TravelCenters of America LLC v. Brog (2008 WL 5272861, Del. Ch. Dec. 5, 2008); Snapping At One's Shareholders

Shareholders of TravelCenters, a Delaware LLC, nominated two individuals for election to TravelCenters’ board of directors at the 2008 annual meeting. TravelCenters’ operating agreement sets forth detailed notice requirements for shareholders to follow in nominating candidates for the board, referred to by Chancellor Chandler as “hypertechnical.” Nevertheless, in a decision he handed down in April 2008, the Chancellor found that the shareholders’ notice did not comply with the operating agreement in several respects.

In a clear instance of “take this,” TravelCenters then sought recovery of over $1.5 million in attorneys’ fees and costs (Skadden represents TravelCenters) from the nominating shareholders! The basis of the request is section 10.3 of TravelCenters’ operating agreement:

“To the fullest extent permitted by law, each Shareholder will indemnify and hold harmless the Company (and any Subsidiaries or Affiliates thereof), from and against all costs, expenses, penalties, fines or other amounts, including, without limitation, reasonable attorneys’ and other professional fees, whether third party or internal, arising from such Shareholder’s breach of any provision of this Agreement or any Bylaws, . . . and shall pay such indemnitee such amounts on demand, together with interest on such amounts, which interest will accrue at the lesser of 15% per annum compounded and the maximum amount permitted by law, from the date such costs or the like are incurred until the receipt or repayment by the indemnitee.”

Slip Opinion at 3 note 8.

(This provision itself strikes this observer as overreaching (15% interest?), and should have put prospective shareholders on notice that this might be an investment to pass on.)

Chancellor Chandler sensibly rejected TravelCenters’ request for fee reimbursement. As he explained, there is a distinction between promises and conditions, with only a breach of the former constituting a breach of contract:

“Under principles of contract law, there is a distinction between promises and conditions. Promises give rise to a duty to perform, and conditions are events that must occur before a party is obligated to perform. While the non-performance of a promise or covenant can result in a breach of contract, the non-occurrence of a condition is not considered a breach unless the party promised that the condition would occur. Thus, unless a party was under a duty for a condition to occur, the nonperformance of a condition is not a breach of the agreement.”

Slip Opinion at 6 (footnotes omitted).

The nominating shareholders here violated a condition, not a covenant, and therefore did not breach TravelCenters’ operating agreement.

Moreover, concluded the Chancellor, his reading of the operating agreement comported with “common sense,” given that it defied belief, absent explicit language to the contrary, that TravelCenters’ shareholders had made a promise to be “personally liable” for millions of dollars for any failure to submit a proper notice to nominate directors.

Delaware, like most states, grants members of a LLC broad discretion to establish their rules of governance through the operating agreement. Accordingly, the Chancellor’s disposition of this dispute turned largely on contract interpretation. In a coporate context, undoubtedly public policy considerations would play a larger role, including the Delaware courts’ vigilance in policing measures that interfere with the effectiveness of a stockholder vote. See, e.g., Blasius Industries v. Atlas Corp., 564 A.2d 651 (Del. Ch. 1988).

What will be interesting is how the shareholders of TravelCenters react to this litigation: Will they head for the exits or redouble their efforts next year with a more careful eye to the notice requirements for nominating directors?