The Court of Chancery was asked to interpret a “Put Right” provision (the “Put Right”) in an LLC Operating Agreement, which provided:
“During the period that is between 30 days and 60 days following March 14, 2014, each Rollover Investor may elect to deliver a written notice . . . to the Company and the Investor of its desire to require the Company (and the Investor as contemplated by Section 9.2(d)) to purchase all (but not less than all) of the Preferred Units held by such Rollover Investor . . . .”
Upon exercise of the Put Right, the Company was required to engage “a nationally recognized valuation firm . . . to determine the Fair Market Value of the Put Units as determined by the Valuation Firm in accordance with [the LLC Operating] Agreement” (the ‘Put Price’) . . . .” The LLC Operating Agreement also stated that the Company and the Rollover Investors “shall be bound by the determination of the Valuation Firm . . . with respect to the Put Price as established by the Valuation Firm . . . .”
The Rollover Investors exercised the Put Option within the applicable window, but after the Put Price was determined, they challenged the Valuation Firm’s results. The court rejected the Rollover Investors’ arguments, finding that the LLC Operating Agreement foreclosed any possibility of an appeal, and that they were contractually bound to accept the valuation.
Bottom Line: LLC members seeking a put right should require that the put right provision include an option to seek judicial review if they disagree with the agreed upon valuation firm’s decision. Stating that both parties “shall be bound” by the valuation firm’s determination, without any mention of judicial review, will moot any challenge of the reasonableness of the valuations firm’s judgment calls.