Sanjiv Mehra v. Jonathan Teller

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
SANJIV MEHRA, individually, and )
SAMRITA MEHRA, as trustee of the )
SANJIV MEHRA 2014 )
IRREVOCABLE TRUST, )
)
Plaintiffs, )
)
v. ) C.A. No. 2019-0812-KSJM
)
JONATHAN TELLER, EOS )
INVESTOR HOLDING COMPANY, )
LLC, ANGRY ELEPHANT CAPITAL, )
LLC, ANDREW SALTOUN, as )
successor trustee of the Teller Children’s )
2015 Trust, and SARAH SLOVER, )
)
Defendants. )
MEMORANDUM OPINION
Date Submitted: October 8, 2020
Date Decided: January 29, 2021
John L. Reed, Peter H. Kyle, Kelly L. Freund, DLA PIPER LLP (US), Wilmington,
Delaware; Patrick J. Smith, Brian T. Burns, Nicholas J. Karasimas, SMITH
VILLAZOR LLP, New York, New York; Counsel for Plaintiffs Sanjiv Mehra and
Samrita Mehra as Trustee of the Sanjiv Mehra 2014 Irrevocable Trust.
Jon E. Abramczyk, D. McKinley Measley, Alexandra M. Cumings, Elizabeth A.
Mullin, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware;
Counsel for Defendants Jonathan Teller, EOS Investor Holding Company, LLC,
Angry Elephant Capital, LLC, and Andrew Saltoun as Successor Trustee of the
Teller Children’s 2015 Trust, and Sarah Slover.
McCORMICK, V.C.
This case involves a dispute between Jonathan Teller and Sanjiv Mehra over
the dissolution of EOS Investor Holding Company, LLC (“Holdco”), a consumer
goods company. Before the disputed dissolution, the two shared control of Holdco
for years. Although Teller, a founder, held a greater equity stake in the company,
Mehra took responsibility for most of the company’s day-to-day management. The
two agreed that these contributions warranted granting Mehra equal say over
member and board decisions. The two also agreed that Mehra would have a right to
equal distributions above a specified threshold.
The parties’ agreements on shared control and equal distributions were
memorialized in Holdco’s LLC agreement. In relevant part, the LLC agreement
made Teller and Mehra managers on the two-person board and required unanimity
to effect board action. If Teller and Mehra deadlocked, the LLC agreement required
that Holdco would be automatically dissolved. In the event of a deadlock-based
dissolution, Holdco would distribute its shares of a first-tier subsidiary to Holdco
members in proportion to their equity stakes and the members would replicate
Mehra’s equal-distribution rights at the first-tier subsidiary level.
Thus, while Teller had to abide by the shared-control arrangement for as long
as the parties operated Holdco, the deadlock provision created a trapdoor with a hair
trigger. If Teller wanted out, he could propose a business divorce to the Holdco
board, declare deadlock if Mehra disagreed, and exit the shared-control arrangement.
After a few successful years, Holdco faced a series of setbacks, including a
lawsuit regarding its signature lip balm, failed product launches, resource-draining
international expansion, supply chain flaws, and a high rate of employee attrition.
Cash flow shortages and other financial difficulties followed. By 2018, distributions
had ceased, leaving Teller strapped for cash.
Holdco’s financial difficulties strained the parties’ relationship. Pressured by
personal liquidity issues, Teller became more critical of Mehra’s management. As
the financial decline deepened, Teller paid greater attention to employee complaints
about Mehra’s management style and misuse of company resources. Teller came to
blame Mehra for Holdco’s problems and determined to cut ties with Mehra.
In September 2019, Teller began meeting with lawyers and devised a plan that
would allow him to exit the shared-control arrangement. According to plan, Teller
noticed a meeting of the Holdco board, which took place on September 26, 2019.
Teller proposed a resolution at that meeting that would remove Mehra as the CEO
of a Holdco subsidiary. Mehra refused to vote on Teller’s proposal and countered
with a proposal to remove Teller from his positions. Teller declared the board
deadlocked and dissolved Holdco. Teller then distributed to Mehra his proportionate
equity in Holdco’s first-tier subsidiary. Teller failed to replicate Mehra’s equal-
distribution rights at the subsidiary level.
2
Mehra filed this lawsuit to invalidate the dissolution with the primary aim of
restoring the shared-control arrangement. Mehra argues that the deadlock was a
contrivance—an inauthentic dispute designed to deliver control over distributions to
a cash-strapped Teller. He contends that Teller was obligated to protect Mehra’s
interests but failed to do so. Mehra moved to expedite the case and, in response, the
court bifurcated the narrow issue of whether Holdco’s dissolution was invalid.
This post-trial opinion resolves that narrow issue in Teller’s favor. Although
Teller contrived the circumstances giving rise to deadlock, Teller proved that the
parties have an irreconcilable disagreement concerning Mehra’s continuing
management of Holdco. The deadlock, therefore, was genuine and sufficient to
warrant dissolution.
Mehra has proven, however, that Teller breached his obligations to replicate
Mehra’s right to equal distributions. Although this is not a basis to invalidate the
dissolution, Mehra will have future recourse against Teller for breach of this aspect
of the LLC agreement.
3
I. STATEMENT OF FACTS1
Trial took place over three days. As reflected in the Schedule of Evidence
submitted by the parties,2 the record comprises 848 trial exhibits, 3 live testimony
from six fact witnesses, 4 deposition testimony from ten fact witnesses, 5 and thirty-
six stipulations of fact. 6 These are the facts as the court finds them after trial.
A. A Brief History of EOS
The collection of entities that operates as “EOS” sells small consumer goods.
EOS’s signature product is a spherical lip balm.
Before the disputed dissolution, EOS comprised three entities: Holdco (or the
“Company”), a Delaware LLC; The Kind Group, LLC (“Kind,” or the “Kind
Group”), a New York LLC; and EOS Products, LLC (“Products”), a New York LLC.
1
The Factual Background cites to: C.A. No. 2019-0812-KSJM docket entries by docket
(“Dkt.”) number; trial exhibits (cited by “JX” number); the trial transcript by page and line
numbers (Dkts. 200–02) (cited as “Trial Tr.”); deposition transcripts lodged with the Court
(Dkt. 186 Exs. A–K) (cited as “Dep. Tr.”); and facts stipulated in the parties’ Joint Pre-
Trial Stipulation and Order (Dkt. 188) (cited as “PTO”).
2
See Dkt. 212, The Parties’ Joint Sched. of Evid.
3
Id. Ex. A.
4
See Trial Tr. at 322, 642, 927 (listing witness testimony by day).
5
The Parties’ Joint Schedule of Evid. Ex. B.
6
PTO ¶¶ 21–56.
4
Teller and Mehra and affiliated entities owned all of the equity of Holdco.7
Holdco owned 66.3% of Kind; 8 the remaining 33.7% of Kind’s membership interest
was owned by Teller, Mehra, an investment vehicle owned by Teller and his mother
called Angry Elephant Capital, LLC (“Angry Elephant”), and various other EOS
employees.9 Kind wholly owned Products, the operating entity. 10
Teller started Kind in 2006 with a friend, non-party Craig Dubitsky. 11 Teller
personally financed the company for the first few months 12 and then provided
financing through Angry Elephant. 13
Mehra joined Kind in early 2008. By then, Kind had developed its first
product, a shaving cream, 14 and Teller and Dubitsky had formed Products as Kind’s
7
Id. ¶¶ 22–23, 25–26.
8
Id. ¶ 29.
9
Id. The pre-trial order cites to JX-459, a document detailing ownership of Kind as of
September 25, 2019. See id.; JX-459. The ownership percentages in the pre-trial order do
not add up to 100%. The actual breakdown of membership interests is as follows: 66.46%
Preferred Interests, 0.15% Class A Interests, 26.72% Class B Interests, and 6.67% Class C
Interests. See JX-459. Regardless, it suffices for the purpose of this decision to note that,
since its formation, Holdco had complete managerial control over Kind. See PTO ¶¶ 29,
38.
10
Id. ¶ 31.
11
PTO ¶ 35; Trial Tr. at 391:4–10 (Teller).
12
Trial Tr. at 391:11–19 (Teller).
13
Id. at 395:3–8 (Teller); see id. at 389:19–390:2 (Teller) (describing Angry Elephant’s
ownership and purpose).
14
Id. at 392:5–8, 22–23 (Teller).
5
operating subsidiary. 15 Mehra had the operational experience to commercialize
EOS’s products. 16 At first, Mehra acted as a consultant, offering guidance regarding
commercialization of the shaving cream, advising on the competitive landscape of
consumer goods, and providing access to his professional network. 17
Kind released its shaving cream to the market in March 2008. 18 Next, Kind
began developing a spherical lip balm, which it released in early 2009. 19 During this
time, Dubitsky left EOS, and Mehra’s role at EOS expanded.20 By the end of 2008,
Mehra was working full time for EOS. 21 Mehra took “full responsibility for
everything,” managing EOS and helping “Teller raise money for the business.” 22
Fueled by the success of its spherical lip balm, EOS became profitable toward
the end of 2011.23 That year, Mehra broadened his influence within the Company
in two ways.
15
PTO ¶ 35 (“Products was formed as an operating entity in 2008 . . . .”). But see Trial Tr.
at 395:1–2 (Teller) (“[I]n November of 2007, we set up an LLC, EOS Products, LLC”).
16
Trial Tr. at 395:19–21 (Teller); Id. at 12:2–23 (Mehra).
17
Id. at 14:13–22 (Mehra).
18
Id. at 393:1–2 (Teller).
19
Id. at 394:3–9, 398:22–5 (Teller).
20
See id. at 399:11–400:15 (Teller); id. at 18:21–19:1 (Mehra).
21
PTO ¶ 36; Trial Tr. at 398:7–10 (Teller); id. at 15:12–18 (Mehra).
22
Id. at 20:18–23 (Mehra).
23
Id. at 25:5–8 (Mehra).
6
First, Mehra acquired equity. After a restructuring, Mehra controlled
approximately 15% of the membership interests in Holdco. 24 Teller controlled 85%
of the membership interests through his interests (70%) and Angry
Elephant’s (15%).25
Second, Teller and Mehra decided that they would share managerial control.
Mehra and Teller agreed that Mehra’s influence would be equal “from an operational
perspective,” despite Teller’s controlling interest.26
B. The LLC Agreement
Teller and Mehra executed an LLC Agreement for Holdco in 2011.27 They
amended the agreement twice—once in 2014 and once in 2016. 28 This decision
refers to the agreement in its final form as the “LLC Agreement” or the “2016 LLC
Agreement,” and the prior versions as the “2011 LLC Agreement” and “2014 LLC
Agreement.”
24
JX-3 Ex. A.
25
Id.
26
Trial Tr. at 23:19–23 (Mehra).
27
JX-3.
28
See JX-17 (amending and restating the Holdco LLC Agreement on July 29, 2014); JX-
33 (amending and restating the Holdco LLC Agreement on May 26, 2016).
7
1. The Shared-Control Arrangement
The LLC Agreement memorializes the parties’ agreement on shared control
by granting Mehra veto power over decisions made at both the Member level and
the Manager level.
The parties’ codified their shared control over Holdco in Sections 3.03
and 4.01 of the LLC Agreement, which impacted decision-making at both the
Member level and the Manager level.
At the Member level, Section 3.03 of the LLC Agreement holds that whenever
“any . . . approval or consent is required to be given by the Company, by vote or
otherwise, it shall be authorized upon receiving the affirmative vote of the Members
holding not less than 90% of the Membership Interests.” 29
At the Manager level, the LLC Agreement established a two-person Board of
Managers (the “Board”) comprising Mehra and Teller. Section 4.01 of the
agreement locks the two principals into that position “[u]nless and until” one of them
resigns or their removal is approved “by a vote in writing of Members holding not
less than 90% of the Membership Interests.” 30
Section 4.01 of the LLC Agreement further provides that “[n]o Manager shall
individually have the authority to bind the Company,” and that a Manager “may only
29
LLC Agreement § 3.03.
30
Id. § 4.01; JX-16.
8
bind the Company through actions taken or approved by the Board of Managers in
accordance with the terms of this Agreement.”31
Operating together, Sections 3.03 and 4.01 prevent Teller from using his 85%
Membership Interest to unilaterally remove Mehra as Manager or take other action
on behalf of Holdco without Mehra’s consent while Holdco is operative.32
Section 4.03 requires that Teller and Mehra act “at all times in good faith and
in such manner as may be required to protect and promote the interests of the
Company and the Members.”33 The LLC Agreement does not waive or eliminate
fiduciary duties under Delaware law.
2. The Distribution Scheme
The 2011 LLC Agreement included the typical language providing that
distributions would be made “pro rata in accordance with [Members’] respective
Membership Interests.” 34 Given Teller’s roughly 85% stake in the Company, this
provision entitled Teller to the vast majority of Holdco’s distributions. EOS,
however, proved remarkably successful between 2011 through 2014 under Mehra’s
leadership. Thus, by 2014, the parties agreed to increase Mehra’s economic rights
to available cash flows. They altered the distribution scheme to reflect those rights.
31
LLC Agreement § 4.01.
32
See id. §§ 3.03, 4.01; see also JX-264 at EOS00012803.
33
LLC Agreement § 4.03.
34
JX-3 § 7.01(a)(i); see also id. Ex. A.
9
Article VII of the LLC Agreement governs “Distributions, Allocations of
Income and Losses,” and Section 7.01(a) governs “Distributions” aside from those
made to cover tax losses.35
The 2014 LLC Agreement amended Section 7.01(a) by requiring that
distributions of proceeds be made based on “Revised Sharing Percentages,” a
defined term that entitled Teller and Mehra each to roughly 49% of the distributions
(and Angry Elephant to the remainder).36 To make Teller and Angry Elephant whole
for their larger capital investment, however, the LLC Agreement included an
exception to the equal-distribution scheme.37 As to distributions of “Extraordinary
Proceeds,” which were proceeds from a sale or similar transaction, the parties agreed
that distributions would be made pro rata until the aggregate distributions hit a $250
million threshold. 38
By 2016, the parties had agreed to simplify the distribution scheme. The 2016
LLC Agreement eliminates the distinction between ordinary proceeds and
Extraordinary Proceeds and provides that all proceeds be distributed proportionate
to the parties’ Membership Interests until distributions in the aggregate (dating back
35
JX-3 Art. VII.
36
JX-17 § 7.01(a)(ii), Ex. A; see also id. § 1.01 (defining “Revised Sharing Percentages”).
37
Trial Tr. at 33:2–21 (Mehra) (explaining the parties’ rationale for deviating from equal
distributions to “give money back to [Teller’s] mother” for Angry Elephant’s investment
and to ensure “money returned to equity holders”).
38
JX-17 § 7.01(a)(iii); see also id. § 1.01 (defining “Extraordinary Proceeds”).
10
to July 29, 2014, the date of the 2014 LLC Agreement) hit a threshold of
approximately $190 million. 39 After meeting the threshold, the distribution scheme
would switch to the equal-distribution arrangement based on the Revised Sharing
Percentages. 40 For simplicity, this decision refers to the terms of Section 7.01(a)(ii)
as the “Equal-Distribution Arrangement.”
In its final form, Section 7.01(a)(ii) provides as follows:
Unless otherwise determined by the Managers, all
Distributions shall be made to the Members pro rata in
accordance with their respective Membership Interests;
provided, however that, from and after the time that
aggregate Distributions to the Members equal the
Threshold, all subsequent Distributions shall be made to
39
See LLC Agreement §§ 1.01, 7.01(a)(ii).
40
Id. § 7.01(a)(ii); see also id. Ex. A (listing percentages). The following chart tracks the
evolution of the parties’ distribution scheme.
Ordinary Distributions Extraordinary Proceeds Distributions
2011 LLC Distributed based on Membership No exception for Extraordinary
Agreement Interests (JX-3 § 7.01(a)(i)). Proceeds.
(JX-3)
2014 LLC Distributed based on Revised Sharing Distributed based on Membership
Agreement Percentages (JX-17 § 7.01(a)(ii)). Interests until $250 million threshold
(JX-17) achieved. After achieving threshold,
distributed based on Revised Sharing
Percentages (JX-17 § 7.01(a)(iii)).
2016 LLC Distributed based on Membership No exception for Extraordinary
Agreement Interests until $190 million threshold Proceeds.
(JX-33) achieved. After achieving threshold,
distributed based on Revised Sharing
Percentages (LLC Agreement
§ 7.01(a)(ii)).
11
the Members in accordance with their respective revised
sharing percentages as set forth on Exhibit A attached
hereto.41
3. The Deadlock Provision
The deadlock provision at the heart of this dispute is found in Article IV
(governing “Board of Managers”), Section 4.10 (governing “Action by Vote”) of the
LLC Agreement.42
The Board structure established by the LLC Agreement had the effect of
necessitating a unanimous vote of the Managers to authorize any Board action.43
This unanimity requirement set up the potential for deadlock.
Section 4.10 provides a way out of a deadlock, although a radical one: “[I]n
the event the vote upon an action by the Board of Managers results in a deadlock,
then the Board of Managers shall dissolve the Company in accordance with Article
41
LLC Agreement § 7.01(a)(ii). The 2016 LLC Agreement also revised the Membership
Interests allocations in Exhibit A to list four Members of the Company: Teller, with
roughly 67.67% of the Membership Interests, Angry Elephant, with roughly 1.16% of the
Membership Interests, the Teller Children’s 2015 Trust, with 16% of the Membership
Interests, and the Sanjiv Mehra 2014 Irrevocable Trust, with roughly 15.16% of the
Membership Interests. LLC Agreement Ex. A. It also grouped the Members into
“Jonathan Teller and Permitted Transferees,” comprising the first three Members, and
“Sanjiv Mehra and Permitted Transferees,” comprising only the Sanjiv Mehra 2014
Irrevocable Trust. Id. Lastly, it changed the Revised Sharing Percentages to 50% for Teller
and his entities, and 50% for Mehra’s trust. Id.
42
LLC Agreement Art. IV; id. § 4.10.
43
See LLC Agreement § 4.10; see also PTO ¶ 24 (“Mehra and Teller were the sole
members of EOS Holdco’s Board of Managers.”).
12
X.”44 Put differently, this clause—which this decision refers to as the “Deadlock
Provision”—mandates (“shall”) that dissolution follow from an event of deadlock.
Section 4.10 further dictates the procedure for Holdco’s dissolution in the
event of deadlock. The relevant language is found in a proviso trailing the Deadlock
Provision. The parties agreed that Mehra and Teller would receive distributions of
the Kind shares held by Holdco proportionate to their Holdco Membership Interests
and that they would replicate the Equal-Distribution Arrangement at the Kind level.
In full, Section 4.10 provides:
[I]n the event the vote upon an action by the Board of
Managers results in a deadlock, then the Board of
Managers shall dissolve the Company in accordance with
Article X; provided that notwithstanding anything to the
contrary contained herein, in connection with such
dissolution, the membership interests of Kind [LLC] then
held by the Company . . . shall be distributed to the
Members pro rata in accordance with their respective
Membership Interests and each of the Members shall take
such actions as are necessary or appropriate to give effect
as members of Kind to the economic arrangements among
the Members set forth in Section 7.01(a)(ii) (i.e., it is the
intent of the Members that, as between such Members, the
same distribution provisions shall apply as Members of the
Company or as members of Kind). 45
44
LLC Agreement § 4.10 (emphasis added).
45
Id.
13
Section 4.10 was adopted as part of the 2014 LLC Agreement. EOS’s outside
counsel, Morrison Cohen LLP, drafted the 2014 LLC Agreement, and Teller and
Mehra were involved in the process.
One aspect of the drafting history warrants mention. The parties specifically
negotiated the last clause of Section 4.10 requiring that the Equal-Distribution
Arrangement be replicated at the Kind level upon a deadlock-based dissolution. As
discussed above, Mehra negotiated for the Equal-Distribution Arrangement as part
of the 2014 LLC Agreement. Through the drafting process, the parties addressed
the question of whether units of Kind would be distributed according to Membership
Interests or according to the Revised Sharing Percentages.
The issue was first raised in a June 23, 2014 redline of the LLC Agreement
prepared by Morrison Cohen attorneys in the form of a bracketed note at the end of
the proposed text of Section 4.10:
Each member of the Board of Managers shall be entitled
to one (1) vote on each action submitted to the Board of
Managers unless otherwise provided herein. Except as
may be otherwise provided by law or this Agreement,
when a quorum is present at any meeting, the vote . . . of
all of the Managers shall be the act of the Board of
Managers; provided, however, in the event the vote upon
an action by the Board of Managers results in a deadlock,
then the Board of Managers shall vote to dissolve the
Company in accordance with Article X. [discuss whether
14
preferred units would be distributed in accordance with
revised sharing percentages.] 46
Mehra reviewed and commented on this draft and the proposed language of
Section 4.10 specifically. 47 He proposed that the Kind stock be distributed according
to the Revised Sharing Percentages, but that the parties escrow any Extraordinary
Proceeds to ensure that they were distributed proportionate to Membership Interests
until the aggregate distributions reached a threshold.48 Teller agreed to this proposal
without comment.49
A Morrison Cohen attorney responded to Mehra’s comments by proposing an
alternative designed to “[kick] the can down the road.”50 Rather than distribute Kind
stock based on the Revised Sharing Percentages, the attorney suggested that the
parties agree to replicate the Equal-Distribution Arrangement at the Kind level.51
Teller forwarded the email suggesting this approach to Mehra with the note:
46
See JX-11 § 4.10 (emphasis added).
47
See, e.g., JX-10 (emailing comments on drafts of the LLC Agreement between Teller,
Mehra, and attorneys at Morrison Cohen), JX-12 (same), JX-14 (same).
48
JX-11 (June 26, 2014 email from Mehra proposing language for the LLC Agreement
that he believed would reflect “an agreement between Members that continues beyond the
life of eos Holdings”); id. (Mehra proposing that “[o]n dissolution of eos Holdings, we
distribute the Preferred Units (which is the only asset of the business) to members in the
Sharing Ratio”).
49
JX-15.
50
Id.
51
Id.
15
“Thoughts?”52 Mehra responded: “That’s fine.”53 The parties thus reached an
understanding reflected in the final language of Section 4.10 as follows: “[T]he
Members shall take such actions as are necessary or appropriate to give effect as
members of Kind to the economic arrangements among the Members set forth in
Section 7.01(a)(ii) (i.e., it is the intent of the Members that, as between such
Members, the same distribution provisions shall apply as Members of the Company
or as Members of Kind).” 54
C. EOS’s Financial Decline Strains the Parties’
Relationship.
Prior to the disputed dissolution, Mehra and Teller were also the sole
Managers of Kind in addition to being co-Managers of Holdco. Kind in turn was
the sole Manager of Products. Mehra and Teller were also co-CEOs of Products.
Although the parties held co-equal titles, Mehra made most of the business decisions,
to which Teller generally deferred.55
The co-management arrangement worked well during the early years of
Mehra’s tenure when the Company experienced remarkable success. The Company
52
Id.
53
Id.
54
LLC Agreement § 4.10.
55
See generally PTO ¶¶ 24, 30, 32, 39; Trial Tr. at 412:15–16, 683:10–12, 685:17–18
(Teller); id. at 64:3–9, 385:23–386:8 (Mehra).
16
first turned a profit in 2011 and revenue doubled every year after, 56 hitting the high-
water mark of about $182 million 2015. 57
During these halcyon days, Mehra and Teller were a highly effective team.
At work, they shared an office and “sat less than a foot and a half apart from each
other during that time.” 58 Outside of work, they were good friends. They shared
meals. 59 Their families went on vacations together.60 Teller knew Mehra’s son well
and would advise him on career and business decisions.61 Teller’s wife took Mehra’s
daughter shopping for prom dresses. 62 Teller made Mehra trustee of a Teller family
trust that held 16% of Teller’s interest in Holdco. 63
56
Trial Tr. at 25:12–15 (Mehra); id. at 407:2–4 (Teller).
57
JX-169a at 6.
58
Trial Tr. at 28:4–5 (Mehra); see also id. at 426:1–7 (Teller) (describing their working
relationship as like “a married couple, in that we spent all this time together . . . he just
feels more comfortable with me and is willing to let loose a little bit more”).
59
Trial Tr. at 34:4 (Mehra).
60
Id. at 34:4–5 (Mehra).
61
Id. at 34:5–34:20 (Mehra).
62
Id. at 35:5–8 (Mehra).
63
Id. at 35:11–24 (Mehra); LLC Agreement Ex. A.
17
Beginning in 2016, however, EOS’s revenue began to decline precipitously,
eventually reaching as low as $106 million in 2018.64 By 2019, the Company had
experienced four consecutive years of declining performance. 65
The beginning of EOS’s financial decline can be traced to a 2016 class-action
lawsuit claiming that EOS’s lip balm caused a rash,66 but a series of business
decisions that followed the lawsuit were contributing factors. 67 For example, the
Company had expanded into international markets without a well-developed
business plan,68 and the international operations depleted the Company’s cash
64
JX-169a at 6. Periodic reports on the value of the Company prepared by an outside firm
showed that the Company value reached a high of nearly $600 million in 2015
($582,000,000) and then dropped to under $80 million ($76,900,000) in 2018, representing
a loss in enterprise value of more than half a billion dollars in less than three years.
Compare JX-20a at SM_QuickPeek_00774375 (valuing Kind as of April 30, 2015), with
JX-169a at 2 (valuing Kind as of December 31, 2018). The valuation reports valued the
Kind Group, whose “sole material asset” is a Class A Membership Interest in Products.
JX-169a at 1, 48.
65
See JX-169a at 16.
66
Id. at 6; Trial Tr. at 61:12–62:1, 68:8–17 (Mehra).
67
See, e.g., Trial Tr. at 429:1–430:13 (Teller) (identifying problems in EOS’s “top-line
performance,” “international businesses,” and lack of innovation making the Company “a
one-trick pony,” in addition to the 2016 class action lawsuit).
68
EOS established foreign operations in China, Hong Kong, Germany, Poland, Sweden,
the United Kingdom, and Mexico. See generally id. at 69:24–71:12 (Mehra). The
expansion plan was imperfect. The international operations lacked “formal business
plans,” and by 2017 the “numbers look[ed] terrible. . . . relative to their budgets and the
expectations they had set” for the international business. Id. at 302:13–19, 306:8–10
(Mehra).
18
balances.69 The Company lacked a line of credit, which could have helped it manage
its cash flow issues.70 The Company also launched a product, “Crystal,” to help
correct its image on the market after the lawsuit, but the launch was rushed and the
product was unstable; the product ultimately created more problems than it solved.71
The Company then transitioned its supply chain to a small overseas manufacturer,
69
EOS’s international subsidiaries failed to produce necessary cash flow back to Products,
which left that debt on EOS’s books as unpaid receivables. See Landsberg Dep. Tr. at
82:4–13, 86:11–92:7. Products continued funding those businesses, resulting millions of
dollars in losses for EOS by mid-2019. See JX-62 at SM_QuickPeek_00106125; Mehra
Dep. Tr. at 275:23–276:8, 277:20–280:7, 281:15-283:3; Trial Tr. at 778:10–13
(Landsberg).
70
The Company’s depleted cash balances prompted Flavia Landsberg, who had joined
EOS as CFO in February 2017, Trial Tr. at 776:24–777:6 (Landsberg), to recommend that
the Company obtain a credit facility, id. at 778:2–779:4 (Landsberg). Mehra had
Landsberg search for outside financing. Before leaving the Company in November 2018,
id. at 804:19–21 (Landsberg), Landsberg negotiated a term sheet for a credit line from
HSBC Bank USA, National Association (“HSBC”), see JX-81a; JX-92a; JX-93 Trial Tr.
at 779:16–780:10 (Landsberg). Although most lenders required audited financials, Trial
Tr. at 184:21–185:23 (Mehra), the HSBC term sheet would have allowed EOS access to
cash based on an initial field exam of EOS’s financials, JX-93; Trial Tr. at 193:21–194:6
(Mehra). After Landsberg’s departure, Mehra took charge of EOS’s finances. Trial Tr. at
875:12–13 (Pasqualini); Mehra Dep. Tr. at 182:14–183:1. In that role, Mehra did not
complete the deal with HSBC or obtain audited financials to facilitate other financing
options. See JX-105; Trial Tr. at 866:9–18 (Pasqualini). By September 2019, EOS still
had not obtained a credit facility. See JX-158; JX-198 at 6; Trial Tr. at 197:14–16 (Mehra).
Ultimately, Teller and Mehra personally loaned money to the Company to cover cash flow
needs. Trial Tr. at 183:8–10 (Mehra).
71
The Company launched the Crystal lip balm in 2017 in reaction to the negative publicity
from the class action lawsuit. Trial Tr. at 82:2–83:5 (Mehra). As it turned out, the product
suffered from significant stability and packaging issues—oils seeped out of its packaging,
for example. Id. at 307:10–308:11 (Mehra). Crystal was the subject of about 90% of all
customer complaints categorized as “‘unusable product’ tags” received by the Company in
September 2018. JX-90 at SM_QuickPeek_00100976–78. Teller and Mehra agree that
the product launch was a failure. Mehra Dep. Tr. at 303:2–303:16; Teller Dep. Tr. at
91:14–92:9.
19
which later proved incapable of handling EOS’s business.72 As a result, EOS’s
relationship with its major customers became strained.73
EOS’s financial decline also strained the parties’ relationship, although not as
early in the timeline as Teller claimed in this litigation. With the benefit of hindsight,
part of Teller’s litigation strategy was to blame Mehra for all of the operational
decisions that contributed to the Company’s financial decline and to suggest that
Teller was increasingly dissatisfied with Mehra as those decisions were being made.
72
In late 2018, while managing EOS’s supply chain, Mehra explored moving production
of EOS’s products to Absara, a manufacturer in Mexico. Trial Tr. at 312:20–313:8
(Mehra); id. at 827:18–21 (Garg). EOS transitioned to Absara in June 2019 and, within a
month, experienced “issues filling orders” due to the poorly planned transition and to
EOS’s order projections that did not accurately reflect demand for its products. Id. at
313:7–17 (Mehra); id. at 828:1–830:8 (Garg). In May 2019, EOS hired a supply chain
manager, Pankaj Garg. Id. at 820:10–15 (Garg). Garg testified that coordination problems
and the Absara transition caused EOS to lose “maybe like 10 to $15 million in revenue
because of Absara” in the third quarter of 2019. Id. at 827:1–3 (Garg). Also, Absara was
a smaller manufacturer and lacked the financial resources required to take on the EOS
business, necessitating “many prepayments for product.” Id. at 868:10–18 (Pasqualini);
id. at 826:4–22 (Garg). Absara’s need for up-front cash and EOS’s inaccurate demand
projections yielded delays and supply shortages that impacted sales. Id. at 827:5–12
(Garg); JX-180. EOS’s supply chain further suffered from high employee attrition—in one
six-week period, half of EOS’s supply chain employees left the Company. Trial Tr. at
822:17–21 (Garg); see JX-156.
73
See, e.g., JX-121 (relaying Costco’s complaints regarding Crystal); JX-216 at
SM_QuickPeek_00314665–66 (describing cuts on orders and the impact it had on EOS’s
business relationships and credibility with customers); JX-165 (rationing product among
customers due to insufficient supply); JX-701 (noting that supply chain failures had
undermined EOS’s credibility); see also Garg Dep. Tr. at 53:18–21, 55:12–14, 56:17–23
(testifying that Costco and Wal-Mart were two of EOS’s larger customers and that there
was a “big mismatch” between case-fill rate numbers reported by these customers and those
used internally at EOS); Mehra Dep. Tr. at 336:16-337:2 (testifying as to a loss of about
$400,000 worth of Costco orders in Aril 2019 due to issues with Absara).
20
But Mehra proved that Teller was highly deferential to Mehra’s business decisions
such that when the criticized decisions were made, Teller tacitly endorsed them.
Mehra also demonstrated that Teller was the driving force behind some of the
decisions Teller now criticizes.74 Mehra further proved that other decisions seemed
reasonable at the time even though they simply did not work out. 75 In the end,
Teller’s tacit endorsement of the business plan in real time makes many of his
rationalizations in this litigation seem insincere.
Although aspects of Teller’s litigation narrative are hard to believe, the record
reflects that Teller did in fact begin to question Mehra’s management decisions in
the year leading up to the disputed dissolution. The timing of Teller’s skepticism
coincided with Mehra’s decision to stop authorizing distributions to Holdco’s
Members.
74
For example, Mehra explained at trial that Teller pushed for expansion into the Chinese
market because he spoke Chinese, had conducted business there, and met his wife in China.
Trial Tr. at 70:2 –71:24 (Mehra).
75
For example, Mehra explained at trial that although Crystal was brought to market with
some urgency, it “tested extraordinarily well,” had been in development “for the past four
or five years,” and that Teller “agreed that it was the right thing to do.” Id. at 82:7–83:20
(Mehra).
21
1. EOS Ceases Distributions to Teller.
From 2011 through 2018, Teller and his affiliated entities received nearly
$100 million in distributions from EOS. 76 During trial, Teller tried to downplay the
significance of the distributions by claiming that “most” of the money went to pay
taxes, but this assertion was unsupported by the record. 77
Mehra testified that Teller’s desire for cash drove the timing and amounts of
distributions. 78 Contemporaneous communications support this testimony. Emails
around the time of certain distributions show Teller requesting cash to finance his
personal needs. 79 Mehra testified that he disagreed with the wisdom of making the
76
Trial Tr. at 552:11-553:16 (Teller); see JX-496 (showing W-2 income of $13.7 million
to Teller); JX-510 (showing about $85.6 million in distributions to Teller, Angry Elephant,
and the Teller Trust).
77
Trial Tr. at 543:2–13 (Teller). Teller offered no documentary proof of how much tax he
paid, id. at 544:12–549:6 (Teller), and the amounts distributed to Teller and his associated
entities exceeded a rough-estimated tax rate of 50% of the attributed income. See JX-510.
78
Trial Tr. at 37:10–38:6, 40:23–42:12 (Mehra).
79
See, e.g., JX-610 (Aug. 2013 email from Teller: “I will need to take $1 million near
term”); JX-612 (Feb. 2014 email from Teller asking about “how much I can take out” to
purchase a Park Avenue apartment); JX-613 (May 2014 email from Mehra authorizing a
$4 million off-cycle bonus to Teller); JX-615 at SM_QuickPeek_00139776 (Feb. 2016
email from Teller: “I will need to take a distribution next week,” “let’s do this for $1
million”); JX-616 (Mar. 2016 email from Teller: “Could you please set up a wire to my
personal account from eos Investor Holdings for $750,000?”); JX-617 (Apr. 2016 email
from Teller: “Can you please set up a $600,000 transfer from . . . eos Investor Holdings to
my personal account and characterize it as a distribution?”); JX-618 (May 2016 email from
Teller: “Can you please set up a distribution for me for $800,000 to my personal
account?”); see also JX-34a (listing 2016 distributions Teller took ahead of others); JX-
38a (indicating that Teller took, in 2017, two $400,000 off-cycle bonuses and a $1.135
million salary advance). The two emails Defendants offered as evidence of Mehra
requesting distributions, see Trial Tr. at 168:5–18, 351:11–352:3 (Mehra) (discussing JX-
22
distributions that Teller demanded,80 but he accommodated his business partner’s
(and friend’s) desire for cash.81
While the business grew rapidly, Teller withdrew large sums to support his
lifestyle.82 After sales declined and costs increased, Teller’s distributions dropped.83
By 2018, distributions had ceased. 84 At the time, Teller received only approximately
$500,000 in salary. 85
Although distributions had ceased, Teller’s need for cash remained. From
2017 through 2019, Teller needed “somewhere between 2 and $2 ½ million” to
support his lifestyle, equivalent to $4 to $5 million in pre-tax income.86 Teller’s
6, JX-845), demonstrate that Mehra received a distribution proportionate to Teller and not
that Mehra was the driving force behind the timing of the amount of the distributions. See
JX-613; JX-625; Trial Tr. at 356:14–357:19 (Mehra).
80
Trial Tr. at 37:10–38:6 (Mehra).
81
Id. at 60:11–61:6 (Mehra). Plaintiffs say that the trial record does not contain every
instance of Teller requesting or receiving cash ahead of other Members. That is quite
possible. The Company refused to produce general ledger records, which would have told
a more complete picture. Id. at 52:24–53:7 (Mehra). As Pasqualini testified, exporting the
data would have been a straightforward task. Id. at 891:16–892:14 (Pasqualini). The
snippets of Holdco’s bank records defendants produced, JX-500, do not tell the whole
story, see supra note 79. In any event, the weight of the existing evidence establishes that
Teller’s need for cash drove the timing and amount distributions. Id.
82
See Pls.’ Demonstrative 2; JX-496.
83
Pls.’ Demonstrative 4.
84
Trial Tr. at 66:17–66:19 (Mehra).
85
JX-496; JX-510.
86
Trial Tr. at 567:19–568:16 (Teller); see JX-509 at 14.
23
$500,000 salary was a fraction of what he needed. As of September 30, 2018, Teller
had less than $1 million in cash. 87
2. Teller Becomes Critical of Mehra’s Management of EOS.
After EOS stopped making distributions, Teller began to pay more attention
to complaints about Mehra’s management of EOS.
As Teller tells it, a number of employee complaints concerning Mehra came
to his attention during the summer of 2019. Teller was overseas that summer
temporarily directing European operations.88 Teller contends that the European
employees expressed concerns regarding Mehra’s management and the weakness of
the Company’s supply chain. 89
Also around that time, EOS’s General Counsel and Head of Human
Resources,90 Sarah Slover, raised concerns about Mehra’s management style,
including feedback on the Glassdoor review site.91 In her capacity as Head of
Human Resources, Slover observed decreasing employee morale and increasing
employee turnover.92 She relayed those concerns to Teller.93
87
JX-509 at 1.
88
Trial Tr. at 440:19–22 (Teller).
89
Id. at 442:7–443:24 (Teller).
90
Id. at 438:11–15 (Teller); id. at 703:14–704:3 (Slover).
91
Id. at 438:24–439:12 (Teller); id. at 709:16–710:14 (Slover).
92
Id. at 704:6–705:21 (Slover).
93
Id. at 438:16–439:12 (Teller).
24
Slover’s report led Teller to investigate employee complaints throughout the
summer of 2019. 94 He credibly testified at trial that his investigation made him
increasingly concerned with Mehra’s management style.95 Testimony from EOS
executives corroborated Teller’s testimony. 96
Mehra acknowledged that he “was a tough manager” who “held people
accountable,” but maintained that he “was also a very friendly person.”97 He
lamented that the concerns over his management style were never brought to his
attention. 98 This decision does not pass judgment on Mehra as a manager. For
present purposes, the accusations are relevant only because they support Teller’s
testimony that he was growing increasingly dissatisfied with the shared-control
arrangement.
3. Teller Explores Selling His Stake in Holdco.
With distributions still at a halt in the summer of 2019, Teller began exploring
alternative paths to liquidity. One alternative was selling his Holdco stake. 99
94
See id. at 440:3–444:13 (Teller).
95
Id. at 445:18–24 (Teller).
96
Id. at 706:1–7, 708:16–709:5 (Slover); id. at 788:1–789:9 (Landsberg); id. at 822:15–
823:11, 824:5–21 (Garg); id. at 877:10–17 (Pasqualini).
97
Id. at 85:15–20 (Mehra).
98
Id. at 86:6–9 (Mehra).
99
Id. at 66:24–67:17 (Mehra); id. at 572:12–574:24 (Teller).
25
In July 2019, Teller contacted Olga Lewis, a Goldman Sachs investment
banker, to explore that possibility.100 Around that time, Teller told Mehra that he
was considering selling his stake. During that conversation, Mehra suggested that
Mehra owned 50% of Holdco.101 This confused Teller, who sent Lewis the outdated
2014 LLC Agreement and sought advice as to whether Mehra actually owned 50%
of the business.102 Lewis apparently assured Teller that Mehra did not own 50%.103
Also in July 2019, Teller consulted with Morrison Cohen attorney Danielle
Lesser about his rights under the various EOS operating agreements. 104 Teller
offered to share Lesser’s advice with Lewis, 105 though Lesser’s advice was also
based on the outdated 2014 LLC Agreement—she was unaware of the 2016 LLC
Agreement until after September 26, 2019.106
Teller’s communications with Lewis and Lesser around July 2019 reflect that
Teller was basing his plans on the outdated 2014 LLC Agreement. As discussed
above, that agreement distinguished between the distribution of ordinary proceeds
100
JX-155; JX-154; Trial Tr. at 573:13–575:3 (Teller); Lewis Dep. Tr. at 14:19–15:9, 42:8–
43:2; see JX-152.
101
Teller Dep. Tr. at 263:8-20.
102
See JX-152; JX152c.
103
Teller Dep. Tr. at 263:21–264:5.
104
JX-482.
105
See JX-164 at EOS00005602.
106
Lesser Dep. Tr. at 62:7–63:9.
26
(shared equally) and the distribution of “Extraordinary Proceeds” (shared about
85/15 in Teller’s favor for the first $250 million). This structure gave Teller an
incentive to dissolve Holdco so he could take 85% of the first $250 million (versus
only 50% once the Threshold was reached under the 2016 LLC Agreement). 107
On August 5, 2019, Mehra informed Teller that the Company’s cash balance
was “very low” and would “need a cash injection very soon.”108 That same month,
Teller discussed his financial situation with his friend Stephen Cornick, a financial
advisor. 109 In that conversation, Teller discussed a potential sale of his Membership
Interests in EOS that he hoped would generate “some liquidity in his life.” 110
4. The Soap Project
Teller’s growing concerns regarding Mehra bubbled over in September 2019
in the context of a dispute concerning a new soap product (the “Soap Project”).
Mehra’s son, Curan Mehra, brought the idea for the soap product to Mehra in
April 2019.111 Mehra liked the idea. It was a “high convenience, low cost, eco-
friendly” product that would appeal to EOS’s target consumers. 112 Mehra also
107
See JX-17 § 7.01; Trial Tr. at 580:20–590:10 (Teller).
108
JX-170; Teller Dep. Tr. at 200:5–201:24, 203:3-206:13.
109
Cornick Dep. Tr. at 63:17–65:24; see also id. at 58:8–22.
110
Id. at 63:17–65:24.
111
Trial Tr. at 95:11–13 (Mehra).
112
Id. at 96:20–22 (Mehra).
27
thought that it would help solve a few problems that EOS was facing. At the time,
EOS was attempting to hire senior executive talent.113 Mehra believed that the Soap
Project could launch as a new brand, which EOS could spin-off in a few years.114
He also believed that granting executives equity in the Soap Project would entice
talent115 and that a sale of the brand could help deliver liquidity to Teller.116
Mehra discussed the Soap Project with Teller in the spring of 2019. 117 Teller
was initially receptive. 118 Mehra recalled Teller saying that the new brand might
“play really well in Europe,” that Teller was going to be making a trip to Europe,
and that he intended to “poll [the EOS] staff in Europe to see what they thought
about the idea.”119 In the late spring and through the summer of 2019, Mehra asked
EOS employees, including its Chief Scientific Officer, Director of R&D, Chief
Marketing Officer, and Vice President of Global Marketing and Innovation, to assist
him with the Soap Project. Later in the summer, EOS marketing personnel assessed
the competitive landscape of the product. 120
113
Id. at 97:3–21 (Mehra).
114
Id. (Mehra).
115
Id. at 97:12–16 (Mehra).
116
Id. at 97:17–21 (Mehra).
117
Id. at 97:22–98:8 (Mehra).
118
Id. (Mehra).
119
Id. at 98:3–8 (Mehra).
120
Id. at 100:9–23 (Mehra); 666:6–11 (Teller).
28
Teller grew less enthusiastic about the Soap Project over the summer of 2019.
At the time, one of the complaints that Teller was investigating concerned Mehra’s
misuse of EOS resources to promote Curan’s business ventures.
Mehra had helped Curan form a consumer products company, Hayden
Products, LLC (“Hayden”), to focus on oral care products in 2017. 121 Mehra funded
Hayden through the same trust that held his interests in Holdco.122 In Hayden’s early
stages, Mehra gave Curan access to the EOS office, where Curan used EOS
resources and held the occasional meeting.123 Through September 2019, EOS
employees assisted Curan. They worked on Hayden’s pitches to customers, attended
pitch meetings, and helped Curan with the development, production, and marketing
of Hayden products.124 Mehra identified Hayden as a “sister company” to EOS and
as “part of the same group as EOS” when obtaining credit references for Hayden.125
As Teller discovered the extent of Hayden’s footprint at EOS, Teller grew
increasingly concerned about the Soap Project.126 He raised these concerns with
121
Id. at 86:16–22, 87:10–21 (Mehra). This decision refers to Curan Mehra by his first
name for clarity. The court intends no disrespect.
122
Id. at 86:23–87:9 (Mehra).
123
Id. at 88:9–24 (Mehra).
124
The record contains numerous instances in which EOS employees worked on Hayden
projects or assisted Mehra’s son within the scope of their employment at EOS. See, e.g.,
JX-148; JX-184; JX-197; JX-209; Slover 3/12/20 Dep. Tr. at 15:7-14, 32:11-12.
125
Trial Tr. at 266:4–23 (Mehra); JX-173; JX-192.
126
See generally Teller Dep. Tr. at 248:9–249:19, 276:4–278:6.
29
Mehra in August 2019, and Mehra and Teller discussed whether to pursue the Soap
Project within EOS.127 Mehra estimated that it would cost the Company between
$5 million and $10 million to bring the product to market.128 Mehra also stated that
they would need to bring it to market quickly.129
In early September, Teller asked Mehra to put the Soap Project on hold until
they could discuss it the following week. 130
The following week, Teller emailed Mehra to ask that EOS not pursue the
Soap Project.
On September 12, 2019, Teller wrote:
I’ve been thinking about this and I’m uncomfortable doing
[the Soap Project] as part of eos. I’d like to keep it
separate. We can discuss more live. I have to head to East
Hampton tomorrow morning but will be available on the
phone or we can discuss Monday. 131
On September 16, 2019, the parties met to discuss the Soap Project.132 They
agreed that Hayden would pursue the project after a transition period to phase the
127
Id. at 249:20–2501:13, 252:16–20.
128
Id. at 250:11–17.
129
Id. at 251:9–13.
130
Id. at 253:21–255:7..
131
JX-222. They agreed to further discuss the Soap Project in person the following
Monday, September 16, 2019. See JX-227.
132
Trial Tr. at 103:1–104:8, 290:21–291:3 (Mehra).
30
project out of EOS. 133 After the September 16 conversation, EOS employees
continued to work on the Soap Project for a brief period.134 EOS’s Chief Scientific
Officer connected Mehra with suppliers for the Soap Project and attended a two-day
trip to Chicago on September 24 and 25 with Mehra to meet with those suppliers.135
The Soap Project transitioned from EOS to Hayden shortly after. 136
D. Teller Decides to Cut Ties with Mehra.
In early September 2019, Teller decided to terminate the shared-control
relationship by removing Mehra from EOS. Teller cites the Soap Project as “the last
straw.”137 This aspect of Teller’s testimony was credible.
On September 10, 2019—two days before he emailed his concerns to Mehra
regarding the Soap Project—Teller, Slover, and Cornick met with Morrison Cohen
attorneys Danielle Lesser and Jack Levy. 138
133
Id. at 104:1–104:15 (Mehra). Slover disputes that Teller agreed to a transition period,
but she was not present for Teller and Mehra’s discussion. Slover 3/12/20 Dep. Tr. at 36:7–
37:23; Trial Tr. at 699:14–19 (Slover).
134
Teller Dep. Tr. at 254:5–13; see also JX-229; JX-248; JX-247.
135
Mehra Dep. Tr. at 153:20–154:11; see also JX-230.
136
See JX-317.
137
Trial Tr. at 466:1–467:23 (Teller); see also Teller Dep. Tr. at 276:6–279:2 (describing
the purpose of a September 12, 2019, meeting with Morrison Cohen as a brainstorming
session for how to approach the issue concerning Mehra and the Soap Project).
138
Slover 3/12/20 Dep. Tr. at 27:22–29:4; Teller Dep. Tr. at 275:19–276:3.
31
According to Slover, the meeting was to discuss “the dispute that [Teller] was
having with Sanjiv over the soap business.” 139 But immediately after the meeting,
Teller took the following steps, which suggest that the September 10 meeting
marked the beginning of Teller’s campaign to dissolve EOS:
• On September 11, Teller asked his cousin to replace Mehra as trustee for the
Teller family trust holding 16% of Teller’s interest in Holdco. 140
• On September 12, Teller sent Mehra the email (block quoted above) asking
that Mehra keep the Soap Project separate from EOS.
• On September 16, Teller hired a security firm to assist with “an employee we
are planning to terminate.” 141
• On September 17, Teller hired a public strategy firm, Mercury Public Affairs
LLC, to help control the narrative surrounding his plan to remove Mehra. 142
• On September 19, the public strategy firm provided Teller with draft
statements to employees to be issued upon Mehra’s departure.143 The firm
prepared two drafts: one described Mehra as leaving voluntarily “to focus on
other ventures;” 144 the other assumed that Mehra would not leave voluntarily
and instructed that he no longer had authority to act on behalf of EOS.145
139
Slover 3/12/20 Dep. Tr. at 29:16–20; Teller Dep. Tr. at 276:6–278:22.
140
PTO ¶ 42; JX-503 at EOS00008400. Teller then executed the papers necessary to
replace Mehra with his cousin on September 16, 2019; he did not inform Mehra. See JX-
228. Mehra discovered the change after this litigation began. PTO ¶ 43.
141
JX-240 at EOS00007351; see JX-240a.
142
See JX-235; see also JX-505 at MOCORev_0001958.
143
JX-252; JX-252a.
144
JX-252a at EOS00005593.
145
Id.
32
Also on September 19, Teller had a “[m]arathon session with the lawyers.”146
According to Teller, it was then that he had decided to remove Mehra from EOS.147
This date seems specious given all that Teller had done to prepare for Mehra’s
removal prior to that meeting, but the timing of Teller’s decision is inconsequential
for the purpose of this decision. The relevant fact is that Teller had determined to
remove Mehra.
Teller emerged from the September 19 lawyers meeting with a “game
plan.”148 As Morrison Cohen attorneys advised Teller, the LLC Agreement required
a 90% vote of the Members to remove a Manager,149 and the only path to removing
Mehra from Holdco management was a deadlock followed by a dissolution. 150
Teller’s game plan therefore required creating a deadlock at the Holdco Board.
Upon dissolution, Teller would distribute Holdco’s shares in Kind to the Holdco
Members in proportion to their Membership Interests. The distribution would
transfer voting power over Kind to Teller, which Teller could use remove Mehra
from his management roles at Kind and Products. 151
146
JX-503 at EOS00008402.
147
Teller Dep. Tr. at 316:9–13.
148
JX-503 at EOS00008402).
149
See LLC Agreement §§ 3.03, 4.01.
150
See id. §§ 3.03, 4.01; see also JX-264 at EOS00012803.
151
See Slover 6/5/20 Dep. Tr. 19:3–19:15, 49:18–50:2.
33
On September 23, 2019, Morrison Cohen attorney Jack Levy sent draft
documents to Teller and Lesser, which Teller forwarded to Slover minutes later.152
Levy’s drafts included a proposed “resolution” of the Holdco Board to remove
Mehra from all his positions at Holdco.153
There were a few problems with the initial version of the papers. Teller
spotted the first: the drafts removed Mehra as co-CEO of Kind, where he was a
Manager but not a CEO.154 Levy spotted the second: the Board could not remove
Mehra from his position as Manager of Holdco under Section 4.01 of the LLC
Agreement. 155 After further email exchanges and calls between Teller, Slover, and
Levy, they settled on a resolution that removed Mehra as Manager of Kind and
reduced the size of the Kind Board. 156 Multiple statements in the email exchanges
made clear that the goal was to “create deadlock.”157
152
JX-262, JXs-262a; JX-262b; JX-262c; JX-262d; JX262e; JX-262f; JX-262g.
153
JX-262e.
154
JX-264 at EOS00012804.
155
JX-264 at EOS00012803 (Levy emailing Teller: “[w]e cannot remove Sanjiv as a
Manager of EOS [Holdco]. . . . If Sanjiv is not Co-CEO of EOS then we need to figure out
how to create the deadlock at the EOS level. Let me think about that”).
156
JX-268; JX-268a.
157
JX-264 at EOS00012803 (Teller writing: “He is a manager of the other two entities.
They wouldn’t need CEO titles because they are holding companies. Why does this change
how we create deadlock?”) (emphasis added); JX-506 at EOS00012817 (Teller asking
Slover: “Can I propose a resolution that changes the board of the Kind group and gives
me control of the board and then that creates deadlock?” (emphasis added)).
34
After the form of the resolution was resolved, Levy emailed Teller the revised
documents necessary to effectuate the dissolution (the “Dissolution Materials”).158
The chronology of execution would have Teller: (1) notice a Board meeting at the
Holdco level; (2) propose a resolution removing Mehra, which would result in a
deadlock; (3) dissolve Holdco; (4) distribute Holdco’s assets consisting of
Membership Interests in Kind; (5) execute a written consent as Kind’s now-majority
Member to remove Mehra as a Manager and reduce Kind’s board to one Manager
(Teller); (6) notify Kind Members of this action; and (7) execute a written consent
as Kind’s now-sole Manager to remove Mehra from his role as co-CEO of Products.
Also on September 23, Lesser sent Teller a preparatory cheat sheet to guide
him through the Board meeting and deadlock process.159 The document included a
script for conducting a Board of Managers meeting, guidance on how to answer
questions or objections Mehra may pose, and statements indicating that Teller need
not provide Mehra a meeting agenda and may count Mehra’s abstention as a “no”
vote.160
158
JX-274. The Dissolution Materials comprised: (1) a notice of meeting of the Holdco
Board of Managers; (2) a resolution at the Holdco level to remove Mehra as a Manager of
Kind; (3) an Holdco notice of dissolution; (4) an assignment of Holdco’s interests in Kind
to each Holdco member; (5) a written consent of the Kind Members removing Mehra as
Manager; (6) a notice to Kind Members of that action; and (7) a written consent of Kind’s
sole Manager removing Mehra as co-CEO and employee of Products. Id.
159
See JX-276; JX-276a.
160
JX-276a.
35
That night, Teller followed up with a technical question about whether he
needed Mehra to waive notice of the Board meeting. 161 Levy responded that he
“would rather have the email [waiving notice] especially if [Mehra] walks out/hangs
up when he hears what the meeting is about.” 162 Slover’s solution was to “reiterate
as we open the meeting that he has waived notice and I can record that as part of the
minutes.” 163
On September 24, 2019, Teller noticed a meeting of the Holdco Board.164
Before this notice, neither Mehra nor Teller had raised business issues for a vote by
the Board of any of the EOS entities. 165 The notice did not identify the purpose of
the meeting.166 Mehra viewed the notice as unusual and emailed himself a copy of
the LLC Agreement as well as the operating agreement for Kind. 167
The notice set the meeting for September 25, 2019.168 Teller subsequently
agreed to move the meeting to September 26 because Mehra was in Chicago
161
JX-279 at EOS00012794–95.
162
Id. at EOS00012794.
163
Id. This was not an issue—the LLC Agreement requires notice by email 24 hours in
advance of a meeting, which Teller provided. See LLC Agreement § 4.08.
164
PTO ¶ 44; JX-283.
165
PTO ¶ 39.
166
See JX-283 (September 24, 2019 notice of meeting of Board of Managers to be held on
September 25, 2019); JX-284 (agreement to move meeting to September 26); LLC
Agreement § 4.08.
167
PTO ¶ 45; Trial Tr. at 113:3–14 (Mehra).
168
JX-283.
36
attending meetings for the Soap Project. 169 On September 25, Slover emailed Teller
unsigned execution versions of the Dissolution Materials.170
To Teller, the outcome of the meeting was pre-ordained. The events leading
up to the meeting—replacing Mehra as trustee, hiring the public strategy firm, hiring
the security guards, receiving the talking points, and obtaining and executing the
Dissolution Materials—made clear that Teller viewed the outcome as a fait
accompli.171
E. The September 26, 2019 Board Meeting
The Board Meeting occurred on September 26, 2019 (the “September 26
Meeting”). 172 Both Teller and Mehra made audio recordings of the meeting.173
Slover attended the meeting as corporate secretary of EOS Holdco. 174
At first, Teller stuck to his script as best he could. He began with a roll call,
announcing that “[t]here is a quorum.”175 He notified Mehra that he was presenting
“a resolution upon which we will then vote.”176 He next informed Mehra that a
169
JX-284; see Trial Tr. at 284:7–14 (Mehra).
170
JX-288; see JX-288a; JX-288b; JX-288c; JX-288d; JX-288e; JX-288f; JX-288g; JX-
288h.
171
JX-290; JX-291.
172
PTO ¶ 46.
173
Id.
174
Id. ¶ 47.
175
JX-300-PT at 3:20–21.
176
Id. at 3:22–23.
37
“failure to vote for any reason will be considered a vote against the proposal.”177 He
then stated that “[t]he purpose of this meeting is to authorize the company to execute
consent as a member of the Kind Group, LLC, to remove Sanjiv Mehra as a member
of the Kind Group, LLC.”178 This last statement was wrong, of course. As discussed
above, the resolution that Teller and the lawyers conceived was to remove Mehra as
a Manager of Kind. Aside from this error, the statements all came from the script
Lesser provided to Teller on September 23, 2019.179 Teller offered Mehra a copy of
the resolution, which Mehra declined to read.
Mehra then forced Teller off script by requesting “a rationale for what you are
doing.”180 Teller stated his reasons as follows:
I don’t believe that you should be a CEO of the company
anymore. I don’t like your influence in the company. I
don’t . . . like the way you . . . worked with me. I think
you’ve been a very negative force in this organization.
You’ve created a toxic culture. You are dishonest. . . . no
one can talk to you. You are very difficult to work
with. . . . I’m thinking of the best interests of the company.
And I think your continued presence as part of
management is adversely affecting the continued viability
of the organization. 181
177
Id. at 3:24–4:2.
178
Id. at 4:3–4:8.
179
See JX-276a.
180
JX-300-PT at 4:15–16.
181
Id. at 4:17–5:12.
38
Before Mehra could respond, Teller noted that “it seems like we have a difference
of opinion here.”182 Teller then declined Mehra’s request to repeat his rationale and
called for a vote.183
Mehra did not vote. He instead proposed “a second resolution . . . that
Jonathan Teller be removed from every aspect of The Kind Group, EOS Products,
for the fact that he is completely incompetent to actually manage the business.”184
From this point on, the meeting descended into displays of personal animus.185
Mehra accused Teller of wrongdoing and continued to refuse to vote on Teller’s
resolution.186 Neither resolution passed, and Teller declared a deadlock. 187
F. Efforts to Dissolve Holdco
After declaring deadlock, Teller proceeded to inform Mehra that Holdco
would be dissolved. 188 As a Manager of Holdco, Teller executed a notice of
dissolution. Teller also executed four “Assignments” distributing Holdco’s
Membership Interests in the Kind Group to Holdco Members proportionate to their
182
Id. at 5:13–15.
183
Id. at 6:1–8.
184
Id. at 6:9–15; see also id. at 6:16–7:11 (Mehra’s statements in support of his counter-
resolution).
185
See id. at 7:17–18:8.
186
Id. at 7:20–24; id. at 9:2–7; id. at 15:12–19.
187
Id. at 8:15–16 (declaring “[w]e are deadlocked”).
188
Id. at 9:22–10:7.
39
Membership Interests as required by Section 4.10 of the LLC Agreement.189 Teller
did not take any action to replicate the Equal-Distribution Arrangement at Kind.
At the September 26 Meeting, Teller notified Mehra that he had been removed
from all EOS management positions and asked him to leave the EOS offices.190
Mehra refused to leave, causing Teller to call in the security guard to escort Mehra
from the office.191 Mehra again refused to leave, prompting the security guard to
call the New York City police. 192 Eventually, two police officers arrived. Mehra
put some papers into a banker’s box and left the building.193 Mehra testified that,
had he been given a choice and some time to consider it, he may have agreed to step
down. 194
G. This Litigation
The plaintiffs are Samrita Mehra as the trustee of the Sanjiv Mehra 2014
Irrevocable Trust, which holds Mehra’s Membership Interests in the Company, and
Mehra (together, “Plaintiffs”). 195 Plaintiffs filed this action on October 10, 2019,196
189
JX-291 at EOS00000494–97.
190
JX-300-PT at 10:11–11:21.
191
Id.
192
JX-300-PT at 13:22–14:6.
193
Trial Tr. at 132:10–133:4 (Mehra).
194
Id. at 141:16–142:2, 144:1–4 (Mehra).
195
See id. ¶¶ 16–17.
196
Dkt. 1, Verified Compl. for Breach of Fiduciary Duty and Breach of Contract.
40
and amended their complaint on December 13, 2019.197 The Amended Complaint
names five defendants: Teller; Holdco; Angry Elephant; Teller’s cousin and trustee
of the trust holding a portion of Teller’s Membership Interests in the Company,
Andrew Saltoun; and Slover (collectively, “Defendants”).
The Amended Complaint asserts four causes of action: Count I against Teller
for breach of fiduciary duty; 198 Count II against Teller for breach of the LLC
Agreement;199 Count III against Slover for aiding and abetting Teller’s breach of
fiduciary duty; 200 and Count IV for a declaratory judgment invalidating the
dissolution of Holdco and enforcing Mehra’s economic rights under the LLC
Agreement. 201
A portion of the relief Mehra sought arguably implicated Kind, a New York
entity. In light of the jurisdictional concerns raised by Kind’s involvement and to
facilitate prompt relief, the court bifurcated the issues in this case.202 By letter
decision dated December 9, 2019, the court limited the scope of the expedited trial
to whether there is a basis for invalidating the dissolution of Holdco. 203
197
Dkt. 58, Verified Am. Compl. (“Am. Compl.”).
198
Id. ¶¶ 80–83.
199
Id. ¶¶ 85–89.
200
Id. ¶¶ 91–96.
201
Id. ¶¶ 99–101.
202
Dkt. 52, Letter Decision at 1–2.
203
Id. at 2.
41
Trial took place over three days in late July 2020.204 The parties completed
post-trial briefing on September 25, 2020, 205 and the court heard post-trial oral
argument on October 1, 2020. 206 This decision focuses solely on the narrow issue
of Holdco’s dissolution, leaving open Mehra’s other claims and any remedies Mehra
seeks outside of invalidating the dissolution.
II. LEGAL ANALYSIS
Plaintiffs assert two claims challenging the dissolution. Plaintiffs first claim
that Teller breached the LLC Agreement when effecting the dissolution. Next, they
claim that Teller breached his fiduciary duties when effecting the dissolution.
A. Breach of the LLC Agreement
Plaintiffs claim that Teller breached the LLC Agreement in three ways. First,
Teller breached Section 4.10 by declaring a deadlock. Second, Teller breached
Section 4.03 by failing to act in good faith and to protect and promote the interests
of the Members. Third, Teller breached Section 4.10 by dissolving Holdco
unilaterally.
204
See Trial Tr.
205
See Dkt. 196, Pls.’ Post-Tr. Opening Br. (“Pls.’ Opening Br.”); Dkt. 205, Defs. Jonathan
Teller, EOS Investor Holding Company, LLC, and Angry Elephant Capital, LLC’s
Answering Post-Tr. Br. (“Defs.’ Answering Br.”); Dkt. 209, Pls.’ Post-Tr. Reply Br. (“Pls.’
Reply Br.”).
206
Dkt. 217, October 1, 2020 Post-Tr. Oral Arg. (“Oral Arg. Tr.”).
42
The Delaware Revised Limited Liability Company Act (the “LLC Act”)
grants members of an LLC “the statutory freedom . . . to shape, by contract, their
own approach to common business relationship problems.” 207 In resolving
governance disputes in the LLC context, the court first looks to the rights and
obligations as set forth in “the parties’ bargained-for operating agreement.”208
Delaware courts interpret LLC agreements like other contracts—objectively, giving
“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.”209
“Under standard rules of contract interpretation, a court must determine the intent of
the parties from the language of the contract.” 210 In so doing, the court looks to
“context [as] the primary determinant of meaning, and . . . the structure and
relationship of the parts of a contract” as indicative of “the drafters’ intent.”211
207
Haley v. Talcott, 864 A.2d 86, 88 (Del. Ch. 2004) (internal quotation marks omitted).
208
Franco v. Avalon Freight Servs. LLC, 2020 WL 7230804, at *2 (Del. Ch. Dec. 8, 2020)
(“In governance disputes among constituencies in an LLC, the starting (and end) point
almost always is the parties’ bargained-for operating agreement. . . .”) (quoting A&J Cap.,
Inc. v. L. Off. of Krug, 2018 WL 3471562, at *5 (Del. Ch. July 18, 2018)).
209
Salamone v. Gorman, 106 A.3d 354, 368 (Del. 2014) (internal quotation marks omitted).
210
Twin City Fire Ins. Co. v. Del. Racing Ass’n, 840 A.2d 624, 628 (Del. 2003) (citing
Kaiser Aluminum Corp. v. Matheson, 681 A.2d 392, 395 (Del. 1996)).
211
JJS, Ltd. v. Steelpoint CP Hldgs., LLC, 2019 WL 5092896, at *6 (Del. Ch. Oct. 11,
2019) (describing the “whole-text canon” of contract interpretation).
43
1. Breach of Section 4.10’s Deadlock Provision
Under the Deadlock Provision, “in the event the vote upon an action by the
Board of Managers results in a deadlock, then the Board of Managers shall dissolve
the Company.”212 Plaintiffs’ first theory of breach is that Teller violated the
Deadlock Provision by manufacturing a deadlock when none existed.
The LLC Agreement does not define “deadlock.” It is appropriate, therefore,
to turn to statutory definitions and decisions of this court defining “deadlock” when
interpreting judicial dissolution provisions in the LLC Act, the Delaware Revised
Limited Partnership Act (the “LP Act”), and the Delaware General Corporation Law
(the “DGCL”).213
212
LLC Agreement § 4.10.
213
See 6 Del. C. § 18-802 (“On 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.”); 6 Del. C. § 17-802 (“On application by or for a partner the Court
of Chancery may decree dissolution of a limited partnership whenever it is not reasonably
practicable to carry on the business in conformity with the partnership agreement.”); 8 Del.
C. § 273(a) (“If the stockholders of a corporation of this State, having only 2 stockholders
each of which own 50% of the stock therein, shall be engaged in the prosecution of a joint
venture and if such stockholders shall be unable to agree upon the desirability of
discontinuing such joint venture . . . either stockholder may . . . file with the Court of
Chancery a petition stating that it desires to discontinue such joint venture . . . or that . . .
the corporation be dissolved.”); 8 Del. C. § 226(a)(2) (providing for judicial appointment
of custodians and receivers when “the directors are so divided respecting the management
of the affairs of the corporation that the required vote for action by the board of directors
cannot be obtained and the stockholders are unable to terminate this division”); see also,
Obeid v. Hogan, 2016 WL 3356851, at *6 (Del. Ch. June 10, 2016) (“The choices that the
drafters make have consequences. . . . Depending on the terms of the agreement, analogies
to other legal relationships may . . . be informative.” (citing JAKKS Pac., Inc. v.
THQ/JAKKS Pac., LLC, 2009 WL 1228706, at *2 (Del. Ch. May 6, 2009))); Vila v.
44
When applied to a vote of a board, “deadlock” means a failure to meet a voting
threshold. 214 Depending on the applicable voting standard, a failure to meet a voting
threshold can result from the presence of negative votes or the lack of affirmative
votes. 215
BVWebTies LLC, 2010 WL 3866098, at *7 & n.49 (Del. Ch. Oct. 1, 2010) (looking to
Section 273 of the DGCL by analogy in resolving claims for judicial dissolution of LLCs
and collecting authorities on Section 273 dissolution).
Defendants deny that it is appropriate to look to judicial precedent when interpreting
the meaning of “deadlock” under Section 4.10. They argue that “Section 4.10 is clear that
deadlock under the [LLC Agreement] occurs as a result of the vote of the Board of
Managers on one action. The [LLC Agreement] does not require anything more . . . .”
Defs.’ Answering Br. at 30–31; see also Oral Arg. Tr. at 41–42 (citing cases, including
Murfey v. WHC Ventures, LLC, 236 A.3d 337 (Del. 2020)). As support, Defendants draw
from the Delaware Supreme Court’s decision in Murfey, where the court declined to
impose the common law “necessary and essential” requirement to an inspection provision
in an LLC agreement that expressly permitted inspection of certain categories of
documents, including the K-1s at issue. 236 A.3d at 346–58. Murfey is not instructive
here. In Murfey, the court cautioned against applying common law precedent to impose
conditions that did not appear on the face of the contract. In this case, common law
precedent is helpful to understanding the meaning of a word appearing on the face of the
contract—“deadlock.”
214
Meyer Nat. Foods LLC v. Duff, 2015 WL 3746283, at *3 (Del. Ch. June 4, 2015)
(defining deadlock as an “inability to make decisions and take action, such as when an LLC
agreement requires an unattainable voting threshold”); see also, 2 David A. Drexler et al.,
Delaware Corporation Law and Practice § 30.01, at 30-1 (2020) (defining deadlock as
“the inability of the directors or stockholders to function effectively because of dissension
among evenly divided interests.”); Donald J. Wolfe, Jr. & Michael A. Pittenger, Corporate
and Commercial Practice in the Delaware Court of Chancery § 9.10[c][3], at 9-256 (2020)
(“[T]he deadlock must stem from the inability of the board to muster sufficient votes to
take curative action due to the division of opinion.”); Deadlock, Black’s Law Dictionary
(11th ed. 2019) (defining “deadlock” generally as “[a] state of inaction resulting from
opposition, a lack of compromise or resolution, or a failure of election”).
215
See Licht v. Storage Tech. Corp., 2005 WL 1252355, at *1 (Del. Ch. May 6, 2005)
(affirming the “widely-accepted notion” that “abstentions are in effect negative votes”
(citing Drexler, Delaware Corporation Law and Practice § 25.06, at 25-10)); In re Del
Monte Foods Co. S’holders Litig., 2011 WL 2535256, at *6 (Del. Ch. June 27, 2011)
45
A deadlock must also be genuine for it to have legal effect. As Chancellor
Bouchard explained in In re Shawe & Elting, LLC, a deadlock must be a product of
genuine, good faith divisions. 216 A genuine deadlock does not exist where it is
“based upon a specious premise” or “one side sought to manufacture it ‘by refusing
to consider any issue.’” 217 Delaware courts have denied petitions for judicial
intervention where the respondent has shown that “the [constituent] seeking
intervention has done so in bad faith by manufacturing a deadlock.”218 “[T]he bad
faith defense . . . seeks to demonstrate that a director or stockholder has
(holding in the context of stockholder votes under 8 Del. C. § 251(b) that “not voting is the
same as voting against” a corporate action); see also Smith v. Sussex Cnty. Council, 632
A.2d 1387, 1388–89, 1392 (Del. Ch. 1993) (deciding that an abstention does not count as
a “concurrence by acquiescence” in the context of a municipal city council vote where
“[n]o action . . . shall be valid or binding unless adopted with the concurrence of a majority
of all members of the county government,” concluding that “the Council as a body acts
through its votes; its members concur in decisions by voting”); id. (“When [the law]
requires the concurrence of all members, it requires, in my opinion, a majority of all
members to vote affirmatively.”).
216
2015 WL 4874733, at *28 (Del. Ch. Aug. 13, 2015) (holding that a deadlock must
“reflect genuine, good faith divisions . . . of a fundamental and systemic nature over how
the Company should be managed”); see also Kleinberg v. Cohen, 2017 WL 568342, at *11
(Del. Ch. Feb. 13, 2017) (same).
217
Kleinberg, 2017 WL 568342, at *11 (quoting Francotyp-Postalia AG & Co. v. On
Target Tech., Inc., 1998 WL 928382, at *4 (Del. Ch. Dec. 24, 1998) and Millien v. Popescu,
2014 WL 656651, at *2 n.17 (Del. Ch. Feb. 19, 2014)).
218
Brian C. Durkin, Manufactured Deadlocks? The Problematic "Bad Faith Defense" to
Forced-Sales of Delaware Corporations Under Section 226 of the Delaware General
Corporation Law, 59 B.C. L. Rev. 725, 729 (2018).
46
manufactured a ‘phony’ deadlock or has sought to give the appearance of a deadlock
by refusing to agree to any business decisions . . . .” 219
Not all deadlocks justify dissolution, as courts will seldom find that deadlock
over an insignificant business decision warrants terminating the entity. For a
deadlocked decision to justify judicial dissolution, the decision at issue must be
qualitatively significant. Delaware business statutes capture this qualitative
requirement in various ways. Relevant here, the LLC Act provides for judicial
dissolution “whenever it is not reasonably practicable to carry on the business.”220
“[S]erious managerial issues,” such as strategic visions, major initiatives, and the
operation and control of a company, will typically satisfy the qualitative
requirements imposed by statute and common law. 221 And the question of who
219
Id. (citing Millien, 2014 WL 656651, at *2 n.17, and Vila, 2010 WL 3866098, at *7).
220
6 Del. C. § 18-802; see also 6 Del. C. § 17-802 (providing for the dissolution of a limited
partnership “whenever it is not reasonably practicable to carry on the business”); 8 Del. C.
§ 273(a) (providing for dissolution of corporate joint ventures if the “stockholders shall be
unable to agree upon the desirability of discontinuing such joint venture”); 8 Del. C.
§ 226(a)(2) (providing for appointment of a custodian where a corporation’s “directors are
so divided respecting the management of the affairs of the corporation that the required
vote for action by the board of directors cannot be obtained”); Deadlock, Black’s Law
Dictionary (11th ed. 2019) (explaining that deadlock arises from “[t]he blocking of
corporate action by one or more factions of shareholders or directors who disagree about a
significant aspect of corporate policy” (emphasis added)).
221
Vila, 2010 WL 3866098, at *7; see also Shawe, 2015 WL 4874733, at *26–28 (finding
deadlock over issues including distributions to members, pursuit of acquisitions, expense
true-ups to reconcile personal uses of company funds, and the hiring and retention of
personnel).
47
should run a company is the quintessential serious managerial issue.222
In this case, Defendants argue that language of Section 4.10 stands unqualified
and does not impose any qualitative requirement on the deadlocked decision at issue.
Section 4.10 does not require that the deadlock make it impracticable to “carry on
the business,” for example. Still, the nature of the decision at issue informs whether
the deadlock is genuine, and the court evaluates the significance of the decision at
issue for that purpose.
Adapting the above principles to the circumstances of this case, Teller’s
resolution at the September 26 Meeting resulted in “deadlock” for the purposes of
the Deadlock Provision if: (a) the Board failed to achieve the necessary voting
threshold on a Board action; and (b) the Board deadlock was genuine.
a. The Board failed to achieve the voting
threshold on a Board action.
At the September 26 Meeting, Teller verbally proposed a resolution to
authorize the company to execute a consent as a Member of the Kind Group to
remove Mehra as a Manager of the Kind Group.223 Teller voted in favor of the
222
See, e.g., Klaassen v. Allegro Dev. Corp., 2013 WL 5967028, at *15 (Del. Ch. Nov. 7,
2013) (“Often it is said that a board’s most important task is to hire, monitor, and fire the
CEO.”).
223
JX-300-PT at 4:3–8. As discussed above, Teller misstated the nature of the resolution
during the meeting, proposing that the Board remove Mehra as a “member of the Kind
Group, LLC.” Id. The decision does not hold Teller to his misstatement, and treats the
proposal as one to remove Mehra as a “Manager” of Kind consistent with the written
resolution that Teller offered Mehra.
48
resolution.224 Mehra did not vote on the resolution.225 The proposed Board action,
therefore, failed to achieve the voting threshold necessary to carry a Board action.
This conclusion should be uncontroversial, but Plaintiffs dispute it
nonetheless. They argue that Mehra’s refusal to vote should not be treated as a vote
against the resolution. 226 As discussed above, however, abstentions can have the
same effect as a “no” vote depending on the voting standard. 227 In this case, the
quorum requirement in the LLC Agreement necessitated the presence of both
Managers; Board action thus required unanimity. 228 Where unanimity is the voting
threshold, either an abstention or a “no” vote can defeat it. Thus, the court treats
Mehra’s abstention as a “no” vote, meaning that the Teller proposal failed to achieve
the voting threshold. 229
In a second and somewhat novel attack on the voting threshold issue, Plaintiffs
argue that there was no failure to meet a voting threshold “by the Board” as required
224
Id. at 8:2–3.
225
Id. at 8:5–14.
226
Pls.’ Opening Br. at 46.
227
See supra note 215 and accompanying text.
228
LLC Agreement § 4.09.
229
Mehra also argues that there was no vote because the proposal was brought on by
“surprise,” see Pls.’ Opening Br. at 1, 46, but that argument speaks more to the genuine
nature of the deadlock discussed infra Section II.A.1.b and Mehra’s claim for breach of
fiduciary duties discussed infra Section II.B.
49
by Section 4.10 because it was not within the Board’s power to take action on the
proposed resolution.
Plaintiffs point to Section 3.03 of the LLC Agreement, which provides that
“[w]henever . . . approval or consent is required to be given by the Company, by
vote or otherwise, it shall be authorized upon receiving the affirmative vote of the
Members holding not less than 90% of the Membership Interests.”230 Plaintiffs
argue that the resolution sought to cause Holdco to provide consent and thus required
approval by Members under Section 3.03. Because the Board was categorically
foreclosed from acting on Teller’s proposal under Plaintiffs’ interpretation of
Section 3.03, they contend that that the Board vote cannot give rise to the relevant
deadlock. Any deadlock on the decision must be construed as a deadlock among
Members and not Managers as required by the Deadlock Provision.
Plaintiffs’ argument based on Section 3.03 fails in the finer details. Article
III of the LLC Agreement establishes requirements for action by Members. Properly
read, Section 3.03 imposes a super-majority voting requirement (90%) on actions to
be taken by Members. It does not require that Members vote as Members on every
Company action. Such an interpretation would run contrary to Article IV,
Section 4.04 of the LLC Agreement. As discussed above, Article IV governs actions
230
LLC Agreement § 3.03.
50
by the Board of Managers. Section 4.02 authorizes the Board to “carry out the
conduct of the Company’s business.”231 Section 4.04 of the LLC Agreement thus
allows the Board to authorize and execute written consents by the Company, which
Teller’s resolution sought to do. Mehra’s abstention on that resolution therefore
gave rise to deadlocked vote on a Board action.
b. The deadlock was genuine, even though
the circumstances forcing the moment of
deadlock were contrived.
The more nettlesome issue raised by the deadlock analysis is determining
whether the deadlock was genuine. This decision finds that Teller and Mehra
expressed a fundamental and irreconcilable disagreement as to who should run EOS,
and that disagreement was sufficient to support a finding of deadlock and justify
dissolution. 232 The proposal at issue was in effect a referendum of Mehra’s
management of EOS. This sort of decision is the quintessential “serious managerial
issue” that speaks to the practicality of carrying on the business and rises to the level
of significance to support a finding that deadlock was genuine. 233
This finding is reached with some reservation because Plaintiffs’ arguments
to the contrary are well-founded. Plaintiffs contend that Teller was motivated by a
231
Id. § 4.02.
232
See JX-300-PT (expressing disagreement and animosity while clashing over competing
resolutions to remove each other as Managers of Kind and a co-CEOs of Products).
233
See supra notes 221–22 and accompanying text.
51
need for liquidity as of September 2019 and sought to dissolve the Company to
further this purpose, that the events giving rise to the deadlock were contrived, and
that most of the justifications proffered for Teller’s desire to end the shared-control
relationship were pretextual. Based on the trial record, most of these contentions
seem true.
It is true that Teller was motivated by a need for liquidity as of September
2019. Teller’s repeated requests to withdraw money from the Company show that
EOS served as the primary source of income funding his lifestyle.234 Around the
time EOS faced liquidity concerns, Teller turned to his financial advisor to explore
a possible sale of his stake in the Company. 235 He even told Cornick that he needed
“some liquidity in his life.”236
Yet, Teller’s desire for liquidity was not the driving force behind Teller’s
decision to oust Mehra. An internal Goldman Sachs email shows that Teller
understood that he could not sell the Company for at least another twelve months.237
234
See Trial Tr. at 45:24–46:7, 47:14–19 (Mehra) (testifying about Teller’s requests for
distributions to fund real estate purchases in Manhattan and in the Hamptons).
235
See JX-154 (noting on July 19, 2019 that EOS’s “majority shareholder reached out;
starting to consider a transaction again”); JX-155 (documenting a July 18, 2019 call
between Teller and Olga Lewis at Goldman Sachs to “discuss his desire for exit”).
236
Cornick Dep. Tr. at 65:7–8.
237
JX-155 (“Call with Jonathan to discuss his desire for exit, likely 12-18 months from
now. . . . He understand [sic] he needs to show growth to attract interest.”) (emphasis
added).
52
And this decision finds that concerns with Mehra that developed over the summer
of 2019 discussed more fully below were Teller’s dominant reasons for removing
Mehra.
It is also true that the events giving rise to the Board’s deadlock were contrived
and the outcome of the September 26 Meeting was pre-ordained. Teller wanted
Mehra out of EOS and took concrete steps to accomplish that goal. He and Slover
met with Morrison Cohen attorneys, 238 devised a game plan, 239 followed a script
designed to “create deadlock,”240 and pre-executed documents in contemplation of
that result.241 Teller even hired an armed guard to ensure the meeting would end
with Mehra’s removal and retained a public relations firm to shape the narrative.242
238
Teller Dep. Tr. at 275:24–276:3; JX-503 at page 20 (message EOS00008402).
239
See, e.g., JX-264 at EOS00012803 (emailing on September 23, 2019, to discuss strategy
for how to best accomplish Mehra’s removal, noting that Teller intends to “create
deadlock”); JX-506 at message EOS00012817 (messaging Slover to inquire about a
resolution that would give Teller “control of the board” and “create[] deadlock”).
240
See JX-264 at EOS00012803; JX-276a.
241
JX-262 (sending Teller draft Dissolution Materials); JX-274 (sending Teller finalized
Dissolution Materials); JX-288 (sending Teller execution versions of the Dissolution
Materials); JX-290 (acknowledging on September 25, 2019, that Teller will be “bringing
signed originals” to the meeting); JX-291 (compiling executed Dissolution Materials).
242
JX-240a (hiring an armed security agent for September 26, 2019); JX-505 (confirming
“a deal for one month” of public relations work on September 18, 2019); JX-252 (providing
Teller with draft press releases characterizing Mehra’s departure).
53
A contrived procedure designed to force deadlock could cast doubt on the
earnestness of the parties’ disagreement.243 Board meetings are intended as times to
deliberate, to convince Board members of ideas and positions, and to debate the
merits of business decisions and business risks. When the result is pre-ordained, the
process becomes artificial. Where there are no sincere efforts to resolve a deadlock,
there is reason to doubt that the deadlock itself is genuine.244
Yet, the focus of the court’s factfinding on deadlock issues is to determine
whether there is a genuine, irreconcilable disagreement between the parties. Here,
there is. In this case, the deadlocked parties had worked closely together for many
243
See, e.g., Millien, 2014 WL 656651, at *2 n.17 (denying reconsideration of the court’s
appointment of a custodian because testimony at trial suggested that any deadlock was
contrived by the petitioner’s refusal “to consider any issue”); Bentas v. Haseotes, 1999 WL
1022112, at *3–5 (Del. Ch. Nov. 5, 1999) (declining to appoint a custodian under 8 Del.
C. § 226 where the reason for a purportedly deadlocked director election was stockholders’
refusal to attend meetings resulting in a failure to reach quorum; ordering a stockholder
meeting under 8 Del. C. § 211 instead to ensure quorum and avoid a contrived deadlock).
244
Plaintiffs go further to say that “the plain meaning of ‘deadlock’ contemplates process
and efforts to resolve,” and the pre-meditated nature of the deadlock renders it
disingenuous. Pls.’ Reply Br. at 6 (citing Merriam-Webster’s Collegiate Dictionary (11th
ed.); The New Int’l Webster’s Collegiate Dictionary of the Eng. Language (2002 ed.)).
They are incorrect in this interpretation—that the deadlock was pre-meditated does not
make it disingenuous, and Plaintiffs erroneously derive their definition from dictionaries
rather than the ample authority of this court interpreting “deadlock.” Neither of the
definitions on which they rely require process or efforts to resolve a disagreement, in any
event. Plaintiffs read too much into those dictionary definitions. The first dictionary
source defines “deadlock” as “a state of inaction or neutralization resulting from the
opposition of equally powerful uncompromising persons or factions.” Merriam-Webster’s
Collegiate Dictionary (11th ed.). The second defines “deadlock” as “[a] cessation of
activity or progress caused by the refusal of opposing parties to cooperate.” The New Int’l
Webster’s Collegiate Dictionary of the Eng. Language (2002 ed.).
54
years, and one of them had grown exceedingly distrustful of the other’s management
decisions. In such circumstances, it is easy to conclude that the disagreement over
whether to continue the shared-control arrangement arose in good faith, even if the
context within which they formally deadlocked was clearly contrived.245
Finally, it is true that Teller’s litigation position overstated the degree to which
Mehra’s business decisions influenced Teller’s determination to cut ties. Teller
made it seem like he was growing increasingly frustrated with Mehra from 2014
through the September 26 Meeting.246 That testimony was insincere, and Mehra
proved that Teller tacitly endorsed business plans and decisions as Mehra made
them. 247
245
See, e.g., Shawe, 2015 WL 4874733, at *28 (holding that a deadlock must “reflect
genuine, good faith divisions . . . of a fundamental and systemic nature over how the
Company should be managed”); Durkin, supra note 218 at 729 (“[T]he bad faith defense .
. . seeks to demonstrate that a director or stockholder has manufactured a ‘phony’ deadlock
or has sought to give the appearance of a deadlock by refusing to agree to any business
decisions . . . .”); see also Fisk Ventures, LLC v. Segal, 2009 WL 73957, at *4–7 (Del. Ch.
Jan. 13, 2009) (finding that deadlock warranted dissolution despite a party’s refusal to
exercise a contractual option that could break the deadlock, noting that the parties could
not “harmoniously resolve their differences” and that “dissolution becomes the only
remedy available” where “deadlock cannot be remedied through a legal mechanism set
forth within the four corners of the operating agreement”).
246
See, e.g., Trial Tr. at 421:9–425:12 (Teller) (hinting at tension underlying their working
relationship due to Mehra’s “temper” and desire to “take more and more control”).
247
See, e.g., JX-71 (capitulating to Mehra’s request to “hold on these discussions until
we’ve had a more full discussion internally”); JX-170 (notifying Teller that financing “will
take 3 months” and “[w]e may get lucky but don’t plan on anything earlier”); Trial Tr. at
70:23 –71:9 (Mehra) (testifying that Teller drove the decision to expand EOS’s business
into China); id. at 847:17–848:13 (Garg) (testifying that the transition to Absara was
Mehra’s decision but that Teller was aware of the decision and raised no objections); id. at
55
Yet, the record reflects that Teller’s primary gripe with Mehra was not
pretextual. Teller and Mehra harbored an irreconcilable disagreement as to who
should run the Company. This disagreement was on vivid display during the
September 26 Meeting. The audio recording of the September 26 Meeting captures
Teller’s resolute belief that Mehra should no longer run EOS and Mehra’s equally
adamant belief that Teller was not qualified to take his place. 248 Teller expressed his
opinion that Mehra was “a very negative force in this organization,” “created a toxic
culture,” and that Mehra’s “continued presence as part of management is adversely
affecting the continued viability of the organization.”249 Mehra responded by
accusing Teller of being “completely incompetent” with “absolutely no
understanding of the economics of the business,” and of “bankrupt[ing] the
83:6–84:5 (Mehra) (testifying that Teller participated in daily discussions about the Crystal
launch); id. at 85:2–20, 86:6–12 (Mehra) (testifying that Teller never confronted him about
his management style even after the two discussed being tougher on employees); id. at
89:1–90:7 (Mehra) (testifying that Teller was aware of Hayden and advised Curan on some
Hayden matters); id. at 99:20–100:1 (Mehra) (testifying that Teller did not ask Mehra to
stop working on the Soap Project within EOS until September 16, 2019); id. at 104:1–19
(Mehra) (testifying that Teller agreed to a transition period during which Mehra would
transfer the Soap Project from EOS to Hayden after September 16, 2019).
248
JX-300-PT at 6:1–15.
249
Id. at 4:17–5:12.
56
business” through his distributions. 250 An insurmountable chasm existed between
Teller and Mehra by the time the meeting concluded.251
This finding is supported by evidence of growing discord between Teller and
Mehra immediately preceding the September 26 Meeting. Of Teller’s many
criticisms of Mehra raised in this litigation, contemporaneous communications and
third-party testimony corroborate two.
First, Teller testified genuinely about his growing concern over Mehra’s
impact on the Company culture and the resulting employee attrition. To recap, Teller
learned of the problem from Slover and from disgruntled employees in Europe. He
spoke to EOS executives over the summer of 2019. 252 Teller stated that these
conversations gave him the sense that the way Mehra interacted with employees
“was having a negative influence on both the culture and just the way the
business . . . was operating.”253 These concerns are reflected in Teller’s
250
Id. at 6:9–7:11.
251
For example, seven lines of the meeting transcript comprise a back-and-forth between
Teller and Mehra repeating “[n]o, you don’t” and “[y]es, I do” at one another until
interrupted by Teller’s security agent. Id. at 12:20 –13:3.
252
Trial Tr. at 442:19–24, 444:5–13 (Teller); see also id. at 440:3–444:13 (Teller)
(detailing his efforts to corroborate the information he obtained from Slover about Mehra’s
treatment of employees).
253
Id. at 445:21–24 (Teller).
57
communications from the summer of 2019. 254 Teller’s testimony is corroborated by
the testimony of EOS executives.255
Second, Teller testified genuinely as to real-time concerns regarding the Soap
Project. Teller was sensitive to Mehra’s use of Company resources to aid Curan.
He was exceptionally frustrated by Mehra’s pursuit of the Soap Project with Curan.
Teller’s testimony is corroborated by the testimony of EOS executives. 256
At least as to these two topics, Teller and Mehra fundamentally disagreed.257
This, coupled with the parties’ conduct during the September 26 Meeting, provides
a sufficient basis on which to conclude that the deadlock was genuine.
254
See JX-138 (June 3, 2019 email from Garg indicating the “[t]hird Monday third
resignation” of an employee); JX-175 (August 8, 2019 email from Teller attributing
comments about “serious turnover” and “low employee morale” to “Glassdoor”).
255
See id. at 439:5–12 (Teller); id. at 706:1–7, 708:16–709:5 (Slover); id. at 788:1–789:9
(Landsberg); id. at 822:15–823:11, 824:5–21 (Garg); id. at 877:10–17 (Pasqualini).
256
Id. at 699:20–700:20, 702:12–703:13 (Slover); id. at 832:20–836:18 (Garg).
257
Plaintiffs’ other attack on the bona fides of the deadlock do not alter this conclusion.
Plaintiffs acknowledge the import of disagreements over the “question of who should run
the company,” but they argue that this question pertained to Products such that there was
no disagreement as to who should run Holdco. Pls.’ Opening Br. at 44. This argument
ignores the reality of EOS’s business structure and falsely assumes that Mehra
compartmentalized his efforts to manage Holdco from his efforts to manage EOS’s
subsidiaries. That is not the case. The parties treated EOS as a single operation and
managed it accordingly. The Board action to remove Mehra as a Manager of Kind was a
surrogate vote to remove Mehra from his management roles at EOS generally.
58
2. Breach of Section 4.03’s Requirements to Act in Good Faith
and Protect and Promote the Members’ Interests
Plaintiffs next claim that the dissolution should be rendered invalid due to
Teller’s breach of Section 4.03 of the LLC Agreement, which required him to act
“in good faith” and to “protect and promote the interests of the Company and the
Members.”258 This argument can be broken down into two parts. First, Mehra
repackages his argument that Teller failed to act in good faith by manufacturing the
deadlock. Second, Mehra contends that Teller failed to protect and promote
Plaintiffs’ interests by discontinuing their shared-control relationship of the EOS
entities.
The Delaware Supreme Court has held that contractual good faith is a
subjective standard applied at the time the decision was made.259 The standard is
“purely subjective” and Section 4.03 is upheld if Teller “in good faith determined”
that Mehra’s removal was in the Company’s best interest and that his secrecy
258
See Pls.’ Opening Br. at 48–49; LLC Agreement § 4.03.
259
See DV Realty Advisors LLC v. Policemen’s Annuity and Ben. Fund of Chicago, 75
A.3d 101, 109–11 (Del. 2013); see also ev3, Inc. v. Lesh, 114 A.3d 527, 539 (Del. 2014)
(applying the DV Realty standard to analysis of contractual good faith in failing to make
milestone payments pursuant to a merger agreement, noting that “[a] plaintiff contending
that a party did not comply with its express contractual duty of good faith would typically
have to show that the party acted in subjective bad faith.”); Allen v. Encore Energy P’rs.,
L.P., 72 A.3d 93, 105–06 (Del. 2013) (holding that where a limited partnership agreement
imposed “a contractual duty of subjective good faith,” a plaintiff must show conscious
disregard of that contractual duty “to form a subjective belief,” which “would take an
extraordinary set of facts”).
59
furthered the Company’s best interest.260 The court need not rehash determinations
reached in prior sections of this decision. Though Teller’s testimony lacked
credibility at times, he believably testified that he fundamentally disagreed with how
Mehra ran the business.
As for the clandestine manner in which Teller accomplished this goal, Teller
testified as to his belief that any transparency about his intentions would have been
counterproductive. Specifically, Teller felt that “asking him to leave would have not
been very productive, and it would have caused . . . obvious dissent in the
organization, which would have had a negative effect on the employees. And I was
concerned that . . . there would be this period of limbo . . . where people weren’t sure
who do I report to and this company is chaotic and I need to leave.” 261 Teller based
his belief on Mehra’s “temperament” and on his “experience with [Mehra].” 262 The
court finds that Teller’s assertion was genuine—Teller honestly believed that
alerting Mehra to his intentions prior to the meeting would have been
counterproductive.
Plaintiffs spend much of their post-trial reply brief attacking Teller’s
credibility on several critical topics, including Teller’s “hope” that Mehra would
260
DV Realty, 75 A.3d at 111.
261
Trial Tr. at 520:4–15 (Teller).
262
Id. at 520:4–5 (Teller).
60
agree to step down, Teller’s purported confusion over the mechanics of the
dissolution, and each of the business disputes put forth by Teller in this litigation.263
As to those topics, the court shares Plaintiffs suspicions. But, as explained above,
Teller credibly testified as to his decision to remove Mehra and as to his reasons for
not approaching Mehra in advance of the September 26 Meeting. Those issues
remain dispositive as to the validity of the dissolution.
Plaintiffs also point to Teller’s liquidity motive as indicative of bad faith.264
As explained in the previous section, the evidence is insufficient to conclude that
liquidity was the driving force behind Teller’s actions or that Teller’s decision to
remove Mehra was made in bad faith.
Plaintiffs next argue that Teller breached Section 4.03 by failing to “protect
and promote” their interests “in maintaining the protections and rights in EOS
Holdco’s Operating Agreement.” 265 The interests to which Plaintiffs cite are “the
Mehra Trust’s effective veto power over actions subject to the vote of EOS Holdco’s
members . . . and its interest in having Mehra remain on the Board.”266 The breach
263
Pls.’ Reply Br. at 14–17.
264
Id. at 18–20. Later, Plaintiffs claim that Teller’s motivation “was to dissolve Holdco.”
Id. at 21. But the only implication or explanation offered for this motive is Teller’s ability
to benefit financially from the outcome. As noted above, the evidence simply does not
demonstrate that this was Teller’s driving motivation.
265
Pls.’ Opening Br. at 49.
266
Pls.’ Reply Br. at 21.
61
they assert is Teller’s act of dissolving the Company, which eliminated those
rights.267
Plaintiffs’ “preserve and protect” argument conflicts with the parties’
contractual scheme. Essentially, Plaintiffs contend that Teller had an obligation to
preserve and protect Mehra’s shared-control rights in all circumstances, even in the
event of deadlock. Put differently, Plaintiffs argue that Teller was required to
continue working in a shared-control relationship with Mehra in perpetuity. This
interpretation would render the Deadlock Provision meaningless by permanently
foreclosing any dissolution that would eliminate the shared-control arrangement.
Plaintiffs’ interpretation must be rejected for that reason.268
To recap, because Teller acted with the honest belief that his conduct was
necessary for the Company, he did not breach the Section 4.03 requirement that the
Board of Managers act in good faith. And the protect-and-promote requirement was
not a till-death-do-us-part commitment; it did not require Teller to remain in a
shared-control relationship with Mehra in perpetuity. Plaintiffs’ arguments therefore
do not warrant invalidating the dissolution of Holdco.
267
Id.
268
Osborn v. Kemp, 991 A.2d 1153, 1159 (Del. 2010) (holding that courts must “read a
contract as a whole and . . . give each provision and term effect, so as not to render any part
of the contract mere surplusage”) (quoting Kuhn Const., Inc. v. Diamond State Port Corp.,
990 A.2d 393, 396–97 (Del. 2010)); Shall, Black’s Law Dictionary (11th ed. 2019)
(defining “shall” as “is required to,” noting that it connotes “the mandatory sense that
drafters typically intend and that courts typically uphold”).
62
3. Breach of Section 4.10’s Dissolution Requirements
Plaintiffs’ final theory of contractual breach is that Teller violated
Section 4.10’s requirements for a deadlock-based dissolution. Plaintiffs first claim
that Teller breached Section 4.10 by unilaterally effecting the dissolution and
distributing Company assets. 269 Plaintiffs next claim that Teller breached
Section 4.10’s requirement to give effect to the Company’s economic sharing
arrangements at the Kind level.270 Once again, Plaintiffs argue that these breaches
warrant invalidation of the dissolution. 271
a. Teller did not breach the LLC Agreement
by acting unilaterally to effect the
dissolution.
The Deadlock Provision of Section 4.10 provides that “in the event the vote
upon action by the Board of Managers results in a deadlock, then the Board of
Managers shall dissolve the Company in accordance with Article X.”272 Plaintiffs
interpret this language as requiring that the Board—meaning both Managers and not
an individual Manager—effect the dissolution. Plaintiffs also argue that this
language incorporates by reference Article X of the LLC Agreement, which requires
that the Board appoint a “liquidator (who may be a Member)” to “liquidate the assets
269
Pls.’ Opening Br. at 50–51.
270
Id. at 52.
271
Id. at 49–50.
272
LLC Agreement § 4.10 (emphasis added).
63
of the Company, apply and distribute the proceeds . . . as contemplated by this [LLC
Agreement].”273 Plaintiffs claim that the dissolution violated these provisions
because Teller, and not the Board, unilaterally executed the Notice of Dissolution
and liquidated the assets.
It is easy to reject Plaintiffs’ interpretation of Section 4.10, which would
essentially require a unanimous Board vote from a deadlocked Board to effect
dissolution. The premise of Plaintiffs’ argument is that because the Board must take
action to dissolve the Company under Section 4.10, Teller could not effectuate
dissolution without Mehra’s authorization. Put differently, Plaintiffs argue that
Mehra holds veto rights over the Board’s compliance with Section 4.10. Taken to
its logical extreme, Plaintiffs’ argument results in the nonsensical possibility that a
Board deadlock—which “shall” trigger dissolution under Section 4.10—does not
result in dissolution if the Board fails to authorize dissolution. To avoid the perpetual
loop of deadlocked Board decisions, and to render the mandatory language of
Section 4.10 effective as this court must,274 dissolution must flow automatically from
an event of deadlock without any intervening Board action. 275
273
Id. § 10.02.
274
See supra note 268 and accompanying text.
275
Plaintiffs’ interpretation seems unlikely to result in an invalidation of the dissolution in
any event. At a minimum, the perpetual deadlock loop created by Plaintiffs’ reading would
support a holding that it is not reasonably practicable to carry on the business so as to justify
judicial dissolution under the LLC Act. See 6 Del. C. § 18-802.
64
Section 10.01 of the LLC Agreement bolsters the conclusion that Section 4.10
requires automatic dissolution upon an event of deadlock. Section 10.01 states that
such “[d]issolution of the Company shall be effective on the day the event occurs
giving rise to the dissolution.”276 As specified by Section 4.10, a deadlocked Board
vote is an event giving rise to dissolution under the LLC Agreement. Thus, under
Section 10.01, dissolution was required to occur on the day of the event of deadlock,
timing that leaves little room for intervening Board action.277
For these reasons, Teller did not breach Section 4.10 by unilaterally
authorizing dissolution.
Plaintiffs’ argument based on Section 10.02’s requirement that the Board
appoint a liquidator fares no better. Once again, the premise of Plaintiffs’ argument
is that intervening Board action is required to implement aspects of Section 4.10,
which runs contrary to the mandatory nature of Section 4.10 and would undermine
the effectiveness of the Deadlock Provision.
276
LLC Agreement § 10.01 (emphasis added).
277
The drafting history of Section 4.10 provides additional support for the notion that the
parties intended for dissolution to follow automatically from an event of deadlock. An
early draft of the 2014 amendment to the LLC Agreement provided that in the event of a
deadlock, “the Board of Managers shall vote to dissolve the Company.” JX-11 § 4.10
(emphasis added). The final version of Section 4.10 omits this language and requires only
that in the event of a deadlock “the Board of Managers shall dissolve the Company.” LLC
Agreement § 4.10 (emphasis added). In so doing, the LLC Agreement contemplates
dissolution as the mandatory consequence of a deadlock.
65
Plaintiffs’ argument based on Section 10.02 fails for other reasons as well. It
is true that dissolution under Section 4.10 is subject to Article X, which governs
dissolution generally. But a deadlock-based dissolution is governed by specific
provisions of Section 4.10. And here the specific terms of Section 4.10 prevail over
the general terms of Article X.278 Section 4.10 requires distribution of the
Membership Interests in Kind:
[I]n connection with such dissolution, the membership
interests of Kind then held by the Company, as well as any
other Company assets . . . , shall be distributed to the
Members pro rata in accordance with their respective
Membership Interests . . . . 279
That requirement applies “notwithstanding anything to the contrary contained
herein.” 280 The requirement is purely formulaic, which cuts against the notion that
the parties intended that a liquidator be appointed to implement it. It is simply not
reasonable to interpret Section 4.10 as requiring the appointment of a liquidator, as
Plaintiffs argue. It is unclear why the appointment of a liquidator would make a
difference given the formulaic nature of Section 4.10 in any event.
278
See, e.g., DCV Hldgs., Inc. v. ConAgra, Inc., 889 A.2d 954, 961 (Del. 2005) (“Specific
language in a contract controls over general language, and where specific and general
provisions conflict, the specific provision ordinarily qualifies the meaning of the general
one.” (citing Katell v. Morgan Stanley Gp., Inc., 1993 WL 205033, at *4 (Del. Ch. June 8,
1993))).
279
LLC Agreement § 4.10 (emphasis added).
280
Id.
66
In sum, in response to a deadlock, the Company “shall” be dissolved. Teller
was therefore empowered to give effect to that dissolution and to liquidate the
Company’s assets notwithstanding the Deadlock Provision’s reference to Board
action or any requirement that the Board appoint a liquidator.
b. Teller breached the LLC Agreement by
failing to give effect to the economic
arrangements among the Members at the
Kind level.
Plaintiffs’ final argument for invalidating the dissolution under the LLC
Agreement is based on the remaining language of Section 4.10, which states:
[I]n connection with such dissolution . . . each of the
Members shall take such actions as are necessary or
appropriate to give effect as members of Kind to the
economic arrangements among the Members set forth in
Section 7.01(a)(ii) (i.e., it is the intent of the Members that,
as between such Members, the same distribution
provisions shall apply as Members of the Company or as
members of Kind). 281
As discussed above, Section 7.01(a)(ii) requires that distributions are made
proportionate to the Membership Interests (approximately 85%/15%) until
aggregate distributions equal the threshold.282 Once the threshold is achieved,
distributions are to be made according to the Revised Sharing Percentages
(50%/50%). Plaintiffs contend that Teller failed to give effect to the Company’s
281
Id. (emphasis added).
282
Id. § 7.01(a)(ii).
67
economic arrangement at Kind when dissolving EOS Holdco. This, according to
Plaintiffs, puts Teller in ongoing breach of Section 4.10. 283
This argument has merit. Teller acknowledges his duty under Section 4.10 to
give effect to the distribution provisions of Holdco after dissolution. 284 He further
admits that he took no action to implement Plaintiffs’ economic rights at Kind.285
Although Plaintiffs’ argument has merit, it does not speak to the immediate
question before the court—whether there was a basis to dissolve Holdco. Plaintiffs
do not argue that this breach, standing alone, warrants invalidation of the dissolution.
Nor could they. Replicating the Company’s distribution provisions at Kind is an
obligation “in connection with” and not a condition precedent to the dissolution.286
As noted above, the court bifurcated proceedings to address the narrow
question of the validity of Holdco’s dissolution. This decision therefore does not
address other remedies for Teller’s failure to replicate the Equal-Distribution
283
Pls.’ Opening Br. at 52.
284
Trial Tr. at 508:3 –11,
285
Id. at 508:12 –509:7, 511:10 –14, 514:17–24 (Teller). Teller attributes his failure to
abide by the requirements of Section 4.10 to Mehra filing this lawsuit, but that does not
make sense given that Mehra sued Teller in part for his failure to abide by Section 4.10.
Trial Tr. at 515:16–516:8, 662:5–9 (Teller); see also Defs.’ Answering Br. at 40 (“When
the parties resolve the economic aspect of this dispute, any funds owed from the Company
to the Mehra trust in order to effectuate the economic arrangements will be paid.”).
286
See LLC Agreement § 4.10.
68
Arrangement at Kind. For now, it suffices to say that this breach does not invalidate
the dissolution of Holdco.
B. Breach of Fiduciary Duties
Plaintiffs’ final argument asks the court to invalidate the dissolution on
equitable grounds.287 They contend that Teller manufactured the deadlock as part of
an illicit scheme to strip Mehra of his economic rights in EOS.288 This, according
to Plaintiffs, violated Teller’s fiduciary duty of loyalty and justifies invalidating the
dissolution. 289
By default, limited liability company managers owe fiduciary duties akin to
those owed by directors of a corporation. 290 Although Delaware law permits a
limited liability company to eliminate fiduciary duties in the governing
agreement,291 the LLC Agreement does not do so.
Teller owed the Company and its Members a duty of loyalty, which “mandates
that the best interest” of the Company and its owners “takes precedence over any
287
Pls.’ Opening Br. at 53.
288
Id. at 53–61.
289
Id. at 62–63.
290
6 Del. C. § 18-1104 (“In any case not provided for in this chapter, the rules of law and
equity, including the rules of law and equity relating to fiduciary duties . . . shall govern.”).
291
6 Del. C. § 18-1101(e) (“A limited liability company agreement may provide for the
limitation or elimination of any and all liabilities for breach of contract and breach of duties
(including fiduciary duties) of a member, manager or other person to a limited liability
company or to another member or manager or to another person that is a party to or is
otherwise bound by a limited liability company agreement . . . .”).
69
interest” he may have possessed personally. 292 “[B]ad faith conduct is a breach of
the duty of loyalty. . . .” 293 Under Delaware law, a plaintiff can show bad faith by
proving that a fiduciary “intentionally acts with a purpose other than that of
advancing the best interests of the corporation,” intentionally “acts with the intent to
violate applicable positive law,” or “intentionally fails to act in the face of a known
duty to act, demonstrating a conscious disregard for his duties.” 294
Plaintiffs assert several variations on their duty of loyalty claim, but the
unifying theme of these claims is that Teller breached his duty of loyalty by acting
to further his own desire for control over EOS’s cash flows. 295 The court has rejected
Plaintiffs’ theory that Teller was motivated to remove Mehra solely by a desire for
liquidity multiple times in this decision. The court has also found that Teller acted
in good faith, both in terms of deciding to remove Mehra and in doing so without
first confronting him.
Relevant to the narrow question addressed in this trial, Plaintiffs contend that
Teller’s actions warrant equitable invalidation of the dissolution because Mehra
292
See Triple H Fam. Ltd. P’rship v. Neal, 2018 WL 3650242, at *18 (Del. Ch. July 31,
2018) (quoting Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993)).
293
See, e.g., Stewart v. BF Bolthouse Holdco, LLC, 2013 WL 5210220, at *11 (Del. Ch.
Aug. 30, 2013) (“It is now well-established . . . that the duty of loyalty encompasses more
than interested transactions and also covers director actions taken in bad faith.”).
294
In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 67 (Del. 2006).
295
See, e.g., Pls.’ Opening Br. at 57–58 (arguing that Teller was motivated by a need for
liquidity and that he sought to gain control over the Company to benefit from its sale).
70
“was ambushed and ejected from the premises,” and therefore “was not given the
opportunity to consider his options.”296 According to Plaintiffs, the Board’s actions
at the September 26 Meeting were void, even if all of the steps taken in advance of
and during that meeting complied with the LLC Agreement and LLC Act.
Plaintiffs rely on two decisions in which this court invalidated actions taken
at a board meeting—VGS, Inc. v. Castiel and Alderstein v. Wertheimer297—but these
decisions are inapposite.
In VGS, Inc. v. Castiel, this court declared invalid a merger orchestrated by
two managers without notice to a third manager who could have used his majority
stake to prevent the merger. 298 The LLC had three members and a three-person
board of managers. Two of the members were entities controlled by the founder,
which collectively designated one manager, and which held a majority of the
membership interests.299 The other member was an entity controlled by an investor,
which designated one manager.300 The third manager was independent from the
members.
296
Id. at 60.
297
Id. (citing Alderstein v. Wertheimer, 2002 WL 205684, at *9–11 (Del. Ch. Jan. 25, 2002)
and VGS, Inc. v. Castiel, 2000 WL 1277372, at *4 (Del. Ch. Aug. 31, 2000)).
298
2000 WL 1277372, at *4–5.
299
Id. at *1.
300
Id.
71
After some time, the founder and the investor “had very different ideas about
how the LLC should be managed and operated.”301 The investor successfully
convinced the third-party manager to merge the LLC into a Delaware corporation
without notice to the founder. 302 They did so by written consent of a two-thirds
majority of the board, an action that the founder could have prevented had he been
informed in advance. The court held that this secret merger violated the managers’
duty of loyalty to the LLC and its majority member. 303 Central to the court’s analysis
was the structure of the LLC agreement, through which the majority stockholder
“protected his equity interest in the LLC through the mechanism of appointment to
the board rather than by the statutorily sanctioned mechanism of approval by
members owning a majority of the LLC’s equity interests.” 304 The court noted that
the defendants “knew that with notice [the third manager] could have acted to protect
his majority interest” and that they therefore “breached their duty of loyalty to the
original member and their fellow manager by failing to act in good faith.”305 For
that reason, the court declared the merger invalid.
301
Id. at *2.
302
Id.
303
Id. at *5.
304
Id.
305
Id. at *4.
72
In Alderstein v. Wertheimer, this court invalidated a stock issuance planned
without notice to a controlling stockholder. 306 The company at issue in Alderstein
struggled financially due to a series of managerial problems that ultimately resulted
in its insolvency. 307 In anticipation of a board meeting, one director proposed terms
for an acquisition of the company but did not disclose those plans to the company’s
founder and controlling stockholder. 308 Upon learning of this plan at the board
meeting, the founder objected to its dilution of his voting control, despite the
company’s “immediate need of funds.”309 After the board voted to approve the
transaction and to remove the founder from the board, the founder voted his majority
shares to remove other directors from the board by written consent.310 He then filed
a suit seeking to invalidate the actions of the board meeting and to reinstate his
majority control, retroactively giving effect to his written consent.311
After concluding that the board meeting complied with the requirements of
the DGCL and the company’s bylaws, the court framed the question as “whether
[the plaintiff] had an adequate opportunity to protect his interests.”312 The court
306
2002 WL 205684, at *9–11.
307
Id. at *1–5.
308
Id. at *6.
309
Id. at *7.
310
Id.
311
Id.
312
Id. at *10.
73
reasoned that “the decision to keep [the plaintiff] in the dark about the plan . . . was
significant because [he] possessed the contractual power to prevent the issuance.”313
Although the plaintiff “may or may not have exercised this power had he been told
about the plan in advance,” the court deemed invalidation of the issuance proper
because “he was fully entitled to the opportunity to [protect himself] and the
machinations of those individuals who deprived him of this opportunity were unfair
and cannot be countenanced by this court.” 314 Despite the directors’ good-faith
desire to save the company, the court would not allow them “accomplish such action
through trickery or deceit,” and invalidated the actions of the board.315
The outcomes of VGS and Alderstein were driven by the fact that the
disadvantaged board member held a controlling equity stake or was the
representative of a controlling stakeholder. In each case, the controllers could have
exercised their voting power or contractual rights to alter the course of the board
meeting at issue. By failing to provide sufficient notice of the board action, the
fiduciaries breached their duties to the controlling stakeholder, which required the
court to invalidate the actions of that meeting.316
313
Id. at *9.
314
Id.
315
Id. at *11.
316
Reasonable minds can debate whether the holdings of VGS and Alderstein are consistent
with other decisions of this court and tenets of Delaware law generally. See generally
Klaassen, 2013 WL 5967028, at *3–16 (discussing VGS, Alderstein, their progenitors and
74
In this case, unlike in VGS or Alderstein, Teller is the majority stakeholder,
and Mehra lacked any contractual or other rights that would have enabled him to
avoid the outcome of the September 26 Meeting, even if he had detailed advanced
notice. 317 Thus, the nature by which the September 26 Meeting was convened does
not provide a basis for invalidating the actions that took place at that meeting.
III. CONCLUSION
For the foregoing reasons, the court enters judgment in favor of Defendants
regarding the existence of deadlock and the validity of Holdco’s dissolution. The
parties are to confer on a path forward for litigating the remainder of Plaintiffs’
claims.
progeny). Because both cases are factually distinguishable, this court need not reach that
issue.
317
The Delaware Supreme Court’s recent affirmance in Bäcker v. Palisades Growth
Capital II, L.P., is distinguishable. See 2021 WL 140921 (Del. Jan. 15, 2021), aff’g 2020
WL 1503218 (Del. Ch. Mar. 26, 2020). There, the defendants affirmatively misled their
fellow director. Id. at *12–15. The Supreme Court observed that the trial court “did not
impose an equitable notice requirement by faulting the Bäckers for their silence,” but
rather, “[t]he court granted equitable relief because the Bäckers made misrepresentations
designed to deceive their fellow directors.” Id. at *18. There are no facts in this case
demonstrating that Teller affirmatively misled Mehra.
75