On August 12, 2021, the Delaware Court of Chancery issued an opinion finding that a company’s sweat equity member had waived the operating agreement formalities and, thus, consented to the dilution of his interest and the company’s conversion to a Puerto Rican entity. Because of this ruling, the court, as a matter of first impression, had to determine whether it had subject matter jurisdiction to dissolve or declare the proper managers of a foreign entity. The court found that under the Delaware Limited Liability Company Act (the Act), its statutory jurisdiction to declare a company’s present managers or order judicial dissolution only extended to domestic entities. Because of the company’s conversion to a Puerto Rican entity, the court did not have subject matter jurisdiction to work an equitable dissolution.
The dispute centered on Coinmint, LLC (Coinmint), a private bitcoin mining firm founded in 2016 by two childhood friends, Prieur Leary and Ashton Soniat. Leary held his interest in the company in Mintvest Capital Ltd. (Mintvest), while Soniat held his interest in Coinmint Living Trust (CLT). The entities were the only members of Coinmint. They agreed that Leary would be the sweat equity partner, Soniat would be the financing partner, each would be 50 percent owners, and Mintvest’s interest would be diluted as Soniat provided more capital. The two formalized this plan in an operating agreement, which provided that the members’ interest could be increased or diluted via cash infusion. Cash infusion in the form of a loan would not impact a member’s equity stake or have a dilutive effect, while capital contributions would affect the voting power of the members.
The operating agreement also provided formal capital contributions procedures. The board would notify members in writing of the need for additional funds, and each member would then make a capital contribution. Each member would have the opportunity to match the capital contributions of the other member in order to avoid dilution. If either failed to make the capital contribution, the other could make the contribution, and the members’ equity percentages would be adjusted accordingly.
Leary and Soniat, however, failed to follow the formal procedures. Leary preferred not to document all happenings, and so would frequently make informal requests for funds from Soniat; Soniat would then provide the funds necessary to support Coinmint’s operations, some in the form of loans and others as capital contributions. By 2017, this diluted Leary’s interest to below 5 percent. Leary and Soniat agreed that because of the amount of Leary’s sweat equity, his interest should not be diluted so greatly, and thus set his interest at 18.2 percent. Leary and Soniat memorialized this new agreement with a written document.
In 2018, Coinmint became a Puerto Rican entity. The record indicated Leary was aware of, participated in, and supported this conversion. However, by 2019, the relationship between Leary and Soniat had deteriorated, with Soniat discovering Leary was struggling to manage the company. As the 81.8 percent member and manager, Soniat amended the operating agreement so that a majority of the members would determine the composition of the board and to permit the board to remove a manager, with or without cause, by a majority vote of the members. Soniat then removed Leary from the board and designated CLT as Coinmint’s sole manager.
Mintvest filed a suit seeking nullification of Coinmint’s conversion; dissolution pursuant to 6 Del. C. § 18-802 or, alternatively, equitable dissolution; and a declaration of Coinmint’s proper managers pursuant to 6 Del. C. § 18-110. Mintvest alleged the court had subject matter jurisdiction under Sections 18-110, 18-111, and 18-802 of the Act. It also alleged Delaware courts have a significant interest in adjudicating disputes implicating the internal affairs, conversion, and dissolution of Delaware entities, regardless of whether Coinmint is a Delaware or Puerto Rican entity, because the operating agreement provided that Delaware law would control.
The court first found that CLT’s cash infusions were capital contributions, and that Mintvest agreed to the informal dilution to 18.2 percent through Leary’s waiver of the formal procedures under the operating agreement. Thus, because CLT held a majority, Mintvest’s vote or consent for Coinmint’s conversion was unnecessary. Yet, because the court found Coinmint’s conversion to a Puerto Rican entity valid, it lacked subject matter jurisdiction to order a dissolution or declare Coinmint’s proper managers.
The court explained that an operating agreement’s choice of law provision alone could not create sufficient contact for personal jurisdiction, nor could parties confer subject matter jurisdiction where it is otherwise absent. Thus, the court needed to consider whether it had subject matter jurisdiction over Mintvest’s claims for (1) dissolution pursuant to 6 Del. C. § 18-802 or, alternatively, equitable dissolution, and (2) a declaration of Coinmint’s proper managers pursuant to 6 Del. C. § 18-110, rather than Coinmint’s operating agreement choice of law provision. The court found that the plain language of the Act provided the court with no power to statutorily dissolve, or declare proper managers of, a foreign LLC, even if it had previously been a Delaware entity. Instead, the Act explicitly distinguished between domestic and foreign LLCs.
The court also found it could not equitably dissolve Coinmint, as it was no longer a Delaware entity. The court explained that Delaware’s interest in resolving issues of internal affairs extends only to Delaware entities, not those organized under the laws of another sovereign. Furthermore, the court reasoned that while Delaware law has not joined other courts in explicitly finding it cannot dissolve foreign entities, Delaware court decisions support doing so. The court cited multiple instances in which the conversion of Delaware stock or the merger of a Delaware entity into an entity created under the laws of a different state resulted in the divesting of Delaware jurisdiction. Thus, because Coinmint was no longer a Delaware entity, the court no longer retained subject matter jurisdiction to equitably dissolve the company. This ruling does two things: (1) reminds company members to abide by the formal procedures delineated in an operating agreement to ensure they do not waive any rights provided thereby, and (2) provides an explicit ruling that Delaware courts do not have subject matter jurisdiction to judicially dissolve, equitably dissolve, or resolve matters of managers of a foreign entity, even where the company was formerly a Delaware entity. Members should be wary of disregarding operating agreement procedures and cautious when considering major changes to a company if they seek to maintain Delaware jurisdiction.