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Fisk Ventures, LLC v. Segal

2008 WL 1961156 (Del. Ch.), aff'd sub nom., Segal v. Fisk Ventures, LLC, 984 A.2d 124 (2009)

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Fisk Ventures, LLC v. Segal

Court of Chancery of Delaware

2008 WL 1961156 (Del. Ch.), aff'd sub nom., Segal v. Fisk Ventures, LLC, 984 A.2d 124 (2009)

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Facts

Dr. Andrew Segal (defendant) founded Genitrix, LLC, a Delaware limited liability company, and retained 55 percent of Genitrix’s Class A membership interest. H. Fisk Johnson held much of the Class B membership interest, along with Fisk Ventures, LLC (Fisk) (plaintiff), Stephen Rose, and William Freund. Fisk was owned and controlled by Johnson. Under Genitrix’s LLC agreement, the board of member representatives, which managed the company’s business and affairs, consisted of five members: two appointed by Johnson, one by Fisk, and two by Segal. Johnson appointed Rose and Freund, his employees, to the board. Section 9.1 of the LLC agreement stated that no member has any duty to any other member, except as expressly set forth in the LLC agreement itself, and that no member is liable for damage to the company unless it is the result of gross negligence, fraud, or intentional misconduct. The LLC agreement also required approval of 75 percent of the board for most actions, thus requiring the cooperation of both the Class A and the Class B members. The Class B members had a “Put Right” clause in their contracts, which stated that at any time, they could sell back to Genitrix any or all of their Class B interests for a price determined by an independent entity. Since it was formed, Genitrix continually had financial difficulty and trouble attracting investors. Segal felt that the Put Right contractual clauses scared off potential investors, but despite his multiple requests, the Class B members refused to suspend their Put Rights. Segal then drafted a private-placement memorandum he planned to use to attract investors, but the Class B members refused to approve it. Throughout this time, the plaintiffs infused Genitrix with operating cash, but not enough to allow Genitrix to succeed. Genitrix soon ran out of operating cash and was eventually left with Segal as the only employee, no office, no funds, and no revenue. Fisk brought suit in the Delaware Court of Chancery, seeking dissolution of Genitrix. Segal filed counterclaims, charging that Fisk breached the LLC agreement and the covenant of good faith and fair dealing implied in the agreement by allegedly blocking Genitrix’s chances at funding. Fisk filed a motion to dismiss Segal’s counterclaims.

Rule of Law

Issue

Holding and Reasoning (Chandler, C.)

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