- Partnerships and LLCs
- February 1, 2010
- Law Firm: Richards, Layton & Finger, P.A. - Wilmington Office
In Olson v. Halvorsen, the Delaware Supreme Court affirmed an appeal from a Court of Chancery ruling that the statute of frauds applies to LLC agreements. The Supreme Court arrived at this decision notwithstanding the fact that the Delaware LLC Act permits oral and implied LLC agreements.
The plaintiff, Olson, was one of three founders of a new hedge fund known as Viking Global. As part of the Viking Global business, the founders formed three Delaware entities (Performance, Investors and Partners). Short-form agreements were adopted to govern the three entities, and each of the agreements provided "that a departing member will receive only his capital account balance and accrued compensation." Longer-form agreements were negotiated but never signed except in the case of one of the entities. As was the case with the short-form agreements, that entity's longer-form agreement also provided that a departing member would "receive only his capital account balance and accrued compensation."
Subsequent to these three formations, Olson recommended that a new LLC be formed (Founders), pursuant to which a founder (i.e., Olson and the two others who formed Viking Global) would be paid an earnout upon leaving Viking Global. Obviously, this was a proposed departure from the more limited payment contemplated by the executed agreements governing Performance, Investors and Partners. While drafts of an operating agreement for Founders were circulated, such an agreement was never executed.
Olson was later terminated by Viking Global. Upon termination, Olson insisted that he was entitled to be paid the earnout as contemplated by the unexecuted operating agreement for Founders. Viking Global believed, however, that he was merely entitled to his compensation and capital account, which Viking Global paid (over $100 million).
The Chancery Court granted summary judgment to Viking Global with respect to Olson's breach of contract claim. Olson appealed and asserted, among other things, that the statute of frauds does not apply to LLC agreements and, even if it did, he had satisfied the multiple-writings exception to the statute of frauds. In this case and as a matter of first impression, the Supreme Court addressed the issue of whether the statute of frauds applies to LLC agreements and, after reviewing the issue de novo, concluded that it did.
The statute of frauds "bars the enforcement of an agreement 'that is not to be performed within the space of one year from the making thereof,' unless it is (1) written and (2) signed by the party against whom the agreement is to be enforced." In possible contrast, the LLC Act provides that LLC agreements may be "written, oral or implied" and that an LLC need not execute its LLC agreement but is nevertheless bound by it. In referring to these provisions of the LLC Act, the court acknowledged that the LLC Act allows for the enforcement of "unwritten, unsigned LLC agreements." But the court did not believe that this means that LLC agreements are not subject to the statute of frauds. Applying principles of statutory construction, the court concluded that the LLC Act did not repeal (by implication or otherwise) the statute of frauds as applied to LLC agreements. As a result, the statute of frauds applies to LLC agreements that may not be performed within one year. As a side note, the court did not feel that it needed to address the multiple-writings exception to the statute of frauds.
This case strongly suggests that practitioners limit their reliance on oral or implied LLC agreements. To the extent possible, signed written LLC agreements should be part of an attorney's best practices.