Pearl City Elevator, Inc. v. Rod Gieseke, Jay Butson and Dan Holland (Adkins Energy, LLC, Nominal Defendant)

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
PEARL CITY ELEVATOR, INC., )
an Illinois cooperative, )
)
Plaintiff, )
)
v. ) C.A. No. 2020-0419-JRS
)
ROD GIESEKE, JAY BUTSON and )
DAN HOLLAND, )
)
Defendants, )
)
and )
)
ADKINS ENERGY, LLC, a Delaware )
limited liability company, )
)
Nominal Defendant. )
MEMORANDUM OPINION
Date Submitted: January 21, 2021
Date Decided: March 23, 2021
Kurt M. Heyman, Esquire and Aaron M. Nelson, Esquire of Heyman Enerio
Gattuso & Hirzel LLP, Wilmington, Delaware and Eric M. Fogel, Esquire,
Victor Peterson, Esquire and Nikhil Mehta, Esquire of SmithAmundsen LLC,
Chicago, Illinois, Attorneys for Plaintiff Pearl City Elevator, Inc.
David A. Felice, Esquire of Bailey & Glasser, LLP, Wilmington, Delaware and
Brian A. Glasser, Esquire, Elliott McGraw, Esquire and Britney A. Littles, Esquire
of Bailey & Glasser, LLP, Washington, DC, Attorneys for Defendants Rod Gieseke,
Jay Butson and Dan Holland.
Laura G. Readinger, Esquire of Potter Anderson & Corroon LLP, Wilmington,
Delaware, Attorney for Nominal Defendant Adkins Energy, LLC.
SLIGHTS, Vice Chancellor
Adkins Energy Cooperative (the “Coop”) was formed to operate as a dry mill
corn-to-ethanol and biodiesel production facility owned by local farmers in or
around Lena, Illinois. 1 In 2011, Plaintiff, Pearl City Elevator, Inc., made a cash
investment in the Coop in exchange for 50% of the outstanding membership units of
the reorganized Adkins Energy, LLC (“Adkins” or the “Company”), with the
previous unitholders of the Coop (the “General Members”) holding the other half of
Adkins’ units. Under Adkins’ Third Amended Operating Agreement
(the “Agreement”), both Pearl City and the General Members were entitled to
appoint three members each to Adkins’ board of governors (the “Pearl City
Governors” and the “General Governors,” respectively, and together, the “Board”).2
Neither faction was permitted to cast a vote in the election of the other’s designated
Governors.3 Thus, the Agreement divided ownership and control equally between
Pearl City and the General Members.
1
Joint Pre-Trial Stip. and Order (D.I. 122) (“PTO”) ¶ 10; Trial Tr. (D.I. 133–34) (“Trial
Tr. __ (witness name)”) 12:7–10, 33:23–34:2 (Ramsel), 345:4–6 (Huffman); Joint Trial
Ex. (“JX”) 156 ¶ 8. I cite to the Verified Compl. pursuant to 6 Del. C. §§ 18-109, 18-110
and 18-111 (D.I. 1) as “Compl. __,” the Post-Trial Tr. (D.I. 154) as “Post-Trial Tr. __,”
and lodged depositions as “(Name) Dep. __.”
2
JX 1 (“OA”).
3
The current General Governors are Defendants, Rod Gieseke, Jay Butson and
Dan Holland (“Defendants”).
1
Pearl City initiated this action under 6 Del. C. § 18-110 (“Section 18-110”) to
obtain a declaratory judgment that it has lawfully altered Adkins’ 50/50 governance
structure by acquiring sufficient equity in the Company to justify its designation of
a seventh Governor to the Board. The lawfulness of Pearl City’s claim to control
depends upon its compliance with the control-related provisions of the Agreement.
Section 5.2 of the Agreement, by all accounts a heavily negotiated provision, entitles
either faction to elect an additional Governor upon its accumulation of more than
56% of Adkins’ units. To cross the 56% threshold, Pearl City and the General
Members could acquire additional Adkins units through private sales or sales
facilitated by a qualified matching service (“QMS”). Transfers can be made between
existing Adkins members, or between existing members and new members
conditioned upon the new member’s execution of a Joinder Agreement, as defined
in the Agreement, in which the new member commits, among other things, to be
bound by the Agreement.
In May 2020, roughly nine years after the Agreement was executed, Pearl City
notified the General Governors that it had acquired over 56% of Adkins’ units.
Citing Section 5.2, Pearl City further notified the General Governors that it intended
to seat a seventh Governor on the Board. The General Governors responded by
advising Pearl City it had improperly acquired units, did not meet the 56% ownership
2
threshold and could not, therefore, designate a seventh Governor to the Board. Pearl
City filed this action shortly thereafter.
The General Governors argue Pearl City’s attempt to reach the 56% threshold
was ineffective on four grounds. First, they read the Agreement to require
affirmative Board approval of all transfers of Adkins’ units, which Pearl City did not
obtain (or even request). Second, they read the Agreement to require Pearl City to
provide a satisfactory legal opinion to the Board in connection with unit transfers
that confirms the transferee’s acquisition of units does not jeopardize Adkins’ tax
status or otherwise violate the Agreement, which Pearl City failed to provide. Third,
they read the Agreement to require advance notice of transfers prior to their
consummation, which Pearl City failed to timely deliver. Fourth and finally, the
General Governors invoke the affirmative defenses of unclean hands and material
breach to argue that, even if Pearl City complied with the Agreement, the Court
should exercise its equitable powers to cancel Pearl City’s acquisition of units.
Pearl City responds that the Agreement says nothing of “advance” notice to
the Board of unit transfers and requires Board approval and delivery of a legal
opinion only when units are transferred to new Members. Because each of its unit
purchases were from existing Members to existing Members, those requirements do
not apply. In any event, says Pearl City, even if the Agreement required legal
opinions in support of intra-Member transfers, Pearl City delivered three legal
3
opinions to the Board in satisfaction of that requirement. Pearl City thus argues it
has complied with the Agreement in all respects.
The matter was tried to the Court in October 2020. After careful consideration
of the trial evidence and arguments of counsel, I find that: (1) affirmative Board
approval is not required for intra-Member transfers; (2) the Board may defer a
transfer pending a legal opinion to verify compliance with discrete areas of law
enumerated in the Agreement; and (3) advance notice of transfers is not required.
Pearl City has complied with the Agreement in its acquisition of Adkins’ units, it is
entitled under the Agreement to seat a seventh Governor on the Board, and the
General Governors’ affirmative defenses do not bar Pearl City from exercising that
bargained-for right. Accordingly, judgment will be entered in favor of Pearl City.
My reasoning follows.
I. BACKGROUND
The facts are drawn from the parties’ pretrial stipulation and the evidence
admitted at trial. The trial record consists of seven lodged depositions, 194 joint trial
exhibits and testimony given during a two-day trial. The following facts were
proven by a preponderance of the competent evidence.
4
A. Parties and Relevant Non-Parties
Non-party, Adkins, is a Delaware LLC that owns and operates an ethanol plant
in Lena, Illinois. 4 Adkins’ Members, as defined in the Agreement, hold varying
amounts of the 115,020 total units outstanding.5 Adkins treats its Members as
“partners” for federal income tax purposes, conferring upon them favorable pass-
through taxation.6
Plaintiff, Pearl City, is an Illinois cooperative and Adkins’ largest unitholder.7
It provides Adkins with grain needed to produce ethanol. 8 Pearl City’s cooperative
members, or “patrons,” are primarily farmers who buy product from Pearl City.9
Most of Pearl City’s 2,000 patrons live near Lena.10 Approximately 280 Pearl City
patrons also own Adkins’ units. 11
4
PTO ¶ 4; Trial Tr. 12:7–10 (Ramsel), 345:4–6 (Huffman); JX 156 ¶ 8.
5
OA; Trial Tr. 25:14–16 (Ramsel).
6
JX 182 at 6; Trial Tr. 346:9–18 (Huffman).
7
PTO ¶ 5; Trial Tr. 25:7–13 (Ramsel).
8
Trial Tr. 11:18–23 (Ramsel).
9
See id. at 10:20–11:6, 81:11–82:1 (Ramsel).
10
Id. at 83:3 (Ramsel), 414:20–415:6 (Foley).
11
Id. at 85:13–24 (Ramsel).
5
Defendant, Rod Gieseke, is a General Governor and Chairman of the Board.12
He has continuously served on the Board since 2008.13 He indirectly owns
approximately 1,700 units through his company, RB Gieseke, Inc., making him one
of the largest unitholders among the General Members.14
Defendant, Jay Butson, has been a General Governor since 2000. 15 He is also
a Member and indirectly owns his units through the Butson family trust.16
Specifically, he owns approximately 2,000 units, making him one of the largest
individual unitholders among the General Members.17
Defendant, Dan Holland, is a Member and General Governor who also serves
as Adkins’ treasurer.18 He has served on the Board since 2010.19
12
Id. at 115:5–11 (Gieseke).
13
Id. at 115:15–20 (Gieseke).
14
Id. at 116:15–23 (Gieseke).
15
Id. at 472:12–13 (Butson).
16
Id. at 471:5–8 (Butson).
17
Id. at 507:17–24 (Butson).
18
PTO ¶ 8; JX 16.
19
(Holland) Dep. 23:16–18.
6
Non-party, Elmer Rahn, is a Pearl City Governor.20 He is also Pearl City’s
President and serves on the Pearl City Board. 21 He is a full-time farmer.22
Non-party, Matt Foley, is also a Pearl City Governor. 23 He is vice chairman
of the Pearl City Board. 24 He is a full-time farmer and lives in Lena.25 Foley has
been a Pearl City patron for more than 20 years.26
Non-party, David Schenk, is the third Pearl City Governor.27 He is the current
secretary for the Board. 28
Non-party, Phil Ramsel, is Pearl City’s General Manager and Chief Executive
Officer.29
20
PTO ¶ 5.
21
(Rahn) Dep. 14:10–15.
22
Id.
23
PTO ¶ 5; Trial Tr. 395:23–396:9 (Foley).
24
Trial Tr. 395:20–22 (Foley).
25
Id. at 414:13–415:9 (Foley).
26
Id. at 414:5–7 (Foley).
27
PTO ¶ 5; Trial Tr. 179:23–180:3 (Gieseke).
28
Trial Tr. 179:21–22 (Gieseke)
29
Id. at 10:8–18 (Ramsel).
7
Non-party, Ray Baker, is Adkins’ General Manager.30 He has worked for
Adkins since 2001 and has served as General Manager since 2011.31 Baker is also
a Member and owns 50 units.32 He actively monitors activity on FNC and advises
the General Governors, but not the Pearl City Governors, regarding the availability
of units for purchase on FNC.33
Non-party, Locke Lord LLP, has been Adkins’ outside counsel since 2000
and participated in the negotiation and drafting of the Agreement. 34 Keith Parr and
David Kendall are attorneys at Locke Lord who have provided legal advice to
Adkins relevant to this dispute.35
Non-party, FNC, is an intermediary bulletin board for thinly traded equity
interests in agricultural companies.36 Selling Members can list a nonbinding price
request for their units on FNC, and buyers can place nonbinding blind offers to
30
Id. at 227:2–4 (Baker).
31
Id. at 227:5–20 (Baker).
32
JX 28 at 4.
33
Trial Tr. 251:6–252:18 (Baker); JX 44 at 688.
34
Trial Tr. 117:8–118:7 (Gieseke), 276:1–13 (Baker).
35
Id. at 117:8–14 (Gieseke).
36
JX 156 ¶ 48.
8
purchase units on the bulletin board. 37 A bidder will be notified of any higher bids
and given the opportunity to increase his original bid. 38 A Member who lists his
units for sale does not know the identity of the bidder—including whether it is a
member of the Board. 39
B. The Formation of Adkins
On December 17, 1999, Adkins was formed as a Delaware limited liability
company.40 As noted, Adkins operates a dry mill corn-to-ethanol and biodiesel
production facility in Lena, Illinois,41 and confers upon its Members favorable pass-
through taxation treatment for federal income tax purposes.42 Adkins relies on Pearl
City for its corn which is supplied through an exclusive supply arrangement captured
in a Grain Delivery Agreement.43
37
(Butson) Dep. 44:5–19; Trial Tr. 221:4–21 (Gieseke); JX 182 at 8.
38
(Butson) Dep. 44:7–12, 46:3–11.
39
Trial Tr. 252:19–22 (Baker); JX 14.
40
PTO ¶ 9.
41
Trial Tr. 12:7–10 (Ramsel), 345:4–6 (Huffman); JX 156 ¶ 8.
42
JX 182 at 6; Trial Tr. 346:9–18 (Huffman).
43
Trial Tr. 95:18–24 (Ramsel).
9
On August 31, 2011, Pearl City acquired 7.778% of the outstanding units from
the Coop. 44 Pearl City and the Coop executed the Agreement the following day.45
At that time, the Coop was liquidated and dissolved, and its ownership interests in
Adkins were distributed to the General Members. 46 That distribution resulted in
both Pearl City and the General Members each owning 57,510 units, or 50% each of
Adkins’ issued and outstanding units. 47
C. The Parties Negotiate a Unit Threshold for Board Control
The Agreement serves as Adkins’ constitutive document. 48 Pearl City and the
Coop are signatories to the Agreement. 49 Each Member must sign a Joinder
Agreement upon first acquiring Adkins units, which binds the Member to the
Agreement. 50
Under Section 5.2 of the Agreement, Pearl City and the General Members
agreed that each would appoint, as 50% unitholders, three Governors to Adkins’ six-
44
OA; JX 182 at 5.
45
See OA.
46
PTO ¶¶ 11–12; OA.
47
PTO ¶ 22.
48
OA; PTO ¶ 14.
49
OA at 46.
50
Trial Tr. 119:17–120:8 (Gieseke); OA § 4.4.
10
member Board—the Pearl City Governors and the General Governors,
respectively.51 This division of power was refined in Section 9.7, where the parties
agreed that only General Members are entitled to vote in the election of the General
Governors, and only Pearl City is entitled to vote in the election of the Pearl City
Governors.52
While Adkins is a manager-managed LLC, with Baker at the helm,53 the
Board is charged under Sections 5.10 and 6.1 of the Agreement with general
“authority to supervise and control all operations of the Company,” except as
expressly provided in the Agreement.54 For the avoidance of doubt, Baker’s
employment agreement stipulated that, “Manager understands that ultimate
discretion and control over the Business shall remain vested in the [Board] and
Manager shall do nothing inconsistent therewith.”55
With two factions holding equal representation on the Board, the parties were
confronted with the question of how one side might one day assume majority control
51
OA § 5.2; JX 156.
52
OA § 9.7; see also id. at § 5.1(a).
53
Trial Tr. 227:2–7 (Baker).
54
OA § 5.10; see also id. § 6.1 (providing that “[t]he business and affairs of the Company
[are] managed by and under the direction of the Board,” and “[t]he management of the
Company is vested in the Board”).
55
JX 28 at 304.
11
of Adkins’ governing body. By all accounts, this issue was a central focus of the
parties’ negotiations. 56 The negotiations culminated in Section 5.2 of the
Agreement, which sets out the procedural mechanism by which either Pearl City or
the General Members (as a group) may take control of the Board. Locke Lord, as
Company counsel, participated in these negotiations. 57 Section 5.2 states:
In the event that either Pearl City or the General Member Group
increase their Percentage Interest to more than fifty-six percent
(56%) . . . the size of the Board of Governors shall be increased from
six (6) members to seven (7) members and the Member (or group of
Members, as applicable) whose Percentage Interest has increased to
fifty-six percent (56%) or more shall be entitled to appoint or elect four
(4) of the seven (7) members of the Board of Governors.58
Through Section 5.2, the parties “very clearly” understood that one faction may
someday seek to gain majority control of the Board through the accumulation of
units.59
Section 12.1 of the Agreement describes the procedures for transferring
Adkins’ units. 60 First, under Section 12.1(i), in connection with all “proposed
Transfer[s],” the parties must provide a “written notice” of transfer to the Company,
56
Trial Tr. 222:1–9 (Gieseke); Pl.’s Opening Post-Trial Br. (D.I. 143) at 4.
57
Id. at 276:7–13 (Baker).
58
OA § 5.2.
59
Trial Tr. 222:1–9 (Gieseke).
60
See OA § 12.1.
12
which must take the form of a “Notice of Proposed Transfer” (“Transfer Notice”).61
The Transfer Notice, attached as Exhibit C to the Agreement, expressly
contemplates two “[m]ethod[s] of proposed transfer”: “[p]rivate sale[s]”
(with “no public solicitation”) and public, qualified matching service (“QMS”)
sales.62 For Adkins, QMS sales occur on FNC and provide safe harbor under IRS
regulations for continued favorable tax treatment. 63 Adkins’ contract with FNC is
governed by an executed engagement agreement called the Trading Services
Agreement (“TSA”),64 which required Adkins to maintain a Trading Service
Operational Manual (the “Trading Manual”) on its website and a Trading Service
Summary (the “Trading Summary,” together with the TSA and Trading Manual, the
“FNC Documents”).65 True to form, Members historically have transferred units
through both private sales and the FNC. 66
61
Id.; see also Trial Tr. 21:23–24:8 (Ramsel).
62
Trial Tr. 39:2–11 (Ramsel), 151:18–152:10 (Gieseke), 238:20–23 (Baker).
63
26 C.F.R. §1.7704–1(g); Trial Tr. 40:1–4 (Ramsel) (“So Adkins is organized as a limited
liability company, and they are taxed as a privately -- private partnership. So they enjoy
single taxation.”).
64
JX 3.
65
JX 35; JX 4.
66
JX 156 ¶ 31; JX 20; Trial Tr. 122:21–123:8 (Gieseke); see also id. at 239:24–240:14
(Baker).
13
Second, under Section 12.1(ii), “to the extent that the proposed Transfer is not
to an existing Member,” the transferring Member must obtain the “affirmative
consent and approval” of the transfer from the Board by simple majority vote.67
With the Board split equally between Pearl City and General Governors,
Section 12.1(ii) expressly requires bipartisan approval of transfers to non-existing
Members. Section 12.1(iii) provides that, “[w]ithout limitation to the foregoing,”
transfers become effective upon the start of the next fiscal quarter “following the
approval of such Transfer by the Board of Governors.” 68
Third, Section 12.1 acknowledges “that the restrictions set forth in
Section 12.2 may limit the number of LLC Units that may be Transferred in a given
period and, in such case, the Board shall consider such approval requests in the order
in which they are received . . . and may defer” their approval “until a later date in
order to comply with such limitations.”69 Section 12.2 enumerates eight categories
of transfers which are, “[n]otwithstanding anything herein [the Agreement] to the
contrary,” prohibited. 70 The final four categories prohibit transfers that would
violate the then existing provisions of certain debt financing documents, violate
67
OA § 12.1.
68
Id.
69
Id.
70
Id. § 12.2.
14
federal or state securities laws, or threaten Adkins’ tax status.71 To police
compliance with those four legal imperatives, Section 12.2 states, “[n]o issuance or
Transfer . . . may be made unless (a) an opinion of counsel, satisfactory in form and
substance to the Board and counsel for the Company [is delivered to the Board]
(which requirement for an opinion may be waived, in whole or in part, at the
discretion of the Board).”72 It also requires “the recipient of the LLC Units [to have]
executed a Joinder Agreement.”73
The parties dispute whether Section 12.2 requires an opinion of counsel
(an “Opinion”)—costing in this case several tens of thousands of dollars 74—for
every transfer under Section 12.2, or only for those transfers requiring the
“execut[ion of] a Joinder Agreement,” i.e., only for transfers to new members. The
Board has never requested nor been provided an Opinion in the past.75 It also has
never formally waived any requirement for an Opinion for any transfer of any type
or scale.76
71
See id.
72
Id.
73
Id.
74
Trial Tr. 53:12–54:2 (Ramsel).
75
Id. at 121:12–19 (Gieseke), 423:12–22 (Foley).
76
Id. at 121:20–24 (Gieseke), 424:3–6 (Foley).
15
Fourth and finally, the parties agreed under Section 16.4 that any amendment
to the Agreement, including amendments to the means by which a Member could
effectively transfer units, must be in writing, adopted by the Board and approved by
a majority of the Members.77 Only two amendments have been made to the
Agreement since it was adopted; neither concerned provisions implicated by this
litigation. 78
D. Pearl City Crosses the Unit Threshold
In February 2020, Pearl City initiated a campaign to accumulate units in an
effort to cross Section 5.2’s 56% threshold and earn the right to seat a seventh
Governor. From February through May 2020, Pearl City acquired 863 units through
the QMS, which were approved by the Board as required under the Trading
Manual. 79 Most unit transfers, however, were facilitated through private sales.80
On March 5, 2020, Pearl City announced to its patrons two initiatives it was
launching for the purpose of attaining the right to elect a seventh Governor (its
77
OA § 16.4.
78
See JX 2.
79
PTO ¶¶ 27–28; JX 35 (“All transfers of Membership Units must be approved by the
Board and must meet all of the conditions and requirements of the Operating Agreement.”).
80
Pearl City believed that private sales did not require approval from the Board under the
Agreement. Whether that belief was well-founded is disputed in this litigation and will be
addressed below.
16
fourth) to the Board. 81 First, Pearl City offered to purchase units from the 280 Pearl
City patrons holding Adkins’ units (the “Purchase Offer”). 82 Under the Purchase
Offer, Pearl City patrons could sell their units to Pearl City for $412.25 per unit, a
price equal to the then-current highest offer price per Adkins Unit on FNC, less the
3% cost per unit for executing a transaction on FNC.83 The Purchase Offer
culminated in around 40 private sales transferring 6,475 units to Pearl City.84 Those
purchases, combined with the 863 units acquired in the FNC sales, gave Pearl City
64,848 units, representing 56.38% of the outstanding units.85 In other words, the
FNC acquisitions and Purchase Offer acquisitions alone gave Pearl City sufficient
units to install its fourth Pearl City Governor under Section 5.2 of the Agreement.
Second, Pearl City formed Alliance Ethanol, LLC (“Alliance Ethanol”),
a wholly-owned subsidiary formed solely to exchange units of its own LLC
membership interests for Adkins’ units held by Pearl City patrons (the “Exchange
81
JX 54; Trial Tr. 15:15–16:19, 43:22–24 (Ramsel); id. at 181:3–19 (Gieseke).
82
Trial Tr. 85:5–86:8 (Ramsel). The Purchase Offer did not extend to General Members.
Id.
83
PTO ¶ 24; JX 95. No commission or fee was charged or collected for such purchases.
JX 95; Trial Tr. 19:13–15 (Ramsel). The purchases were memorialized through a Bill of
Sale, which were written to “be deemed accepted upon [] execution on behalf of
[Pearl City] below. [Pearl City] shall pay the purchase price specified above [$412.25] to
Seller within thirty (30) days after such acceptance.” JX 56 at 8867.
84
JX 7; PTO ¶ 26; JX 165.
85
Trial Tr. 25:14–22 (Ramsel).
17
Offer”). 86 Each Alliance Ethanol unit entitled its holder to a pass-through of all
distributions received by Alliance Ethanol from Adkins. 87 Patrons also received
benefits not offered by Adkins, such as an annual dividend rate of 4% per year
guaranteed by Pearl City, and costs and expenses of Alliance Ethanol borne by Pearl
City.88 Any Alliance Ethanol unitholder could either sell their units to Pearl City or
require Pearl City to post its allocable share of units on FNC for sale and to pass on
the sale proceeds (net FNC fees) to the unitholder.89 While devised with some effort,
the Exchange Offer ultimately was never executed, meaning Pearl City did not
acquire any Adkins units through this means.90
The General Governors learned of Pearl City’s initiatives days after they were
revealed to Pearl City’s Members. 91 Invoking the assistance of Locke Lord, who as
Company counsel also represented the Pearl City Governors, the General Governors:
• Prevented the Pearl City Governors from sharing any Adkins information with
Pearl City; 92
86
JX 56; (Ramsel) Dep. 168:8–170:8.
87
JX 56.
88
Id.
89
Id.
90
Trial Tr. 27:15–28:21 (Ramsel).
91
Id. at 181:1–4 (Gieseke), 498:3–5 (Butson); JX 17 at MMS Msg on March 7, 2020,
at 8:46 A.M.; JX 111; see also JX 5, JX 55, JX 56, JX 63, JX 67.
92
JX 24
18
• Discussed forming their own LLC to “bid up” the price of units Pearl City
was attempting to acquire;93
• Formed a Special Committee consisting of only General Governors
empowered to evaluate the Exchange Offer without consulting the Pearl City
Governors;94
• Engaged in a public letter writing campaign against the Exchange Offer
(the “Fight Letters”). The Fight Letters stated Defendants’ opposition to the
Exchange Offer and asserted: (a) all transfers must occur on FNC; (b) Pearl
City was putting Adkins’ favorable single taxation status at risk; (c) Pearl City
was violating federal and state securities laws; and (d) the Exchange Offer
required the approval of the General Governors as a Related Transaction
under Section 5.15; 95
• Drafted a Joinder Agreement for Alliance Ethanol that differed from the
standard form in several material respects; 96 and
• Revealed at the Board’s monthly meeting on April 21, 2020, that the General
Governors had privately decided the Pearl City Governors were not entitled
to vote on whether the transfers to Alliance Ethanol would be recognized.97
Despite the General Governor’s efforts, as noted, Pearl City was able to
accumulate sufficient units to cross the threshold to take control of the Board. It then
sought to assert its newfound control position.
93
JX 55, JX 57; see also JX 17.
94
JX 84.
95
JX 74; JX 111; Trial Tr. 150:16–152:21 (Gieseke). The Fight Letters were drafted by
Baker, with help from Locke Lord. JX 69; JX 93.
96
Trial Tr. 263:1–264:18 (Baker).
97
JX 70.
19
E. The General Governors Refuse to Recognize Pearl City’s Transfers
On May 29, 2020, hours after Pearl City filed its Complaint in this Court
(in apparent anticipation of the General Governors’ resistance), 98 Pearl City emailed
a letter to the General Governors stating that it had increased its stake in Adkins to
64,848 units, that these acquisitions caused it to cross the 56% threshold set out in
Section 5.2, and that it was now entitled to seat its fourth Governor on the Board.99
Pearl City designated David Daly as its fourth Governor.100 The same day, Pearl
City mailed the Bills of Sale and Transfer Notices for the private sales from Pearl
City patrons, which were delivered to Adkins on or around Tuesday, June 2, 2020.101
The General Governors subsequently refused to recognize Daly as a Governor
because, in their view, Pearl City’s transfers did not comply with the procedures set
out in the Agreement. 102
Although Pearl City believed it unnecessary under the terms of the
Agreement, on August 10, 2020, Pearl City provided the General Governors and
98
See Compl. at 1. The General Governors had made clear prior to Pearl City’s filing of
the Complaint that they would not recognize Pearl City’s transfers. See JX 74; JX 108;
JX 111.
99
PTO ¶ 32; JX 132.
100
JX 132.
101
PTO ¶ 33; JX 7; JX 132.
102
See Trial Tr. 424:7–425:5 (Foley).
20
Adkins with three separate legal opinions (the “PC Opinions”) addressing the five
relevant legal matters flagged under Section 12.2.103 The PC Opinions concluded
that the private sales were not prohibited by the Agreement.104 In the cover letter,
Pearl City offered to dismiss its lawsuit if the General Governors dropped their
opposition to Daly’s appointment as Adkins’ seventh Governor. 105 Although the
General Governors were in possession of the Transfer Notices, Bills of Sale and the
PC Opinions as of the next Board meeting (August 18, 2020), they remained
steadfast in their refusal to recognize the seventh Governor.106 Following the
August 18 meeting, Locke Lord advised the General Governors that they could
approve the private sales to Pearl City on the basis of the PC Opinions. 107
F. The General Governors Call Two Special Meetings
On August 31 and September 6, 2020, Defendants provided the Pearl City
Governors with notices of two special meetings of the Board.108 Though the notices
103
PTO ¶ 34; JX 163.
104
JX 163.
105
Id.
106
Trial Tr. 425:22–426:23 (Foley), 535:10–537:4 (Butson).
107
JX 176; (Gieseke) Dep. 64:15–18.
108
JX 174; JX 184.
21
purported to call the meetings “with the intention to approve” the private sales,109
the General Governors actually planned to establish a quorum at the meetings, block
a vote on the transfers and impose conditions to preserve the General Governors’
equilibrium. 110 Suspecting an ambush was afoot, and believing Board approval
unnecessary under the Agreement, the Pearl City Governors did not attend either
special meeting.111
G. Procedural History
Pearl City filed its Complaint with this Court on May 29, 2020, asserting three
counts. Count I seeks a declaratory judgment under Section 18-110 that Pearl City
is entitled to designate Daly as the seventh Governor of Adkins’ Board. 112 Count II
asserts breach of contract against the General Governors under the Agreement for
their refusal to recognize Daly as a properly designated Governor.113 Count III
asserts breach of the covenant of good faith and fair dealing against the General
Governors for refusing to comply with the Agreement’s terms in bad faith. 114 In the
109
(Gieseke) Dep. 105:4–16.
110
Trial Tr. 166:1–171:17 (Gieseke), 238:6–239:7 (Baker); JX 62.
111
JX 177; JX 185; Trial Tr. 59:3–23 (Ramsel), 426:2–16 (Foley).
112
Compl. ¶¶ 73–77.
113
Compl. ¶¶ 78–83.
114
Compl. ¶¶ 84–88.
22
Pre-Trial Stipulation and Order, Plaintiff narrowed its prayer for relief to a
declaration that its disputed transfers were effective and a declaration that it is
entitled to appoint a seventh Governor. 115 It also seeks attorneys’ fees.116
The Court convened a two-day trial on October 21 and 22, 2020. 117 The
matter was deemed submitted following post-trial briefing and closing arguments on
January 21, 2021. 118
II. ANALYSIS
Pearl City alleges the General Governors’ refusal to recognize Pearl City’s
designation of a seventh Governor after its accumulation of more than 56% of
Adkins’ units breached the unambiguous terms of the Agreement. Its request for a
declaratory judgment seeks both a declaration of its rights under the Agreement and
a judgement declaring that the General Governors must recognize Pearl City’s fourth
designated Governor. In the Pretrial Order, Pearl City appears to have collapsed its
breach of contract and implied covenant claims into its claim for relief under
Section 18-110. There is no claim for damages and no evidence was presented to
115
PTO at 12–13.
116
Id.
117
D.I. 145–46.
118
D.I. 143 (“Pl.’s Opening Post-Trial Br.”); D.I. 147 (“Defs.’ Post-Trial Br.”); D.I. 149
(“Pl.’s Reply Post-Trial Br.”).
23
support such a claim. To obtain the declaration it seeks under Section 18-110,
Pearl City must demonstrate that its construction of the Agreement is superior and
that the Agreement supports the relief it seeks—the placement of a seventh Governor
on the Board.
The General Governors resist Pearl City’s request for declaratory relief on two
grounds. First, they assert Pearl City failed to adhere to the Agreement’s protocols
for the effective transfer of Adkins’ units, including by failing to seek or obtain
Board approval and failing to secure a timely Opinion endorsing the transfers.119
Second, even if the Court finds Pearl City complied with the procedural and
substantive requirements for unit transfers under the Agreement, Defendants invoke
the affirmative defenses of material breach and unclean hands as grounds to
foreclose any declaratory relief in this action.120
“The primary goal of contract interpretation is to attempt to fulfill, to the
extent possible, the reasonable shared expectations of the parties at the time they
contracted.”121 The contract is the first, and often last, place the court looks to
119
Defs.’ Post-Trial Br. at 5.
120
Id.
121
Comrie v. Enterasys Networks, Inc., 837 A.2d 1, 13 (Del. Ch. 2003) (internal quotations
omitted).
24
discern the parties’ “shared expectations.” 122 “If, on its face, the contract is
unambiguous, extrinsic evidence may not be used to interpret the intent of the
parties, to vary the terms of the contract or to create an ambiguity.” 123
As is often the case, the parties assert the Agreement is unambiguous while
simultaneously proffering very different constructions of its terms.124 Of course,
dissensus regarding a contract’s meaning among its signatories does not an
ambiguous agreement make; “a contract is ambiguous only when the provisions in
controversy are reasonably or fairly susceptible of different interpretations or may
have two or more different meanings.”125 By contrast, a “contract is unambiguous
when the agreement’s ordinary meaning leaves no room for uncertainty, and the
plain, common, and ordinary meaning of the words . . . lends itself to only one
reasonable interpretation.”126 As the court assesses whether ambiguity exists, the
122
Greenstar IH Rep, LLC v. Tutor Perini Corp., 2019 WL 6525206, at *9 (Del. Ch. Dec. 4,
2019).
123
S’holder Representative Servs. LLC v. Gilead Scis., Inc., 2017 WL 1015621, at *16
(Del. Ch. Mar. 15, 2017) (internal quotations omitted).
124
Pl.’s Opening Post-Trial Br. at 35; Defs.’ Post-Trial Br. at 38.
125
Rhone-Poulenc Basic Chems. Co. v. Am. Motorist Ins. Co., 616 A.2d 1192, 1196
(Del. 1992) (emphasis supplied).
126
Greenstar, 2019 WL 6525206, at *9 (emphasis in original) (internal quotations and
footnote omitted).
25
contract must be “read in full and situated in the commercial context between the
parties.”127
I begin the contract construction exercise by considering “[t]he basic business
relationship between [the] parties” so that I may “give sensible life” to the
Agreement when construing its terms. 128 With the Agreement’s commercial context
in hand, and mindful that my understanding of the parties’ contractual relationship
cannot overwrite an unambiguous contract,129 I then construe the Agreement’s
terms.
A. The Basic Business Relationship Between These Parties
To start, the Agreement is undisputedly the product of a compromise between
two factions who, at least initially, contemplated equal ownership and control of
Adkins.130 The parties agree that Section 5.2 provides that the size of the Board
“shall be increased” to seven members when either faction (the General Members or
Pearl City) obtains more than a 56% stake in Adkins.131 The parties also agree they
127
See Chicago Bridge & Iron Co. v. Westinghouse Elec. Co. LLC, 166 A.3d 912, 926–27
(Del. 2017).
128
Id. at 927.
129
See Solomon v. Fairway Cap, LLC, 2019 WL 1058096, at *9 (Del. Ch. Mar. 6, 2019).
130
OA § 5.2; Trial Tr. 222:1–9 (Gieseke); Pl.’s Opening Post-Trial Br. at 33.
131
OA § 5.2.
26
recognized at signing that one side may someday attempt to gain majority control of
the Board. 132 The parties’ shared understanding stops there, leaving for decision:
(1) whether the parties agreed that notice to the Board was required prior to
attempting a transfer; (2) whether either side could move to block the transfer of
units such that neither faction could cross the 56% unit threshold absent the other’s
consent; and (3) why the parties would agree to such an absolute structural
impediment to attaining control through voluntary unit transfers.
The contractual lay of the land is straightforward. Section 12.1 (titled “Notice
and Approval of Transfers”) provides that a transferring Member who wishes to
transfer its units “must first [] give written notice” in a specified form.133 The
provision goes on to provide that, “to the extent that the proposed Transfer is not to
an existing Member,” the transferring Member must “obtain the affirmative consent
and approval of such Transfer from the Board of Governors, which consent shall be
determined by a simple majority vote of the Board and shall not be unreasonably
withheld.” 134 In the very next sentence, Section 12.1 acknowledges that Section 12.2
sets forth certain restrictions that “may limit the number of LLC Units that may be
Transferred in a given period and, in such case, the Board shall consider such
132
Trial Tr. 222:1–16 (Gieseke).
133
OA § 12.1.
134
Id.
27
approval requests in the order in which they are received.” 135 Section 12.2 states
that, “[n]otwithstanding anything herein to the contrary,” a transfer may not
“be made unless (a) an opinion of counsel [on four discrete legal topics] . . .
which . . . may be waived . . . is delivered to the Board . . . and (b) the recipient of
the Units has executed a Joinder Agreement.” 136
While Section 12.1 and 12.2 clearly reference Board approval and legal
opinions, the parties dispute how these requirements fit within the larger governance
framework contemplated by the Agreement. Pearl City explains that Adkins’
Members are a collection of close-knit farmers who live in or around small-town
Lena, Illinois. Wary of adding new Members from outside this community, the
parties agreed that, “to the extent” a transfer was to a new Member, Board approval
would be required.137 An Opinion might also be appropriate for transfers to non-
Members to ensure that the introduction of a particular new member would not raise
compliance issues. 138 But the parties agreed that intra-Member transfers would not
require an Opinion or Board approval, not only because that process would be cost
prohibitive but also because, more fundamentally, the requirement of majority Board
135
Id.
136
Id. §12.2.
137
Id.
138
Post-Trial Tr. 32:11–33:22.
28
approval for every transfer would serve as an unworkable impediment to either
faction ever being able to assume control of the Board.139 Had the parties intended
the Board’s Governors to remain in a perpetual state of equilibrium by arming either
faction with de facto veto power over unit transfers, they would not have agreed in
Section 5.2 to a means by which one side might gain control through the acquisition
of additional equity.140
Defendants paint a different “big picture.” As they see it, the signatories to
the Agreement confronted a serious problem: they had to ensure Adkins’ pass-
through tax status was preserved for its Members. 141 That status would be threatened
if unit transfers exceeded a certain volume per year.142 With this threat in mind,
Defendants assert the parties empowered the Board to approve all unit transfers ex
ante and to require that the transferring parties provide an Opinion that the transfer
139
Id.; Trial Tr. 53:22–54:2 (Ramsel).
140
I note that neither party has grappled with the final dictate of Section 12.1(ii), namely
that the Board’s affirmative consent “shall not be unreasonably withheld.” OA § 12.1.
This language arguably answers Plaintiff’s concern that the Board might exercise its veto
authority arbitrarily. Of course, this fact-intensive standard encourages serial disputes and
litigation were it to apply to every transfer. Because the parties chose not to engage on this
point, I will follow suit and not dwell on it further.
141
See Defs.’ Post-Trial Br. at 26; Post-Trial Tr. 76:1–3.
142
Defs.’ Post-Trial Br. at 16–17. But see Trial Tr. 358:1–359:16 (Huffman) (explaining
that the 2 percent safe harbor is not a “cap” on trades for purposes of a partnership’s trading
status, as there are many safe harbors and a “facts and circumstances” test that would apply
in any event).
29
complied with the Agreement.143 To avoid inefficient review of every transfer
(where the cost of obtaining an Opinion could easily exceed the economic benefit of
any individual transaction), the Board was authorized to waive the Opinion in
particular cases.144 While the General Governors recognize their proffered
construction—where the Board is endowed with the right to approve all transfers at
its leisure—“may sound harsh,” they insist “that’s what they [Pearl City] agreed to
when they signed onto the [Agreement].” 145
A subtheme of Defendants’ view of the Board’s role in the transfer procedure
is the degree of transparency with which the two competing factions would have to
operate. Under Defendants’ construction of Board approval and advance notice, the
Agreement would enable either party to know when the other made a move for
control and counter accordingly. Pearl City’s effort to obscure its acquisition of
units by, for example, providing delayed notice of the transfers, violated that
understanding.
Neither party’s portrayal of transactional context is impeccable. The problem
with Defendants’ claim that Board approval was necessary for transparency and to
preserve Adkins’ tax status is that transparency evidently was available without any
143
Post-Trial Tr. 76:2–19.
144
See OA § 12.2; Post-Trial Tr. 66:10–16; Trial Tr. 53:22–54:2 (Ramsel).
145
Post-Trial Tr. 77:9–11.
30
contractual requirement and the protection of Adkins’ tax status was already built
into the Agreement. More specifically, the record reveals that the General
Governors knew of Pearl City’s plan to assume majority control of Adkins’ Board
almost as soon as it was revealed to Pearl City’s patrons; in fact, they quickly went
to work with “Company counsel” to consider countermeasures to “fight back.”146
The apparent ease with which either side could monitor the other without any
contractually hardwired transparency comes as no surprise, given both Pearl City
and the General Members of Adkins comprise a small group of farmers in or around
the Lena, Illinois area, a small agricultural town with a population of around 2700.147
146
See JX 17 (text messages between Baker and the General Governors discussing
Pearl City’s offer dated as early as March 7, 2020); see also JX 24; JX 55; JX 57; JX 74;
JX 76; JX 79; JX 111. In this regard, Locke Lord (who participated in drafting the
Agreement) advised the General Governors that, in its opinion, Pearl City has grounds to
“argue that . . . Transfers to an ‘existing Member’ [are] not subject to board approval under
[the Agreement].” JX 70 at 8943. With that said, I do not share Pearl City’s view of this
communication as a “smoking gun.” Post-Trial Tr. at 96:3–5. While it appears Locke
Lord may have had some questions regarding the validity of the General Governor’s
reading of the Agreement, the import of this evidence is nil since the Court is charged with
construing the Agreement as a matter of law and has concluded the provisions at issue are
unambiguous.
147
Trial Tr. 12:12–13 (Ramsel). Defendants argue the FNC Documents’ requirement for
Board approval of intra-Member transfers shows the parties contemplated Board approval
in all instances. Defs.’ Post-Trial Br. at 29–33. As explained in more depth below,
the FNC Documents were never integrated into the Agreement and do not govern private
sales. See OA §§ 16.4, 16.14. Thus, they have no bearing on the bargain struck by the
parties in the Agreement.
31
As for the parties’ need to protect Adkins’ tax status, Section 12.2 prohibited
any transfer that would cause the Company to be a publicly traded partnership.148
The provision goes on to state clearly: “Any purported issuance or Transfer which
would otherwise violate the requirements of this Section 12.2 shall be void and of
no effect.”149 Thus, the parties agreed to make any unit transfer threatening Adkins’
tax status or violating Section 12.2’s other imperatives void ab initio.150 There was
no need under the Agreement for the Board to weigh in on that point before a transfer
was consummated.
This lends credence to Pearl City’s proffered contextual framework, where
the parties agreed neither faction would be allowed to stonewall the other’s attempt
to accumulate more than 56% of Adkins’ equity. Even so, Pearl City’s explanation
is wanting for a means by which the Board could discover a “void” transfer. And
Pearl City’s distinction between inter- and intra-Member transfers appears contrived
under Section 12.2, as Pearl City admits intra-Member transfers implicate the legal
matters flagged in Section 12.2 the same as extra-Member transfers.151
148
OA § 12.2
149
Id.
150
See Southpaw Credit Opportunity Master Fund, L.P. v. Roma Rest. Hldgs., Inc., 2018
WL 658734, at *7 (Del. Ch. Feb. 1, 2018) (enforcing a void ab initio clause).
151
See Post-Trial Tr. 33:4–14.
32
In any event, the Court must be mindful that “Delaware has long adhered, and
continues to adhere, to the objective theory of contracts.” 152 “While [our courts]
have recognized that contracts should be read in full and situated in the commercial
context between the parties, the background facts cannot be used to alter the
language chosen by the parties within the four corners of their agreement.” 153 Here,
the background facts point to a construction that favors Pearl City, but they are by
no means definitive in that regard. As is the Delaware way, I turn to the words the
parties agreed to in their contract as the best evidence of their intent.
B. The Agreement’s Procedure to Transfer Units is Unambiguous
For reasons explained below, I find the Agreement unambiguously provides
the following: (1) prospective affirmative Board approval is required only for
transfers to non-Members as a means to vet the admission of new Members; (2) the
152
Solomon, 2019 WL 1058096, at *9 & n.89 (citing Eagle Indus., Inc. v. DeVilbiss Health
Care, Inc., 702 A.2d 1228, 1232–33 (Del. 1987)).
153
Town of Cheswold v. Cent. Del. Bus. Park, 188 A.3d 810, 820 (Del. 2018) (internal
quotations and footnote omitted). As contract scholars have pointed out, the specificity
with which provisions are written in a contract may affect the extent to which the court
relies on commercial context when construing the contract’s terms. See Robert E. Scott &
George G. Triantis, Anticipating Litigation in Contract Design, 115 YALE L.J. 814, 818–
20 (2006) (arguing that parties can design contracts ex ante to provide for rule-like terms
that reduce potential litigation costs ex post, suggesting that the extent to which the court
will inquire into contextual factors is, in part, driven by the clarity with which a provision
is written (i.e., as a rule or standard)); Cathy Hwang & Matthew Jennejohn, Deal Structure,
113 NW. U. L. REV. 279, 279 (2018) (making Scott and Triantis’ argument explicit and
explaining how, beyond using a rule or standard, contract structure may influence the role
of commercial context in contract construction).
33
Board may require a conforming Opinion verifying that any transfer, both as
between Members and as between Members and non-Members, complies with the
legal considerations identified in Section 12.2, and may defer recognition of the
transfer until such Opinion is delivered; and (3) advance notice to the Board is not
required before the parties to a transfer may effect their transaction, but notice is
required before the transfer will be deemed effective by the Company.
The Board Has Limited “Approval” Rights for Transfers of Units
Between Members
Article 12 of the Agreement governs “Transferability,” and the key provision
to this dispute—appropriately titled “Notice and Approval of Transfer”—is
Section 12.1. 154 That Section provides in full:
Before a Transferring Member may Transfer its
Membership Interest (including all associated LLC Units) to any
Person (including another Member), such Member must first
(i) give written notice of such proposed Transfer to the Company which
notice shall describe the terms and conditions of the proposed Transfer
(and, to the extent applicable, shall contain a copy of the proposed
contract of sale) and shall be in the form of the Notice of Proposed
Transfer included as Exhibit C hereto and (ii) to the extent that the
proposed Transfer is not to an existing Member, obtain the
affirmative consent and approval of such Transfer from the Board
of Governors, which consent shall be determined by a simple majority
vote of the Board and shall not be unreasonably withheld. It is
acknowledged that the restrictions set forth in Section 12.2 may
limit the number of LLC Units that may be Transferred in a given
period and, in such case, the Board shall consider such approval
requests in the order in which they are received (i.e., on a "first
154
OA § 12.1.
34
come, first served" basis) and may defer the approval of Transfer
requests until a later date in order to comply with such limitations.
Without limitation to the foregoing, the Board, may require the
Transferring Member or its transferee to execute a Joinder Agreement
and such other certificates, representations and documents and to
perform such other acts as the Board may in its reasonable discretion
deem reasonable or advisable (i) to verify the Transfer; (ii) to confirm
that the person desiring to acquire an interest in the Company, and to
be admitted as a Member, has accepted, assumed and agreed to be
subject and bound by all of the terms, obligations and conditions of this
Operating Agreement; (iii) to maintain the status of the Company as a
partnership for federal tax purposes; and (iv) to assure compliance with
any applicable state and federal laws including securities laws and
regulations. Any Transfer of Membership Interests in accordance
with this Operating Agreement shall become effective upon
commencement of the Company's next fiscal quarter following the
approval of such Transfer by the Board of Governors.155
Pearl City asserts that Section 12.1(ii)’s “to the extent that” language makes
clear that the Board has the right to exercise prospective approval rights only with
respect to unit transfers between existing Members and non-Members. The General
Governors respond that Section 12.1(ii) merely clarifies that a prospective
transferring Member would first have to seek Board approval of the admission of a
new Member before seeking Board approval of the transfer to that new Member.
According to the General Governors, that pre-approval right is separate and apart
from the Board’s right prospectively to approve all unit transfers, whether between
existing Members or between existing Members and non-Members.
155
Id. (emphasis added).
35
The plain text of Section 12.1’s first sentence (encompassing 12.1(i) and (ii)),
in isolation, indicates that the Board’s “affirmative consent and approval” by simple
majority vote is required only “to the extent that” the transfer is to a non-Member.
That language—“to the extent that”—indicates the Agreement contemplates two
separate procedures based on the membership status of the recipient: (1) if the
transfer is to a non-Member, “affirmative consent and approval” is required; and
(2) by implication, “affirmative consent and approval” of the Board is not required
for transfers among existing Members.156
Defendants’ arguments based on the text of Section 12.1(ii) alone do nothing
to change that analysis. Defendants point out that Section 12(i) and (ii) are
connected with the conjunctive “and,” not the disjunctive “or.” 157 According to
Defendants, this means the first sentence of Section 12.1 merely clarifies that
transfers to a non-Member require Board approval; it does not purport to set out a
156
See Extent, MERRIAM-WEBSTER, https://www.merriam-webster.com/dictionary/extent
(last visited March 14, 2021) (defining “extent” as, “the range over which something
extends”); see also Freeman v. X-Ray Assocs., P.A., 3 A.3d 224, 227–28 (Del. 2010)
(“Because dictionaries are routine reference sources that reasonable persons use to
determine the ordinary meaning of words, we often rely on them for assistance in
determining the plain meaning of undefined terms.”).
157
Defs.’ Post-Trial Br. at 25 n.3.
36
separate procedure exempting transfers between existing Members from Board
approval. 158
The problem with Defendants’ argument is that the conjunctive connector
between Section 12.1(i) and (ii) is qualified immediately by the phrase “to the extent
that.” That phrase can only reasonably be understood to contemplate a distinction
between transfers to non-Members—requiring “affirmative consent and approval”
of the Board—and transfers to existing Members, which are implicitly reviewed
under a different process.159 Otherwise, there would be no need to distinguish
between transfers by the membership status of its recipient; the drafters would
simply have written something to the effect that “all transfers require affirmative
Board approval by simple majority vote.” Defendants’ reading would thus render
Section 12.1(ii)’s “to the extent that” language superfluous, contrary to well-settled
canons of contract construction.160
158
Id. at 20.
159
Cf. Feeley v. NHAOCG, LLC, 62 A.3d 649, 661–62 (Del. Ch. 2012) (“The introductory
phrase ‘[t]o the extent that’ in Section 18-1101(c) does not imply that the General
Assembly was agnostic about the ontological question of whether fiduciary duties exist in
limited liability companies. . . . [T]he phrase ‘[t]o the extent that’ embodies efficiency in
drafting.”). While it does not affect the Court’s independent interpretation of the
provision’s terms, I note that Company counsel, Locke Lord, came to the same conclusion
about Section 12.1’s operation in its legal memorandum to the General Governors. JX 70.
160
See NAMA Hldgs., LLC v. World Mkt. Ctr. Venture, LLC, 948 A.2d 411, 419 (Del. Ch.
2007), aff’d, 945 A.2d 594 (Del. 2008).
37
Defendants also emphasize Section 12.1(i)’s reference to “proposed
Transfer[s],” which they argue implies Board approval is required for any transfer
to become effective. But the language “proposed Transfer” appears in both
Section 12.1(i) and 12.1(ii), and yet Section 12.1(ii) still clarifies that a proposed
transfer “not to an existing Member” requires affirmative Board approval. 161 Thus,
reading “proposed Transfer” to imply a requirement for “the affirmative consent and
approval of such Transfer from the Board” in all cases would again render
Section 12.1(ii)’s language superfluous. 162
Of course, contractual provisions cannot be read in isolation, and Defendants’
argument that prospective Board approval of intra-Member transfers is required
based on other language in Section 12.1 could carry more force. 163 The second
sentence in Section 12.1 states that the “restrictions set forth in Section 12.2 may
limit the number of LLC units that may be Transferred in a given period and, in such
case, the Board shall consider such approval requests in the order in which they are
161
See OA § 12.1.
162
See NAMA Hldgs., 948 A.2d at 419.
163
See Elliott Assoc., L.P. v. Avatex Corp., 715 A.2d 843, 854 (Del. 1998) (“It is well
established that a court interpreting any contractual provision, including preferred stock
provisions, must give effect to all terms of the instrument, must read the instrument as a
whole, and, if possible, reconcile all the provisions of the instrument.”).
38
received (i.e., on a ‘first come, first served’ basis) . . . .” 164 Defendants argue that
this sentence, in tandem with an analysis of Section 12.2, makes clear Board
approval is necessary for all transfers.
Pearl City responds that the Court need not refer to Section 12.2 to construe
Section 12.1 for two reasons. First, Section 12.1’s heading (“Notice and Approval
of Transfer”) makes clear it is the only operative provision governing how to
effectuate transfers.165 This argument, however, runs headlong into Section 16.7 of
the Agreement, titled “Headings,” which states that “[t]he headings in this Operating
Agreement are inserted for convenience only and are in no way intended to describe,
interpret, define, or limit the scope, extent or intent of this Operating Agreement or
any provision hereof.” 166 Pearl City’s position is also contrary to the canon of
construction that requires the Court to read and interpret the Agreement as a
whole. 167
164
OA § 12.1.
165
Pl.’s Reply Post-Trial Br. at 13.
166
OA § 16.7.
167
See GMG Cap. Invs., LLC v. Athenian Venture P’rs I, L.P., 36 A.3d 776, 779–84
(Del. 2012) (“In upholding the intentions of the parties, a court must construe the
agreement as a whole, giving effect to all provisions therein.”) (internal quotations
omitted).
39
Pearl City retreats to a textual argument, asserting the selection of determiner
in Section 12.1’s second sentence to modify approval—“approval of such Transfer”
(as opposed to “any Transfer”)—can only be understood to refer back to
Section 12.1(ii)’s procedure for “proposed Transfer[s] . . . not to an existing
Member.”168 Thus, Section 12.1’s discussion of the Board’s right to “defer the
approval of Transfer requests until a later date” must be understood to limit only
“such Transfer[s]” discussed in Section 12.1(ii), namely transfers to non-Members.
I disagree with this construction. The subject of Section 12.1’s second
sentence is “the restrictions set forth in Section 12.2,” which “may limit the number
of [] Units that may be transferred in a given period.”169 If the “limit[s]” imposed
by Section 12.2 empower the Board to “defer the approval” of all transfer requests
“until a later date,” as Section 12.1 suggests, then “such approval requests” must be
understood to refer to “the restrictions set forth in Section 12.2.” Indeed, the Board’s
ability to “limit” transfers in a period by “defer[ring] the approval” of transfers on a
168
OA § 12.1(ii) (emphasis added). See Donaghy v. State, 100 A. 696, 700 (Del. 1917)
(“In the present instance it cannot be seriously contended that the framers of the
Constitution meant to include any or all misdemeanors, for not only did they specify certain
species of the genus which they had in mind, but they also qualified ‘other misdemeanors’
not by the word ‘any’ but by the word ‘such.’ The first or primary definition of the word
‘such’ in the Century Dictionary and Cyclopedia is ‘of that kind’; ‘of like kind or degree’;
‘like’; ‘similar.’ A secondary meaning of the word is given as ‘the same as previously
mentioned or specified’; ‘not other or different.’”) (emphasis added).
169
See OA § 12.1.
40
“first come, first served” basis implies that Section 12.2 confers on the Board a
constrained power of approval (i.e., the power to “defer”) separate from, and more
limited than, the Board’s power to reject by “affirmative consent and approval”
transfers to a non-Member, as contemplated in Section 12.1(ii). 170 If, however,
Section 12.2 cannot be understood to set forth any requirements for “approval
requests,” then Pearl City’s reading becomes the only logical one. In either event,
an analysis of Section 12.2 is warranted.
Section 12.2 states in relevant part:
12.2 Prohibited Transfers. Notwithstanding anything herein to the
contrary, the Members acknowledge and agree that no issuance by the
Company or Transfer by any Person of LLC Units or any other interest
in the Company may be made which would . . . (iv) violate the then
existing provisions of the Primary Debt Financing Documents (unless
a written unconditional consent and waiver is first obtained from the
Lender); (v) violate any federal securities laws or any state securities or
“blue sky” laws (including any investor suitability standards)
applicable to the Company or the interest to be Transferred; (vi) cause
the Company to be required to register as an “investment company”
under the U.S. Investment Company Act of 1940, as amended;
(vii) cause the Company to be considered as terminated pursuant to
Section 708 of the Code (or any successor thereto); or (viii) cause the
Company to be a publicly traded partnership within the meaning of
Section 7704 of the Code (or any successor thereto) [26 U.S.C. § 7704].
No issuance or Transfer of LLC Units or any other interest in the
Company may be made unless (a) an opinion of counsel,
satisfactory in form and substance to the Board and counsel for the
Company (which requirement for an opinion may be waived, in whole
or in part, at the discretion of the Board), is delivered to the Board
170
Id. Presumably, the Board’s affirmative vote entitles them to reject (not merely defer)
a transfer to non-Members.
41
opining that such issuance or Transfer, as applicable, meets the
requirements of clauses (iv) through (viii) of this Section 12.2 and
(b) the recipient of the LLC Units has executed a Joinder
Agreement. Any purported issuance or Transfer which would
otherwise violate the requirements of this Section 12.2 shall be void
and of no effect.171
Defendants argue Section 12.2 empowers the Board to police transfers in all
instances to ensure that unit transfers will not result in the legal consequences
identified in that section. To that end, Section 12.2 states in broad terms,
“[n]o issuance or Transfer” of units “may be made” without “an opinion of counsel,
satisfactory in form and substance to the Board and counsel for the Company” which
“may be waived . . . at the discretion of the Board.”172 Defendants assert there would
be no way for the Board or the Company to police compliance with Section 12.2 if
intra-Member transfers are independently effective absent Board review.173
171
Id. § 12.2 (emphasis added).
172
Id.
173
Defs.’ Post-Trial Br. at 42. Defendants also argue that the FNC Documents expressly
identify that all transfers require Board approval. Id. at 3 (citing JX 34; JX 35; JX 36). But
the Agreement contains an integration clause requiring that any amendment to its terms be
in writing and approved by a majority of the Members. See OA §§ 16.4, 16.14.
The Agreement has been amended twice, but neither amendment addressed the FNC
Documents. JX 2. Moreover, there is no evidence in the record to suggest that all parties
to the Agreement intended that the FNC Documents would modify the means by which
unit transfers are authorized under the Agreement. See Trial Tr. 246:8–13 (Baker)
(admitting the FNC Documents are not part of the Agreement); JX 96 (an attorney for
Company counsel Locke Lord stating, “[u]nless each member who wishes to utilize the
system executes the document, I don’t see how the members had been bound by these
[FNC] rules”). In this regard, Defendants cite to Ramsel’s highlighted and underlined copy
of the Trading Service Operational Manual as evidence that Pearl City appreciated the
42
Pearl City responds that the “and” conjoining the Board’s right to a legal
opinion and a Joinder Agreement implies that the former is required only when the
latter is required. Because only new Members must execute a Joinder Agreement,
Pearl City reasons that Section 12.2 requires an Opinion only for transfers to non-
Members. According to Pearl City, this would be consistent with Section 12.1(ii),
which states “affirmative” Board approval is required “only to the extent that”
a transfer is to a non-Member. 174
Neither party’s proffered interpretation harmonizes all provisions across the
Agreement. Defendants’ argument that Section 12.2 empowers the Board to
affirmatively approve all transfers simply cannot be squared with Section 12.1(ii),
Trading Service Operational Manual’s provision that, “Transfers that are not made through
the Trading Service will be null and void unless they are approved by the Adkins Energy’s
Board of Governors and comply with [the Agreement].” See JX 122. But Ramsel
underlined language that appeared to incorporate by reference the Agreement, which he
credibly asserts in this litigation conflicts with the FNC Documents’ Board approval
requirement. I agree that JX 122 does not evidence that Ramsel somehow acknowledged
that the FNC Documents would supersede the Agreement with respect to unit transfers.
Thus, the FNC Documents do not govern the transfers through which Pearl City
undisputedly accumulated more than 56% of Adkins’ Units. See ev3, Inc. v. Lesh,
103 A.3d 179, 185 (Del. 2014), opinion revised and superseded, 114 A.3d 527 (Del. 2014),
as revised (Apr. 30, 2015) (noting that parties intending for separate agreements to modify
contractual rights should expressly identify those agreements as carve-outs to the
integration clause).
174
Pl.’s Opening Post-Trial Br. at 18–19. Pearl City also argues Opinions were never
required in the past, but Sections 12.2 and 16.8 of the Agreement together make clear the
Board had discretion to waive its right to a legal opinion and waiver of such a condition
does not prevent a party from later exercising its right to insist on compliance.
See OA §§ 12.2, 16.8.
43
which, as explained above, states plainly that “affirmative consent and approval” by
a majority of the Board is required only “to the extent that” a transfer is made to a
non-Member. Defendants’ argument also does not sit well within the Agreement’s
Chicago Bridge big picture: it is unreasonable to think the parties would carefully
negotiate how one faction could expand their Board membership under Section 5.2
while, at the same time, hinder the possibility of expansion by allowing either faction
to stonewall the other with de facto discretionary veto rights over all unit transfers.
As for Pearl City’s construction, Section 12.2’s choice of the past tense
(“has executed a Joinder Agreement,” as opposed to the present tense “executes”)
signals that the provision contemplates the transferee “has,” at some point in time
but perhaps not contemporaneously, executed a Joinder Agreement. 175 Further,
Section 5.2 states in relevant part:
Any change in the number of Governors appointed or elected by Pearl
City or the General Member group shall be effective simultaneously
with the effectiveness of the Transfer of Membership Interest giving
rise to such change (i.e., upon commencement of the Company’s
next fiscal quarter following the approval of the Transfer by the
Board of Governors). 176
175
OA § 12.2 (emphasis added).
176
Id. § 5.2 (emphasis added).
44
The term “i.e.” or “id est” is a Latin phrase meaning “that is,” which expands or
explains the thing to which it refers. 177 The parenthetical “i.e.” defines when a
transfer becomes effective—“upon commencement of the Company’s next fiscal
quarter following the approval of the Transfer by the Board of Governors.”178
At first glance, this language appears to contemplate Board “approval” for all
transfers.
In response to this provision, Pearl City contends it must be disregarded
because it renders Section 12.1(ii)’s express requirement for affirmative Board
approval meaningless and conflicts with the spirit of the Agreement. 179 I disagree.
Sections 5.2, 12.1 and 12.2 can all be harmonized when the Court gives life to
Section 12.1’s distinction between “affirmative consent and approval . . . determined
by a simple majority vote of the Board”—required “to the extent that” transfers
involve a non-Member under Section 12.1(ii)—and mere tacit “approval,” or
recognition of the unit transfer, that occurs after the Board is provided notice of the
transfer under Section 12.1(i) and either receives or waives the Opinion required
under Section 12.2. Section 12.1 states expressly in its second sentence that the
177
i.e., MERRIAM-WEBSTER, https://www.merriam-webster.com/dictionary/i.e. (last
visited March 8, 2021).
178
OA § 5.2.
179
See Pl.’s Opening Post-Trial Br. at 39 (citing Chicago Bridge, 166 A.3d at 926–27 &
n.61).
45
limits in Section 12.2 are subject to “approval requests” as contemplated in that
section. 180 Section 12.1 also makes clear that the Board may request an Opinion for
the sole purpose of ensuring that prohibited transfers are not consummated; the
Board may then only “defer” (not reject) a transfer under Section 12.2 until it
receives an Opinion “satisfactory in form and substance.” 181
Thus, the transfer process contemplated by the Agreement functions as
follows: 182
• Section 12.1(i) requires notice of all proposed transfers to be provided to the
Board. 183
• Section 12.1(ii) states, “to the extent that the proposed Transfer is not to an
existing Member,” the Board must pre-approve “such Transfer” by a simple
majority vote. 184
• The following sentence of Section 12.1 acknowledges, however, that all
transfers are subject to the limitations set forth in Section 12.2, “the Board
shall consider such approval requests in the order in which they are
180
OA § 12.1.
181
See id. §§ 12.1, 12.2.
182
I note that the Agreement’s lack of ambiguity removes all force from Defendants’
argument that Section 5.10 (empowering the Board with general “authority to supervise
and control all operations of the Company,” “[e]xcept as otherwise provided”) should be
understood as a gap-filler that entitles the Board to vote on all transfers. See Defs.’ Post-
Trial Br. at 23.
183
OA § 12.1. I address the timing of this notice below.
184
Id.
46
received . . . and [the Board] may defer the approval of Transfer requests until
a later date in order to comply with such limitations.” 185
• Section 12.2 proceeds to outline eight types of “Prohibited Transfers.” It then
empowers the Board to ensure transfers comply with Section 12.2(iv)–(viii)
by authorizing the Board to request an “opinion of counsel, satisfactory in
form and substance to the Board and counsel for the Company (which
requirement may be waived . . . at the discretion of the Board)” for transfers
prior to their becoming effective.186
• If the Board takes no action with respect to the unit transfer(s) “upon
commencement of the Company’s next fiscal quarter,” then it has waived its
right to a legal opinion under Section 12.2, thereby “approv[ing]” the transfer
such that it “shall become effective.”187
• In the event the Board opts not to seek an Opinion for a transfer prohibited
under Section 12.2, it would nevertheless be void ab initio under the last
sentence of Section 12.2 upon discovery that it violates Section 12.2. 188
Certainly, the Agreement could have more clearly distinguished between the
“affirmative consent and approval” required for transfers to new Members and the
tacit “approval” right conferred upon the Board after it receives or waives its right
185
Id. (emphasis added). To be clear, the right to defer approval is limited; once the
conditions (e.g., delivery of a conforming notice and/or Opinion) are satisfied, the right to
defer or withhold approval disappears.
186
Id. § 12.2.
187
See id. § 12.1 (emphasis added). Contrary to Defendants’ suggestion, the Agreement
does not require “prospective waiver” of an Opinion. Post-Trial Tr. 49:20–50:1. Such a
requirement would impose the sort of “affirmative consent and approval” reserved
specifically for transfers to non-Members under Section 12.1. Instead, Section 12.2 states
that the “requirement for an opinion may be waived, in whole or in part, at the discretion
of the Board.” OA § 12.2. Reading Sections 12.1 and 12.2 together, the requirement for
an Opinion would be deemed waived either upon an express waiver or once the Board opts
not to defer the transfer upon commencement of the next fiscal quarter. See id. §§ 12.1,
12.2.
188
See id. § 12.2.
47
to request a conforming Opinion. But the above sequence is the only reasonable
construction that harmonizes each of the provisions flagged as relevant by either
party.189 Section 5.2’s definitional reference to Board approval—“i.e., upon
commencement of the Company’s next fiscal quarter following the approval of the
Transfer by the Board of Governors”—can be understood to acknowledge that all
transfers are “approv[ed]” by the Board in the sense that the Board has the right to
defer recognition of the transfer and to seek an Opinion that the transfer is not among
those prohibited under Section 12.2. 190
189
See GMG Cap. Invs., 36 A.3d at 779–84 (noting that the meaning inferred from a
particular contract provision cannot control the meaning of the entire agreement if such an
inference conflicts with the agreement’s overall scheme or plan).
190
See OA §§ 5.2, 12.1, 12.2. Defendants also make passing reference to another provision
of the Agreement, Section 12.6, as supporting their proffered construction. Section 12.6
states in relevant part: “Treatment of Transferees. . . . [T]he Board may only change such
method of allocation [losses, income, gains and expense deductions] on a prospective basis
to take effect for the Transfers submitted to the Board for approval in the fiscal quarter
following the fiscal quarter in which the Board approves the change in the method of
allocation.” JX 2 § 12.6. Defendants do not endeavor to explain how this provision
supports their construction, but presumably they take the language “for the Transfers
submitted to the Board for approval” as textual evidence that Board approval was
contemplated with respect to all transfers. Again, Defendants’ argument that affirmative
Board approval was required in all cases cannot be squared with the clear and unambiguous
language Section 12.1(ii). Reading the Agreement to allow the Board to defer recognition
of the transfer pending receipt of an Opinion under Section 12.2 as a form of passive
approval, however, makes sense of Section 12.6’s reference to “approval.”
48
*****
The Agreement confers upon the Board a right to approve unit transfers that
will bring new members into the Company, limited only by the requirement that the
Board exercise its approval authority reasonably. The Agreement also confers upon
the Board the right to request that parties to all unit transfers supply an Opinion to
the Board that confirms the transfer does not implicate any of the legal concerns
expressly called out in the Agreement. The Board may defer approval of the unit
transfer until it receives the Opinion, or it may waive the requirement to supply the
Opinion. Upon satisfying the Opinion condition, the unit transfer shall be deemed
“approved.”191
Before addressing whether Pearl City complied with the requirements of
Section 12.2, I address the parties’ dispute regarding the contours of the “notice”
requirement under the Agreement.
191
Though the parties disagreed on the Board’s approval rights vis-à-vis intra-Member
transfers, it was clear the General Governors objected to the unit transfers that Pearl City
relied upon to cross the 56% threshold, and Pearl City was aware of the General Governors’
concerns prior to the commencement of fiscal quarter beginning June 1, 2020. See JX 108
(April 27, 2020 letter from Gieseke stating the General Governors’ intent to deny the
transfers); JX 134 (May 29, 2020 notification letter from Pearl City arguing “[i]n no way
do these purchases jeopardize the tax status of Adkins”). Thus, contrary to Pearl City’s
argument, there is no basis to find that the General Governors waived their right to an
Opinion concerning the transfers. See Pl.’s Opening Post-Trial Br. at 53–55.
49
Section 12.1 Does Not Require “Advance” Board Notice of Transfers
Defendants argue that, even if affirmative Board approval is not required for
all transfers under the Agreement, Pearl City failed to comply with Section 12.1’s
requirement that a Member seeking to transfer units provide prior notice of that
intent to the Board.192 Pearl City responds that Section 12.1(i) merely requires a
putative transferee to provide “written notice” to the Company, without regard to
timing, through a Transfer Notice and accompanying Bill of Sale, for recording on
the Company’s register. 193
In support of its position, Pearl City cites the plain text of Section 12.1, which
reads: “Before a Transferring Member may Transfer its Membership Interest . . .
such Member must first (i) give written notice of such proposed Transfer . . . .” 194
Pearl City emphasizes the conspicuous absence of an adjective preceding “notice”
akin to “advance”—a term the drafters used several times throughout the
Agreement. 195 A requirement for “advance notice” would impose on transferors the
sort of timing sequence Defendants ask the Court to read into Section 12.1(i); the
drafters chose not to include such language.
192
Defs.’ Post-Trial Br. at 43.
193
Pl.’s Reply Post-Trial Br. at 22.
194
OA § 12.1.
195
See id. §§ 5.3(c), 5.9.
50
Further, Section 16.1 provides that, “[a]ny notice, demand, or communication
required or permitted to be given by any provision of this Agreement shall be
deemed to have been sufficiently given or served for all purposes . . . two days after
the date of its mailing or deposit with such delivery service.” 196 The notion that the
Board is entitled to receive notice before a unit transfer is even attempted does not
jibe with the self-executing notice contemplated by Section 16.1.
Defendants respond that the words “first” and “proposed” serve a functionally
equivalent role to “advance,” imposing a requirement on transferors to provide
notice to the Board prior to initiating a unit transfer so that the Board can approve
the transfer. And, according to Defendants, if the Court accepted Pearl City’s
argument under Section 16.1, then it would be allowing “Pearl City [to] grant itself
effective transfers of thousands of Adkins Units before Adkins even knew the
identities of the Transferring Members.” 197 Defendants maintain that by
understanding the words “first” and “proposed” to relate to when a transfer would
be effective (i.e., notice must “first” be given of a “proposed” transfer in order for
the transfer to be effective), as Pearl City would have it, the Court would have to
196
Id. § 16.1.
197
Defs.’ Post-Trial Br. at 45.
51
read into Section 12.1 the word “effective.” According to Defendants, that would
alter the meaning of the parties’ chosen language.
Defendants’ arguments misconstrue the provisions they cite and seek to
expand the limited role those provisions play within the larger Agreement.
Section 16.1 speaks only of effectuating “notice,” which is just one “box” that a
transferor must check before the transfer will be deemed effective. Another box to
be checked, as already explained, is the Board’s right under Sections 12.1 and 12.2
to “defer . . . approval” of a “proposed” transfer pending the production of a
satisfactory Opinion confirming the transfers’ compliance with Section 12.2(iv)–
(viii). 198 Thus, contrary to Defendants’ construction, lack of advance notice does
not conflict with the Board’s authority to supervise and control the Company’s
operations. Nor does it authorize Members to bind the Company to changes in its
ownership and allocations without the Board’s knowledge. Rather, the Board defers
by default the effectuation of certain transfers pending production of a satisfactory
Opinion, which it may waive expressly or by recognizing the transfer upon
commencement of the next fiscal quarter.199 Indeed, there would be little logic
198
OA §§ 12.1, 12.2.
199
In the same vein, Defendants miss the point when they argue notice was ineffective
because, under the Bills of Sale, Pearl City was required to pay the seller the purchase price
30 days after the date written. Defs.’ Post-Trial Br. at 15 (citing JX 56). The effective date
of notice is separate from the effective date of transfer. As explained, the effective date of
transfer would be September 1, 2020. The consideration memorialized by the Bills of Sale
was undoubtedly exchanged by that time. See JX 56. Under Section 12.1, the transfers
52
behind requiring “advance” notice to the Board when, under Sections 12.1 and 12.2,
the Board defers by default, but cannot blithely deny, intra-Member transfer
requests. And, for reasons explained, unit acquisitions were already transparent to
Adkins Members and the General Governors, who could (and in fact did) learn of
privately placed purchases days after they were solicited. 200
Defendants’ argument that “effectiveness” cannot be read into Section 12.1 or
the Notice of Transfer attached as Exhibit C to the Agreement similarly ignores
Section 12.1’s role within the Agreement’s overall structure. As Defendants
themselves acknowledge, Section 12.1 is the only provision that describes how to
effectuate a transfer.201 Section 12.1 makes clear that every transfer is “first”
“proposed” and then “become[s] effective upon commencement of the Company’s
next fiscal quarter following the approval of such Transfer by the Board of
Governors.” 202 Whether the Board receives notice in advance of a transfer’s
themselves are effective “upon commencement of the Company’s next fiscal quarter.”
OA § 12.1; see also id. § 5.2 (“Any change in the number of Governors . . . shall be
effective simultaneously with the effectiveness of the Transfer of Member Interest giving
rise to such change (i.e., upon commencement of the Company’s next fiscal quarter
following the approval of the Transfer by the Board of Governors).”).
200
JX 17 (text messages between Baker and the General Governors discussing Pearl City’s
offer dated as early as March 7, 2020).
201
See Defs.’ Post-Trial Br. at 21 (characterizing Section 12.1 as setting out “two must-
do’s”).
202
OA § 12.1.
53
negotiations or after those negotiations are complete but before approval (whether
discretionary for transfers to non-Members or implicit upon receipt or waiver of the
requisite Opinion for all transfers) makes no difference.
*****
The Agreement unambiguously requires “written” notice of transfers to be
submitted at a time chosen by the transferring Members. While Pearl City’s strategy
of stockpiling proposed private transfers before delivering them en masse may be
suboptimal in most scenarios, it does not frustrate the Board’s limited oversight role.
Rather, a bulk delivery of notices likely increases the chance the Board will defer
recognition of some (if not all) of those transfers pending production of a costly
Opinion, given transfers in bulk pose more legal risk and Section 12.1 provides that
transfers must be accepted on a “first come, first served” basis. 203 Indeed, that is
what happened here; upon receipt of the notices, the Board effectively exercised its
right to receive a conforming Opinion.204
203
See Trial Tr. 213:8–21 (Gieseke), 233:22–235:2 (Baker); see also id. at 358:1–359:16
(Huffman).
204
See JX 74; JX 111.
54
C. Pearl City Has Complied with the Unambiguous Terms of the Agreement
As explained above, the Agreement imposes two procedural requirements that
bear on Pearl City’s transfers: (1) an Opinion “satisfactory in form and substance,”
and (2) written notice.
1. The PC Opinions
It is undisputed that, on August 10, 2020, Pearl City provided the PC Opinions
to the General Governors addressing all issues flagged by Section 12.2.205 In a letter
to the General Governors, Locke Lord stated it was willing to approve the PC
Opinions.206 The General Governors then called two special meetings purportedly
for the express purpose of “approv[ing]” the private sales.207 Gieseke confirmed that
he was “willing to accept those legal opinions” “based upon the advice [he] received
from [Locke Lord]” and that it was fair to say the only thing remaining for Pearl City
to appoint a seventh Governor was for the Board to approve the private sales.208
205
PTO ¶ 34; JX 163.
206
JX 176.
207
JX 183. Gieseke confirmed that the meeting was called “with the intention to approve”
the private sales, that Pearl City provided a notice of sale with the transfer documents, that
Pearl City provided Bills of Sale in connection with the private sales, and that the PC
Opinions supporting the private sales had been submitted. (Gieseke) Dep. 105:1–111:24;
see also JX 189 (Holland’s personal notes, made after a call with Butson the night before
Holland’s deposition, stating: “[w]e are not opposed to PCE [(Pearl City Elevator)] gaining
an extra Board seat”).
208
(Gieseke) Dep. 105:21–109:19.
55
If the Board approved the private sales at that time, they would have been effective
as of September 1, 2020—the start of the next fiscal quarter.209
Defendants attempt to escape their own sworn testimony affirming that the
PC Opinions were “satisfactory in form and substance” in two ways. First,
Defendants invoke the “mend-the-hold” doctrine to argue the Court should not
permit Pearl City to submit conforming Opinions belatedly after it commenced
litigation. 210 Named after “a nineteenth century wrestling term, meaning to get a
better grip (hold) on your opponent,”211 “the ‘mend-the-hold’ doctrine is an equitable
doctrine intended to prevent a party from asserting grounds for repudiating
contractual obligations and then, in bad faith, asserting different grounds for
repudiation once litigation has commenced and it becomes apparent the original
grounds for repudiation will not work.”212 Writing for the Seventh Circuit, Judge
Posner observed that there is substantial overlap between the “mend-the-hold”
209
Pl.’s Reply Post-Trial Br. at 25 (citing OA §§ 5.2, 12.1).
210
Defs.’ Post-Trial Br. at 47.
211
Harbor Ins. Co. v. Cont’l Bank Corp., 922 F.2d 357, 362–63 (7th Cir. 1990) (Posner, J.)
(discussing the origins of the mend-the-hold doctrine).
212
Health Corp. v. Clarendon Nat’l Ins. Co., 2009 WL 2215126, at *14 (Del. Super. Ct.
July 15, 2009); see also Liberty Prop. Ltd. P’ship v. 25 Mass. Ave. Prop. LLC, 2008
WL 1746974, at *14 (Del. Ch. Apr. 7, 2008) (discussing “mend-the-hold” doctrine but
declining to apply it on equitable grounds); Friel v. Jones, 206 A.2d 232, 235 (Del. Ch.
1964) (“Where a party gives a reason for his conduct and decision touching anything
involved in a controversy, he cannot, after litigation has begun, change his ground, and put
his conduct upon another and a different consideration.”).
56
doctrine and bad faith because when “[a] party . . . hokes up a phony defense to the
performance of his contractual duties and then when that defense fails (at some
expense to the other party) tries on another defense for size [he] can properly be said
to be acting in bad faith.”213
The record before the Court simply does not support a finding that Pearl City
has proceeded in bad faith.214 Rather, Pearl City believed, based on the Agreement’s
text, that an (expensive) Opinion was not necessary for intra-Member transfers.
History supported that view, as the Board has never sought an Opinion with respect
to any unit transfer. 215 Absent evidence of bad faith, the “mend-the-hold” doctrine
is inapt. 216
213
Harbor Ins. Co., 922 F.2d at 363; see also Bank of New York Mellon v. Commerzbank
Cap. Funding Tr. II, 2011 WL 3360024, at *8 n.71 (Del. Ch. Aug. 4, 2011) (citing with
approval Liberty Property’s analysis); Health Corp., 2009 WL 2215126, at *9 n.12 (citing
with approval Harbor Insurance’s analysis).
214
Defendants cite cases where, in the context of advance notice bylaws, Delaware courts
have not permitted stockholders to ignore procedural deadlines and then seek to remedy
them after the fact. See BlackRock Credit Allocation Income Tr. v. Saba Cap. Master Fund,
Ltd., 224 A.3d 964, 980 (Del. 2020). In those cases, however, the parties agreed the
procedure was clear and simply decided not to follow it; in other words, they arguably
proceeded in bad faith.
215
Trial Tr. 121:12–15 (Gieseke), 423:20–424:6 (Foley).
216
See Bank of New York Mellon, 2011 WL 3360024, at *8 n.71 (“[I]t cannot be said, based
on the record before the Court, that [Defendants] have [taken a different position from the
one previously taken] in bad faith, or that the position the Defendants now assert is
somehow phony or trumped up. . . . Under these circumstances, the Court concludes that
the ‘mend-the-hold’ doctrine does not bar the Defendants from asserting that same position
here.”).
57
Defendants next argue the PC Opinions are not substantively “satisfactory”
under Section 12.2. In this regard, they argue the Court cannot assess the legal
sufficiency of the PC Opinions since they are hearsay and were received in evidence
on the condition they would not be considered for the truth of the matters asserted
therein.217 According to Defendants, the “only substantively admissible expert legal
opinion the Court heard was from Pearl City’s tax expert, Gary Huffman,” who
“opined on only two (2) of the five (5) opinion of counsel deliverables required under
[Section] 12.2 (iv)–(viii).”218 Thus, say Defendants, any declaration by the Court as
to the validity of the PC Opinions would require undue speculation. And, while
Defendants may have been satisfied with the PC Opinions in August 2020, they
insist they have serious doubts about the PC Opinions now. When pressed for an
example, Defendants pointed to Pearl City’s failure to explain why it submitted three
separate opinions from different law firms (as opposed to one). 219 They also
discovered that Pearl City submitted “secret confidential bids on FNC” and, in any
event, “[t]here is no rule that says you can’t change your mind.” 220
217
Defs.’ Post-Trial Br. at 49.
218
Id. at 48.
219
Post-Trial Tr. 82:3–83:3.
220
Id. at 81:15–82:12.
58
None of the purported problems that Defendants identify with respect to the
PC Opinions have anything to do with the securities and tax matters the Board is
empowered to review under Section 12.2(iv)–(viii).221 To reiterate, Defendants do
not have arbitrary power to deny a transfer under Section 12.2; they may only “defer”
transfers until they have in hand Opinion(s) “satisfactory in form and substance.”222
And, contrary to Defendants’ suggestion, the Court may consider the PC Opinions
for the facts that they exist and say what they say (true or not).223 Further, the fact
Pearl City delivered several legal opinions is hardly suspicious, as Section 12.2
touches on various intricate tax and securities matters that require different legal
expertise. In other words, Defendants’ newfound “reservations” concerning the PC
Opinions are not credible.
In view of Defendants’ acceptance of the PC Opinions at the start of litigation,
their inability to point to a relevant change of circumstance in the interim, and the
221
See OA § 12.2. Defendants’ inability to cite any legitimate objection is striking given
that they have had the PC Opinions throughout this proceeding and maintain regular
contact with counsel, both their own and the Company’s. See JX 176 (Locke Lord email
discussing the PC Opinions, stating that the Board could accept them, and implicitly
acknowledging they were “satisfactory in form and substance” to “counsel for the
Company” under Section 12.2).
222
OA §§ 12.1, 12.2.
223
See 2 MCCORMICK ON EVIDENCE § 249 (8th ed.) (explaining that a statement is “not
subject to attack as hearsay” when its purpose is to establish the statement was made).
On their face, the PC Opinions address each of the matters identified in Section 12.2.
59
Agreement’s clear instruction that the Board may not wield its right to receive an
Opinion as a weapon to strike down transfers arbitrarily,224 the preponderance of the
evidence indicates the PC Opinions satisfied Section 12.2.225 Because the Court has
found an Opinion was required to effectuate the transfers, the relevant date relating
to the parties’ notice dispute is September 1, 2020, the date the PC Opinions were
delivered. Pearl City mailed written notice on May 29, 2020, and the Transfer
Notices and Bills of Sale were received on or around June 2, 2020.226 Thus, Pearl
City’s written notice of its transfers would have been effective by the date Pearl City
was eligible to have the unit transfers recognized by the Company.
2. The Written Notice
The General Governors reflexively invoke the “mend-the-hold” doctrine
again to argue that Pearl City’s notice of the transfers was somehow deficient. But
the Court already has determined that Pearl City reasonably understood notice to be
224
See OA § 12.1.
225
At trial, Pearl City produced credible and unrebutted expert testimony from Gary
Huffman, who testified that Pearl City’s transfers would have no effect on Adkins’ tax
status. Trial Tr. 329:20–389:20 (Huffman). Huffman’s testimony thereby directly
addresses the primary concern raised by the General Governors at every stage prior to trial
as justification for their opposition to Pearl City’s transfers. See Defs.’ Post-Trial Br. in
Opp’n to Pl.’s Mot. to Expedite and Mot. for a Status Quo Order (D.I. 22) at 17–19;
Defs.’ Answer to Verified Compl. (D.I. 39) ¶ 2; see also Trial Tr. at 371:9–22 (Huffman)
(confirming this was not “even a close call”).
226
PTO ¶¶ 32–33.
60
required only prior to the time it sought to have the unit transfers recognized by the
Company as of the next fiscal quarter. Consistent with Section 16.1, Pearl City
mailed notice two days prior to the start of the next fiscal quarter. As with the
Opinion requirement, there is no reason to find that Pearl City’s notice was delivered
in bad faith.
The General Governors are left to quibble with the substance of the May 29
Letter and Transfer Notices. Specifically, they assert the May 29 Letter: (1) arrived
one hour after the Complaint in this action was filed, (2) assumed consummation of
all private and public transfers, and (3) demanded acknowledgment of the relief
requested.227 According to Defendants, this is not proper prior notice as required
under Section 12.1.
None of the purported deficiencies identified by Defendants render Pearl
City’s notice substantively void. The Complaint was filed after the General
Governors informed Pearl City they would not recognize Pearl City’s acquisition of
units, a position Pearl City believed in good faith was contrary to the Agreement.228
227
See Defs.’ Post-Trial Br. at 43 (citing JX 134). I note that Defendants did not raise the
argument that Section 12.1 specifies that the transferring Member should provide notice,
while Pearl City was in all cases the transferee. Defendants’ ambivalence is likely due to
the fact that Pearl City delivered notice jointly on behalf of itself and the transferor, making
the argument a distinction without a difference. See JX 132; JX 138. In any event, “[i]ssues
not briefed are deemed waived.” Emerald P’rs v. Berlin, 726 A.2d 1215, 1224 (Del. 1999).
228
See JX 70.
61
Though the Court has held the Board was entitled to defer approving the transfers
until production of a satisfactory Opinion, Section 12.1 prescribes no magic words
Pearl City had to incant in its May 29 Letter—only that it “describe the terms and
conditions of the proposed Transfer.” 229 Confined by the record, Defendants do not
(because they cannot) suggest that the required content was absent from Pearl City’s
notices.
Defendants’ only substantive argument based on the text of the Agreement is
that Section 12.1(i) requires “a copy of the proposed contract of sale” to be
“contain[ed]” with the written notice, but Pearl City mailed the Transfer Notices and
Bills of Sale under “separate cover.” 230 It is undisputed, however, that the executed
Transfer Notices and Bills of Sale were mailed to Adkins and Defendants via Federal
Express the same day, and Adkins received them no later than June 2, 2020.231
Furthermore, the Transfer Notices and Bills of Sale expressly provide that Pearl City
and the Transferring Member were jointly delivering the documents.232 The fact the
documents were delivered in separate envelopes does not violate the Agreement’s
229
See OA § 12.1.
230
Id.; see Defs.’ Post-Trial Br. at 44 (citing JX 134).
231
PTO ¶ 33; JX 7; JX 132; Trial Tr. 49:1–6 (Ramsel), 289:2–9 (Baker); Defs.’ Post-Trial
Br. at 4.
232
JX 7.
62
notice requirement.233 Thus, Pearl City substantively complied with all aspects of
the Agreement’s notice requirements.
D. Defendants’ Affirmative Defenses Fail
Defendants raise two affirmative defenses: unclean hands and material
breach. I address each in turn.
Unclean Hands
The doctrine of “unclean hands” provides that “a litigant who engages in
reprehensible conduct in relation to the matter in controversy . . . forfeits his right to
have the court hear his claim, regardless of its merit.”234 “[T]he purpose of the clean
hands maxim is to protect the public and the court against misuse by one who,
because of his conduct, has forfeited his right to have the court consider his claims,
233
I note that my findings regarding Pearl City’s compliance with the Agreement’s
procedural and substantive transfer requirements puts to bed Defendants’ ripeness
argument, namely that the dispute was not ripe when filed because Pearl City failed to meet
all the procedural prerequisites prior to filing its Complaint. See Defs.’ Post-Trial Br. at 37;
see also Stroud v. Milliken Enters., Inc., 552 A.2d 476, 479–80 (Del. 1989) (listing ripeness
as among the four elements required for a Court to exercise its statutory authority to hear
a claim seeking a declaratory judgment). At the time suit was filed, Pearl City had mailed
notices and thus believed at that time that it had fulfilled its obligations under the
Agreement and was entitled to a seventh Governor upon commencement of the new fiscal
quarter two days later, on June 1. The General Governors had informed Pearl City prior to
initiating this action that they would refuse to recognize Pearl City’s newly acquired units.
See JX 108; see also JX 74; JX 105; JX 111. And they continued thereafter to oppose Pearl
City’s right to elect its fourth Governor. See Post-Trial Tr. 81:20–83:18. Accordingly, the
dispute is ripe for adjudication.
234
Nakahara v. NS 1991 Am. Tr., 739 A.2d 770, 791–92 (Del. Ch. 1998) (internal
quotations omitted).
63
regardless of their merit. As such it is not a matter of defense to be applied on behalf
of a litigant; rather it is a rule of public policy.” 235 As refined by this court, “[t]he
question raised by a plea of unclean hands is whether the plaintiff’s conduct is so
offensive to the integrity of the court that his claims should be denied, regardless of
their merit.”236 “This court has consistently refused to apply the doctrine of unclean
hands to bar an otherwise valid claim of relief where the doctrine would work an
inequitable result.”237
Defendants assert that the following acts Pearl City took in furtherance of its
“schem[e]” to accumulate units amount to unclean hands: 238
• Pearl City falsely reported the number of units it owned at various times.239
By “sandbagging” the General Members with their accumulation of units
through private transfers, Defendants argue Pearl City: (1) robbed the
minority of their ability to seek a control premium for the units, and (2) robbed
the minority unitholders from deploying their own capital to stave off a change
in control. 240
235
Skoglund v. Ormand Indus., Inc., 372 A.2d 204, 213 (Del. Ch. 1976).
236
Gallagher v. Holcomb & Salter, 1991 WL 158969, at *4 (Del. Ch. Aug. 16, 1991), aff’d
sub nom. New Castle Ins., Ltd. v. Gallagher, 692 A.2d 414 (Del. 1997).
237
Dittrick v. Chalfant, 948 A.2d 400, 408 n.18 (Del. Ch. 2007), aff’d, 935 A.2d 255(Del. 2007).
238
See Defs.’ Post-Trial Br. at 55. Defendants also argue the doctrine of unclean hands
should apply because Pearl City did not comply with Section 12.1’s notice provision.
See Defs.’ Post-Trial Br. at 56. For reasons already explained, however, Pearl City’s
actions complied with Section 12.1; this argument fails a fortiori.
239
See JX 7.
240
Id.64
• Pearl City enlisted the help of a broker to place confidential standing offers
on FNC.241 Pearl City’s use of the broker to purchase units for its own account
violated the Adkins’ Trading Service Operational Manual. 242
• Pearl City was offering two different prices on the FNC and to its patrons in
private purchases, thereby breaching its fiduciary duties of loyalty to minority
Members.243
Defendants maintain that the Court “should not and cannot endorse this false and
faithless conduct by granting Pearl City the relief it requests.”244
None of the acts asserted by Defendants justifies this Court’s equitable
intervention to bar Pearl City’s claims. Courts have refused to apply the unclean-
hands doctrine where the conduct at issue involved no intent to deceive, or if the
degree of inequity resulting from the conduct is de minimis.245 For an omission to
be material, there must be “a substantial likelihood that the disclosure of the omitted
fact would have been viewed by the reasonable investor as having significantly
altered the ‘total mix’ of information made available.”246 The purported omission
within Pearl City’s Transfer Notices relates to 277 units purchased in February 2020,
241
JX 41; JX 35 at 2, ¶ 11.
242
JX 35 at 2, ¶ 11.
243
See JX 98; JX 95.
244
Defs.’ Post-Trial Br. at 6.
245
See Wilmont Homes, Inc. v. Weiler, 202 A.2d 576, 580–81 (Del. 1964); Portnoy v. Cryo-
Cell Int’l, Inc., 940 A.2d 43, 81 (Del. Ch. 2008); Gallagher, 1991 WL 158969, at *4.
246
Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944 (Del. 1985).
65
roughly 4% of the 6,475 units it acquired through private sales from existing
Members.247 I do not view this error as material. There is also no evidence of bad
faith, as Pearl City excluded the units because they were not yet reflected on the
Company’s register. 248 Pearl City owned 50% of Adkins’ units since the Company’s
founding. Thus, Pearl City’s patrons (as well as the General Governors) were
presumably aware that Pearl City’s purchase of any more units might warrant a
control premium.
As for the FNC purchases, as noted, there is no reliable evidence on record
that the FNC Documents were made binding on Pearl City or the Members. Thus,
there is no inequity here: Pearl City did not breach the FNC Documents because they
were not binding. At best, they were guidelines for those trading on FNC.
Finally, Pearl City’s purchase of different units at different prices from its
patrons does not warrant equitable intervention under these facts. Delaware law on
this matter is well-settled:
[A]s a general principle our law holds that a controlling shareholder
extending an offer for minority-held shares in the controlled
corporation is under no obligation, absent evidence that material
information about the offer has been withheld or misrepresented or that
247
See JX 7.
248
Trial Tr. 73:1–16 (Ramsel).
66
the offer is coercive in some significant way, to offer any particular
price for the minority-held stock. 249
Defendants cite Unocal Corp. v. Mesa Petroleum Co. to argue that, because Pearl
City embarked on a purely private solicitation to only its patrons, it violated its
fiduciary duties. 250 Unocal, however, was decided in the context of a public tender
offer.251 Pearl City’s transfers were the product of private sales placed among
Members who were on notice of Pearl City’s majority-owner status. Defendants
admitted at trial that any Member was free to offer any price on FNC; in other words,
the parties were free to negotiate price as a matter of course.252 Indeed, the price of
Pearl City’s cash offer was based on an FNC bid posted by Baker. 253 Accordingly,
Pearl City did not violate any obligation, under the Agreement or otherwise, in the
course of its acquisition of units to reach the 56% threshold. Its hands are clean.
249
In re Ocean Drilling & Expl. Co. S’holders Litig., 1991 WL 70028, at *3 (Del. Ch.
Apr. 30, 1991).
250
493 A.2d 946 (Del. 1985).
251
Unocal, 493 A.2d at 956.
252
Trial Tr. 221:8–21 (Gieseke).
253
JX 9 at 403.
67
Material Breach
“A prior material breach by one’s counterparty is an excuse for non-
performance.” 254 “The question whether the breach is of sufficient importance to
justify non-performance by the non-breaching party is one of degree and is
determined by ‘weighing the consequences in the light of the actual custom of men
in the performance of contracts similar to the one that is involved in the specific
case.’”255
The Court has found Pearl City’s conduct comported with the express
contractual requirements set forth in the Agreement. And for reasons explained, the
FNC Documents are not binding. Accordingly, Defendants’ material breach defense
fails.
E. Attorneys’ Fees
Pearl City asks the Court to award its legal fees incurred in this action.256
Under the American Rule, each party typically must bear its own litigation expenses,
including counsel fees.257 “This court has the discretion, however, to shift litigation
expenses, in whole or part, when a party to the litigation has engaged in bad faith
254
Costantini v. GJP Developers, Inc., 2015 WL 5122992, at *8 (Del. Ch. Aug. 24, 2015).
255
In re Mobilactive Media, LLC, 2013 WL 297950, at *13 (Del. Ch. Jan. 25, 2013).
256
Pl.’s Opening Post-Trial Br. at 58.
257
Tandycrafts, Inc. v. Initio P’rs, 562 A.2d 1162, 1164 (Del. 1989).
68
litigation conduct.”258 The bad faith exception may be invoked only where there is
“clear evidence” that the party against whom the sanction is sought has acted in
subjective bad faith. 259 I deny Pearl City’s request for a fee shift as I am satisfied
the General Governors’ asserted defenses fall well short of the “bad faith conduct”
that would warrant an award of attorneys’ fees.260
III. CONCLUSION
For the reasons discussed above, Pearl City is entitled to declaratory
judgments under Section 18-110 that it has complied with the Agreement in all
relevant respects and is entitled to seat Daly as the seventh Governor on the Board.
Pearl City shall submit a conforming final judgment on notice to Defendants within
ten (10) days.
258
Ensing v. Ensing, 2017 WL 880884, at *11 (Del. Ch. Mar. 6, 2017).
259
Arbitrium (Cayman Is.) Handels AG v. Johnston, 705 A.2d 225, 232 (Del. Ch. 1997),
aff’d, 720 A.2d 542 (Del. 1998).
260
See Beck v. Atlantic Coast PLC, 868 A.2d 840, 851 (Del. Ch. 2005).
69