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Chancery Addresses Subject Matter Jurisdiction and Basic Contract Principles


A recent Court of Chancery decision provides a few basic but important statements of Delaware law that are useful for the toolbox of corporate and commercial litigators. In Klein v. ECG Topco Holding, LLC, C.A. No. 2021-0701-LWW (Del. Ch. July 8, 2022), the Court pithily decides issues that arose in the context of the disputed buyout of a member of an LLC. Specifically, the issues included (i) whether the lack of ripeness of the disputed payment for the member’s LLC interest deprived the court of subject matter jurisdiction; (ii) whether the failure to allege any harm from the application of the restrictive covenant warranted dismissal under Rule 12(b)(6); and (iii) if an alleged breach excused performance.

Essential Background Facts

For this very short blog post, the salient facts involve a member of an LLC whose divorce led to his ex-wife acquiring most of his interest in the LLC. That event triggered a buyback provision in the LLC agreement which described how the shares were to be bought back, and at what price and when payments were to be made. The event also triggered a restrictive covenant.

Key Takeaways

The complaint appeared to ask for a declaratory judgment regarding the exact price that was due for the purchase of the LLC interests. But the court read the LLC agreement as not requiring payments, at the earliest, for several more months–which rendered that issue not yet ripe for the court to decide it. Thus, under Rule 12 (b)(1), the court did not have subject matter jurisdiction to decide an issue that was not ripe.

The next two issues involved a restrictive covenant. The court reasoned that there were no allegations that the restrictive covenant was harming the plaintiff. To the contrary, the court took judicial notice of a press release indicating that the plaintiff was already gainfully employed. Moreover, there was an argument that the company did not comply with a notice provision. The court was not persuaded that the notice provision applied, but even it did apply, and if the notice were not sent, the court restated basic principles applicable to restrictive covenants: “Delaware courts excuse performance on non-compete obligations following a material breach” that “goes to the essence” of the agreement. Slip op. at 16 (citation omitted). Even if the notice provision at issue applied, the plaintiff did not allege harm from the lack of notice–or that the alleged breach was material.



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