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Delaware Supreme Court Reaffirms Freedom of Contract Regarding Limited Liability Company Agreements

In a case that has important implications for private company agreements, the Delaware Supreme Court recently confirmed that freedom of contract in the context of limited liability company agreements extends to “contractually specified incurable voidness,” even where an opposing party might have equitable defenses.

In Holifield v. XRI Inv. Holdings LLC, the limited liability company agreement at issue restricted transfers of membership interests and expressly provided that any purported transfer in violation of the transfer requirements would be void. In other words, any transfer in violation of the restrictions would be treated as if it never occurred, and the violation could not be cured.

The court held that when contracted for, the remedy of incurable voidness cannot be overcome by equitable defenses. The Delaware Supreme Court further held that parties to limited liability company agreements need not use any particular “magic words” to establish a remedy of incurable voidness, as long as their intent is clear.

This decision highlights the Delaware Supreme Court’s continued recognition of the extensive contractual freedom enjoyed in respect of limited liability companies. Members of a limited liability company generally have broad discretion to contract not only for remedies for breach and transfer restrictions but also with respect to limiting members’ and managers’ rights and obligations as to the company and each other, including the limitation or elimination of fiduciary duties. The Court’s holding in Holifield emphasizes that the remedies available to limited liability company members will be governed largely by reference to express language within the limited liability company agreement. Accordingly, these agreements should be drafted and reviewed carefully.

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