedure.137
the birth of an entity under its own laws without the interference or participation of its sister
states, so too should judicial dissolution be determined by the laws of the state of birth”).
134
To be clear, the New York court has never suggested it could or would entertain a
request to dissolve PTP. It appropriately decided the issues before it in the context of the
parties’ competing requests for decrees of specific performance of the Operating
Agreement.
135
Haley, 864 A.2d at 96.
136
See Resp’t’s Opening Br. at 1–2.
137
The court’s exclusive jurisdiction over dissolution distinguishes this case from Seokoh’s
cited authority, Ashall Homes Ltd. v. ROK Entm’t Gp., Inc. 992 A.2d 1239 (Del. Ch. 2010).
There, the court addressed whether a fraudulent inducement claim could be heard in any
court of competent jurisdiction despite the parties’ contractual choice of a particular forum.
30
While the New York court denied Lard’s motion for summary judgment on
the option theory, it did not enter a final decision on any live issues that are
implicated by this Court’s dissolution analysis.138 Seokoh stipulates, as it must, that
the New York Opinion is not binding under the doctrines of res judicata or collateral
estoppel, which apply only after a final determination is made on the merits.139
Further, the parties have agreed to stay the New York Litigation in favor of this
dissolution action.140 This Court, therefore, must decide certain issues addressed in
the New York Opinion as a matter of course prior to rendering any binding decision
on the Petition for Dissolution. 141
See id. at 1246–48 (enforcing a contractual forum selection clause). In this case, for reasons
explained, Seokoh’s petition for dissolution must be adjudicated in the Court of Chancery.
138
See New York Op. at 25–26, 34–35.
139
See Pet’r’s Answering Br. at 30–31; 135 Evergreen Corp. v. Delvalle, 115 N.Y.S.3d
804, 2019 WL 2275480, at *2 (N.Y. App. Term 2019) (“[R]es judicata, or claim preclusion,
requires a final adjudication on the merits.”); McGrath v. Gold, 36 N.Y.2d 406, 412 (N.Y.
1975) (“To invoke collateral estoppel, the issue of ultimate fact must have been determined
by a ‘final judgment.’”); see also In re Tr. FBO duPont Under Tr. Agreement Dated Aug. 4,
1936, 2018 WL 4610766, at *9 (Del. Ch. Sept. 25, 2018) (“[W]hen applying the preclusion
analysis to a judgment from another state, the foreign judgment should be given the same
effect that it has in the state of rendition with respect to the persons, the subject matter of
the action and the issues involved.” (internal quotations omitted)).
140
D.I. 52.
141
As discussed below, while not binding, I do find the New York Opinion persuasive.
31
D. Seokoh Has Adequately Pled That PTP’s Board Is Deadlocked
Under the Operating Agreement, PTP’s Board has the exclusive power to
manage the business and affairs of the Company.142 The Board is unable to act on
Reserved Matters unless the Members unanimously agree.143 Reserved Matters
include the acquisition of PTP’s facilities, the financing of the Company’s operations
and its dissolution.
While Lard points out that Seokoh has a tie-breaking vote on the Board for
garden variety matters, it wrongly claims this confers upon Seokoh
“the [unexercised] authority to break the claimed deadlock.” 144 As pled, for more
than two years, Seokoh and Lard have been unable to resolve their deadlock on
issues requiring their unanimous agreement—including, inter alia, the location of
PTP’s physical facilities, the Company’s financing, the appointment of a CEO and
now, the dissolution of the Company. 145 “[T]his court has rejected the notion that
one co-equal fiduciary may ignore the entity’s governing agreement and declare
himself the sole ‘decider.’”146 Neither Seokoh’s 51% ownership interest nor its tie-
142
See OA §§ 7.1, 7.2.
143
Id. § 8.6.
144
Resp’t’s Opening Br. at 13–15.
145
Pet. ¶¶ 24–27, 30–43, 58–59, 64–65, 78; New York Op. at 18–19.
146
See Vila, 2010 WL 3866098, at *1, 6–8 (ordering judicial dissolution after finding that
the manager of an LLC bound to cooperate with a co-equal manager had “unilaterally
32
breaking vote at the Board level offer a means to avoid the alleged source of the
parties’ deadlock.
Lard also asserts that Seokoh’s claims concerning Reserved Matters fail
because Seokoh has not alleged an instance where it sought approval, through Board
resolution, to move forward on any of those issues.147 Not surprisingly, Lard cites
no authority for the proposition that a petitioner must allege it sought to break a
deadlock through formal board resolutions in order to well plead that a board is in
deadlock. The Petition alleges that Seokoh and Lard discussed facilities and
financing on numerous occasions but could not agree on a path forward. 148 Delaware
law does not require a member to plead she made performative proposals she knew
would be dead-on-arrival as a predicate to seeking judicial dissolution. Such a
arrogated to himself decision making authority over” the company, and concluding “it is
not reasonably practicable for the LLC to operate consistently with its operating
agreement”); see also Acela Invs. LLC v. DiFalco, 2019 WL 2158063, at *33 (Del. Ch.
May 17, 2019) (citing Vila and holding, “[t]he same conclusion is compelled here”).
147
Resp’t’s Opening Br. at 16.
148
Pet. ¶¶ 46–48, 68, 79–80. For example, the CEOs and representatives of Kolmar and
Lard met on February 27, 2019 to resolve Reserved Matters but could not come to an
agreement. Pet. ¶¶ 46–48.
33
requirement would put form over substance, contrary to our law’s well-established
equitable principles.149 Seokoh has well pled deadlock. 150
Seokoh also has pled a reasonably conceivable basis to infer that PTP’s
financial condition leaves effectively no business for the Board to manage and
operate. By Lard’s account, PTP remains a viable business with significant streams
of revenue from multiple corporate clients.151 While Lard admits PTP is struggling,
it cites to then-Vice Chancellor Strine’s decision In re Arrow Investment Advisors,
LLC 152 to argue that the Company is a far cry from the “confluence of situationally
specific adverse financial, market, product, managerial, or corporate governance
circumstances [that] make it nihilistic for the entity to continue.” 153
Lard’s citation to Arrow Investments misses the mark. In that case, the court
addressed a purpose-driven dissolution petition filed after the LLC began pursuing
strategies that were not part of the original business plan but within the scope of the
LLC agreement’s purpose clause. Here, by contrast, Seokoh claims PTP’s Board-
149
Monroe Park v. Metro. Life Ins. Co., 457 A.2d 734, 737 (Del. 1983) (“[E]quity regards
substance rather than form.”); accord Gatz v. Ponsoldt, 925 A.2d 1265, 1280 (Del. 2007)
(“It is the very nature of equity to look beyond form to the substance of an arrangement.”).
150
With this said, Seokoh may ultimately fail to prove deadlock for precisely the reasons
identified by Lard in its motion to dismiss.
151
Resp’t’s Opening Br. at 31–34.
152
2009 WL 1101682 (Del. Ch. Apr. 23, 2009).
153
Arrow, 2009 WL 1101682 at *3.
34
level deadlock has ground Company operations to a halt. That distinct scenario was
confronted by the court (again by then-Vice Chancellor Strine) in Haley v. Talcott,154
where the court dissolved an LLC even though it continued to generate meagre
profits.155 The court reasoned that, while the business was “technically
functioning . . . [its] operation [wa]s purely a residual, inertial status quo,” and it was
“not credible that the LLC could, if necessary, take any important action that
required a vote of the members.”156
While the LLC in Haley differs from PTP in its requirement that the members
agree on any company act, and its “status quo” exclusively benefitted one of the 50%
members, Seokoh alleges the Company cannot act on critical issues and has negative
earnings. Specifically, Seokoh alleges:
• PTP has in the past relied on loans from Members to stay solvent, even in
times with positive economic tailwinds.157
• PTP must currently rely on government subsidies to meet its payroll
obligations.158
154
864 A.2d 86 (Del. Ch. 2004).
155
Id. at 91.
156
Id. at 96.
157
See Pet. ¶ 29.
158
Pet. ¶ 78(d).
35
• PTP’s losses are mounting, as it recorded a $1.2 million net loss for Q1 2020
and is projected to incur a $2.5 million net loss in Q2 2020.159
• PTP is confronting customer retention issues. 160
• A major customer of PTP brought suit against PTP and Wormser Corp.
claiming up to $65 million in damages.161
• PTP has defaulted on its $20.5 million lines of credit and is unable to obtain
any alternative financing. 162
• The Members disagree on business philosophy, facility expansion, the root
cause of and solution to the Company’s poor performance in 2018 and 2019,
the appointment of a CEO or other management positions and PTP’s lease,
among other issues fundamental to the Company’s survival.163
While Lard argues that Seokoh has not pled PTP is without revenue, profits are the
lifeblood of a company and Seokoh has well pled that PTP’s earnings are negative
as it struggles to make payroll. 164
159
Pet. ¶ 67.
160
Pet’r’s Answering Br. Ex. H at 19.
161
Pet. ¶ 55.
162
Pet. ¶ 78(c). Lard argues that because Kolmar is the source of PTP’s loan obligations,
PTP’s financial hardship is somehow Kolmar’s doing. See Oral Arg. Tr. at 42:19–43:2.
That contention cannot support dismissal, particularly at the pleading stage. Kolmar is
entitled to recover on loans it guaranteed for the parties’ joint venture; its past efforts to
help the Company succeed cannot now be thrown in its face in a dissolution proceeding
when those efforts failed.
163
Pet. ¶ 78(e).
164
Pet. ¶ 78(d).
36
Gripped in deadlock, hemorrhaging cash, defaulting on loans and unable to
appoint key management personnel, no wonder both Seokoh and Lard seek to exit
the Company one way or another. The evidence may ultimately support Lard’s view
of PTP’s financial fitness. But, for now, Seokoh has well pled that PTP’s
languishing financial condition favors dissolution.
While the Company’s deadlock and deteriorating financial condition support
Seokoh’s petition for dissolution, PTP is an LLC with an “I cut; you choose” exit
provision in its constitutive document. 165 “The Delaware LLC Act is grounded on
principles of freedom of contract. For that reason, the presence of a reasonable exit
mechanism bears on the propriety of ordering dissolution under 6 Del. C. § 18-
802.”166 With this in mind, I turn to the efficacy of the Operating Agreement’s
Deadlock procedure.
E. It Is Reasonably Conceivable the Deadlock Procedure Has Been
Rendered Ineffective
Where an LLC’s operating agreement “provides a fair opportunity for the
dissenting member who disfavors the inertial status quo to exit and receive the fair
market value of her interest,” then “it is at least arguable that the limited liability
company may still proceed to operate practicably under its contractual charter
165
See Haley, 864 A.2d at 96.
166
Id.37
because the charter itself provides an equitable way to break the impasse.”167
To obtain dismissal of a petition for judicial dissolution based on a contractual exit
plan, however, the movant must demonstrate, as a matter of law, that the exit
mechanism “can actually extract [the parties] fairly.”168
Lard argues the Deadlock procedure in the Operating Agreement
unambiguously and comprehensively provides a means to extract the Members from
any Deadlock that may exist. According to Lard, the Deadlock procedure within
Section 10.2(e) contemplates the creation of a binding option contract, identical to
the buyout provision held to be an irrevocable option contract in Walsh v. White
House Post Productions, LLC.169 Seokoh triggered this option when it sought an
order of specific performance to purchase Lard’s interest in the Seokoh New York
Action. According to Lard, Seokoh breached the Operating Agreement, triggering
the 30% enhancement in Section 10.2(e) and must now buy out Lard’s interest at a
purchase price of over $13,000,000.
Lard admits, as it must, that it is relitigating a claim already rejected by the
New York court. In the New York Opinion, the court held that Lard breached its
167
Id.168
Id.169
2020 WL 1492543 (Del. Ch. Mar. 25, 2020).
38
obligations under the Operating Agreement and Kolmar was, therefore, entitled to
revoke its offer to buy out Lard’s interest. The New York court explained:
Kolmar’s subsequent unilateral offers to resolve this matter including
bringing the Kolmar Lawsuit were not accepted prior to Kolmar
rescinding its prior offers to resolve this matter. Kolmar had a right to
rescind the March Deadlock Notice because the terms contained in the
Deadlock Notice were commercially reasonable (i.e., no one would
expect to have to continue to guaranty loans in a business that they are
exiting) and they continued to act in a commercially reasonable manner
including by attempting to call a meeting to seek dissolution of [PTP]
effectively rescinding its March Deadlock Notice which Lard refused.
Finally, no reading of the Operating Agreement supports the notion that
the Deadlock Provision is designed to have the acquiring member
satisfy [PTP’s] obligation to repay the member loans. Accordingly,
summary judgment is denied. 170
The parties stipulate that the New York Opinion did not squarely adjudicate Lard’s
option theory, however, because it held Lard materially breached the contract after
Kolmar offered to buyout Lard under the bargained-for Deadlock procedure.171
Contrary to Lard’s contentions, the New York court’s reasoning is consistent
with Delaware law. Even assuming arguendo that Section 10.2(e) contemplated an
option contract, Walsh itself makes clear that the exercise of an option creates an
“enforceable bilateral contract.”172 While Seokoh could not unilaterally revoke a
170
New York Op. at 26.
171
Id. at 25–26.
172
Walsh, 2020 WL 1492543, at *6.
39
binding bilateral contract in the ordinary course, “[a] party is excused from
performance under a contract if the other party is in material breach thereof.” 173
The New York Opinion rejected Lard’s option theory on the ground that Lard
breached Section 10.2(e) by insisting on commercially unreasonable terms and
failing to perform its obligations under the Deadlock provisions. This is a reasonable
construction of the Operating Agreement. By Lard’s own admission, the Deadlock
procedure’s text (or lack thereof) left material terms undefined, requiring that
“the parties would negotiate the open material terms (such as the closing date, the
174
extension on the lease, the supervision of the business until closing, etc.).”
But, according to the Petition (and the New York Opinion), Lard, among other key
points, refused to comply with Kolmar’s request for Lard to replace it as the
guarantor of PTP’s lines of credit upon buying out Kolmar’s Member interests.175
This arguably was commercially unreasonable, as Kolmar would no longer have any
part of the business, and yet Lard insisted it remain personally liable for the
Company’s credit.
173
BioLife Sols., Inc. v. Endocare, Inc., 838 A.2d 268, 278 (Del. Ch. 2003).
174
Resp’t’s Opening Br. Ex. D ¶¶ 34–35, 37 (“Seokoh’s Deadlock Notice failed to include
material terms necessary to consummate the sale of Seokoh’s interest to Lard.
By necessity, of course, Lard’s buyout of Seokoh’s interest in Process Tech was a . . .
complex transaction that would require further documentation – beyond simply the
purchase price – to transition the business from Seokoh to Lard, which would take time.”).
175
Pet. ¶¶ 51–52.
40
In these circumstances, it is reasonable to infer that Seokoh acted in accord
with its contractual rights when, in the June Letter, Kolmar’s CEO, Sang Hyun
Yoon, claimed that Lard had breached the Operating Agreement. 176 The June Letter
stated on behalf of Kolmar: “we hereby exercise our option to buy Lard-PT’s 49%
ownership in the Company [PTP] at US $10,000,000 in accordance with
Section 10.2(e) of the LLC Agreement.” 177 While Kolmar pointed out it “has the
right to buy Lard-PT’s Interest at a 30% discount under Section 10.2(e),” it was
“willing to pay the full price . . . out of good faith and in the interest of swift transition
of ownership,” but only “on the express condition that the deal be closed by July 31,
2019.” 178 Lard took no action. If Section 10.2(e) was an option turned binding
176
Lard confuses what Walsh refers to as “irrevocable” when the court discusses an
“irrevocable option.” See Resp’t’s Reply Br. at 19 (arguing “authority concerning the
excuse of performance in the face of supposed material breach is beside the point” because
“the exercise of an option is irrevocable”). The “irrevocable” nature of an option describes
its relationship to the offeror, not the offeree. 1 WILLISTON ON CONTRACTS § 5:16
(4th ed. 1993) (“During the option period the irrevocable offer may only be modified,
released or rescinded by agreement of the parties. It cannot be unilaterally withdrawn.”).
Under Lard’s option theory, then, the breaching Member could not revoke its “offer” to the
non-breaching Member for a reasonable period of time—hence the option’s
“irrevocability.” Once the non-breaching Member exercises the option, however, a
bilateral contract is formed. Id. Performance of that otherwise binding contract may be
excused in the event of a material breach, such as nonperformance. See DeMarie v. Neff,
2005 WL 89403, at *4 (Del. Ch. Jan. 12, 2005). As noted, Section 10.2(e) left open
material terms necessarily to be negotiated by the parties. In the event a party fails to
negotiate in good faith or otherwise fails to perform its end of the bargain, then its
counterparty is within rights to rescind its offer. Id.177
New York Op. at 14–16.
178
Id.41
bilateral contract upon its exercise, then Lard conceivably was in breach of
Section 10.2(e) by virtue of its nonperformance.179
Thus, months after its June Letter and its July deadline, with its counterparty
allegedly in breach and its own hands clean, 180 Kolmar conceivably could have sued
179
See BioLife, 838 A.2d at 278; see also 17A AM. JUR. 2D Contracts § 594 (2004) (“[I]f it
is clear that the parties intend that time is of the essence to a contract, timely performance
is essential to a party’s right to require performance by the other party. . . . It is a general
rule that one who contracts to complete work within a certain time is liable for the damage
for not completing it within that time, unless the delay is excused or waived.” (citations
omitted)); 14 WILLISTON ON CONTRACTS § 43:7 (4th ed. 1993) (“[E]ven in the absence of
a clause making time of the essence, time will generally be regarded as of the essence in
option contracts and in contracts for the sale of property which is subject to rapid
fluctuations in value.”).
180
Lard argues that Kolmar first breached the Operating Agreement by purchasing the land
where PTP maintains its offices, and “[a]s a general rule the party first guilty of a material
breach of contract cannot complain if the other party subsequently refuses to perform.”
Hudson v. D & V Mason Contrs., Inc., 252 A.2d 166, 170 (Del. Super. 1969). As a result,
Lard argues its alleged material breach must be excused once the infractions are reduced.
But even if Kolmar’s purchase of PTP’s land breached the Operating Agreement, that
breach would have occurred nearly two years prior to Kolmar’s exercise of its option.
See Pet. ¶ 26. Lard’s alleged course of conduct after Seokoh’s real estate purchase—
acquiescence to its acquisition and PTP’s continual compliance with the lease’s
(unchanged) terms—make it reasonably conceivable Lard waived any claim related
thereto. See 17A AM. JUR. 2D Contracts § 681 (2004) (“[A]nything that induces the other
party to perform an agreement after a default, or which shows that the agreement subsists
after a default, amounts to a waiver. . . . The waiver of a breach of contract may be shown
by an act that is so inconsistent with an intent to enforce the right that arises upon the breach
as reasonably to induce a belief that the right has been relinquished.” (citations omitted));
accord 23 WILLISTON ON CONTRACTS § 63:9 (4th ed. 1993) (“A party to a contract may . . .
waive a breach of a contractual provision without consideration or estoppel, if the waiving
party did not commit the breach, the breach does not involve a total repudiation of the
contract so that the innocent party continues to receive some of the bargained-for
consideration, and the innocent party is aware of the breach and intentionally waives the
right not to perform by continuing to perform or to accept the partial performance of the
breaching party. . . . The issue whether a [waiver] has occurred is typically one of fact for
the jury.” (citations omitted)).
42
Lard or rescinded the contract consistent with Delaware law. 181 While Kolmar
explored an accord and satisfaction with Lard as an alternative to litigation,182
Seokoh well pleads that nothing came of these efforts because Lard was either
unwilling or unable to enter into a separate agreement.183 Seokoh then filed a lawsuit
in New York seeking a remedy for Lard’s breach. Seokoh’s prayer for specific
performance of Section 10.2(e) represented to the New York court not only that an
underlying, legally cognizable agreement existed, but also that Lard breached the
agreement by failing to perform.184 Lard continued to resist performance throughout
that litigation; and its alleged nonperformance of a binding contract conceivably puts
it in continued breach of Section 10.2(e).
It is also reasonably conceivable that the breach is material, as Lard’s
repudiation allegedly extended PTP’s paralyzed status quo and, in doing so,
exacerbated its continued financial decline.185 Indeed, Seokoh seeks dissolution in
part because Lard’s interest is no longer worth the $7.75 million, at minimum,
181
Pet. ¶ 61; see DeMarie, 2005 WL 89403, at *4; BioLife, 838 A.2d at 278.
182
See Bhaskar S. Palekar, M.D., P.A. v. Batra, 2010 WL 2501517, at *9 (Del. Super.
May 18, 2010); 29 WILLISTON ON CONTRACTS § 73:27 (4th ed. 1993).
183
See Pet. ¶ 61.
184
See H-M Wexford LLC v. Encorp, Inc., 832 A.2d 129, 144 (Del. Ch. 2003).
185
See Pet. ¶¶ 75, 78.
43
it demanded when it initiated the Seokoh New York Action. 186 These factual
circumstances conceivably justify Seokoh’s subsequent refusal to perform, as a
“party may terminate or rescind a contract because of substantial nonperformance or
breach by the other party.” 187
The parties’ alleged inability to break their Deadlock makes plain the
Deadlock procedure’s shortcomings. The procedure does not mandate a price,
pricing formula or a closing timeline at which either Member can buy out the other;
negotiations regarding these terms are required as a matter of course. The parties to
the Operating Agreement clearly presumed that the Members would deal with each
186
Pet. ¶¶ 78–79.
187
DeMarie, 2005 WL 89403, at *4 (internal quotations and citations omitted). While Lard
contends that Seokoh continues to pursue a breach of contract action in New York for
$10 million in damages, and so never rescinded the March Deadlock Notice, this is not
improper as Seokoh may elect its remedy. See RESTATEMENT (SECOND) OF CONTRACTS
§ 378 (1981) (explaining that, where a party with a cause of action for breach of contract
“has more than one remedy,” that party’s “manifestation of a choice of one [remedy] by
bringing suit or otherwise is not a bar to another remedy unless the remedies are
inconsistent and the other party materially changes his position in reliance on the
manifestation”). Seokoh’s position in its New York action is that Section 10.2(e) is a
discretionary remedy for Lard’s failure to buy out Seokoh’s interest, akin to an acceleration
clause. Pet’r’s Answering Br. at 47–48. Under its construction, Seokoh is entitled to seek
a declaratory judgment and compensatory damages for Lard’s breach, measured as the
price Lard failed to pay after agreeing to purchase Seokoh’s interest in PTP. See Maravilla-
Diego v. MBM Constr. II, LLC, 2015 WL 4468625, at *5 (Del. Super. July 21, 2015).
The claim is also consistent with Section 14.3 of the Operating Agreement, which provides
that, “[a]ll rights and remedies existing under this Agreement are cumulative to, and not
exclusive of, any rights or remedies otherwise available, whether by contract, at Law,
in equity or otherwise.” OA § 14.3. In any event, the parties have elected to stay their
litigation activities in New York while this Court determines whether judicial dissolution
is justified.
44
other in a commercially reasonable manner and consummate the “divide and
choose” transaction in good faith. Based on the well-pled facts in the Petition, that
appears to have been wishful thinking. With PTP’s value in precipitous decline,
litigation between the parties breaking out in courts across the country and no end to
the deadlock in sight, I find it reasonably conceivable that judicial dissolution is
warranted.
III. CONCLUSION
For the foregoing reasons, Respondent’s motion to dismiss is DENIED.
IT IS SO ORDERED.
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