The Delaware Court of Chancery recently emphasized the meaning of “null and void” in the context of an LLC agreement. In Absalom Absalom Trust f/k/a Anne Deane 2013 Revocable Trust v. Saint Gervais, LLC, an LLC member (the “member”) transferred her membership interest to an entity (the “transferee”) that she controlled. The court held that the “null and void” language in the LLC agreement reflected a specific intent to override the common law and caused the transfer to be void, signifying that the phrase can have unintended consequences in this context.
This case addressed whether the transferee was a member of the LLC who had the right to make a demand on the LLC to inspect certain categories of documents. The LLC agreement restricted transfers of membership interests, providing that any disposition or substitution of members made without the prior written unanimous consent of the managers was “null and void.” The LLC argued that the transferee lacked standing to seek books and records because the agreement only authorized members of the LLC to make such a demand, and managers of the LLC had not consented to the member’s transfer of her interest. The Court of Chancery noted that the validity of the transfer and the outcome of the standing issue hinged on the language in the LLC agreement.
Court of Chancery Decision
The Court of Chancery deferred to CompoSecure, L.L.C. v. CardUX, LLC, in which the Delaware Supreme Court considered whether a contract was voidable or void and determined that “the plain language of the provision would render the [contract] void, and therefore incapable of being ratified.” The Delaware Supreme Court defined void acts as “ultra vires” that “generally cannot be ratified.”
In Absalom, although the transferee argued that the LLC’s conduct prevented it from disputing the transferee’s membership status, the Court of Chancery stated that “equitable defenses can validate voidable acts but not void acts.” In CompoSecure, the Delaware Supreme Court held that, by using the word “void” in an LLC agreement, the parties to that agreement adopted the common law rule and foreclosed the application of equitable defenses. The LLC agreement in Absalom contained the words “null and void” in reference to the transfer of membership interest without the managers’ consent.
The Court of Chancery reasoned that at common law, the transfer of the membership interest to the transferee would likely be voidable, not void. However, the word “void” was interpreted to trump the common law and rendered the assignment ineffective and invulnerable to equitable defenses. Consequently, the court held that the plain language of “null and void” reflects a specific intent to override the common law and cause the transfer to be void.
The words “null and void” in an LLC agreement may have unintended consequences and will likely prevent certain transactions from being ratified or later cured. Consult counsel when drafting and reviewing your LLC agreement to avoid potential pitfalls.