Delaware Declines Subject Matter Jurisdiction Over Judicial Dissolution of Foreign Entities
September 07, 2021
It’s not surprising that Vice Chancellor Zurn’s recent, first-impression decision in In re Coinmint, LLC, aligning itself with rulings in many other states including New York, found that Delaware courts lack subject matter jurisdiction over petitions to dissolve non-Delaware business entities — in this case, a Puerto Rico limited liability company. It’s also not surprising that the Delaware Chancery Court, better known for leading rather than following the pack when it comes to business law, is addressing the issue for the first time decades after New York and other state courts have done so. After all, Delaware is famous as an exporter of Delaware entities operating in other states, not as an importer of non-Delaware entities operating in Delaware.
Delaware’s lopsided trade imbalance as an entity exporter explains the highly unusual path Coinmint took to VC Zurn’s jurisdictional ruling. The company, which operates a data center in upstate New York and reputedly is among the largest bitcoin mining firms in the world, began its life in 2016 as a Delaware limited liability company owned 50/50 by two childhood friends, Prieur Leary and Ashton Soniat. Leary contributed “sweat equity” by running Coinmint’s day-to-day operations while Soniat provided the necessary funding. In October 2017, the two owners reached a compromise agreement on an adjusted equity split of 81.8%-18.2% in Soniat’s favor reflecting his tens of millions in additional capital contributions as the company expanded operations.
In early 2018, looking to reap certain tax benefits, the company filed a Certificate of Conversion with the Delaware Secretary of State, redomesticated in Puerto Rico, and thereafter operated as a Puerto Rican entity.
In 2019, as the owners’ relationship deteriorated due to disagreements over the company’s management, Soniat exercised his majority voting power (gained from the dilution of Leary’s interest) as a member and on the board of managers by amending Coinmint’s operating agreement, removing Leary from the board, and designating Soniat’s holding company as sole manager.
In late 2019, Leary filed suit in Delaware Chancery Court. Leary’s amended complaint sought to nullify Coinmint’s conversion to a Puerto Rican entity on the grounds that it was done without Leary’s knowledge or consent, and did not comply with the operating agreement’s formalities. His complaint also asserted that Soniat’s amendment of the operating agreement, removal of Leary from the board, and dilution of Leary’s membership interest and voting rights underlying those actions did not comply with the formal requirements of the operating agreement governing additional capital contributions. Soniat’s millions in cash infusions, Leary contended, therefore should be treated as loans. Leary also sought judicial dissolution of Coinmint under Section 802 of the Delaware LLC Act.
The Court Upholds Dilution and Conversion Based on Soniat’s Equitable Defenses
Soniat did not dispute that the operating agreement’s formal procedures for dilutive capital contributions, and for approval of the company’s conversion to a Puerto Rican entity, were not followed. Rather, Soniat argued that the equitable defenses of waiver, estoppel, and acquiescence barred Leary from seeking to invalidate the actions for noncompliance with the operating agreement’s formalities.
VC Zurn held a bench trial in early 2021. The bulk of her 79-page post-trial opinion analyzes in great detail the evidence and law concerning Soniat’s equitable defenses, ultimately concluding that Leary had consented to dilution notwithstanding the lack of formalities, that the conversion was voidable rather than void, that Leary knew of and actively participated in the company’s conversion to a Puerto Rican entity, and that
the greater weight of the evidence rests on [Soniat’s] side of the scale. Under the doctrines of waiver, estoppel, and acquiescence, I conclude that [Soniat’s] cash infusions were capital contributions, and that [Leary] agreed to dilution notwithstanding the Operating Agreement’s requirements and is therefore an 18.2% Member. Under those same doctrines, and in view of [Soniat’s] majority voting power, [Leary’s] claim that the Conversion was invalid because it was effectuated without [his] vote or consent also fails.
The Court Declines Jurisdiction Over Dissolution and Leary’s Removal From the Board
Beginning at page 66 of her opinion, VC Zurn turns to Leary’s argument that the court has the power to adjudicate his claims for judicial dissolution and to reverse his removal from the board because, regardless of Coinmint’s domicile, its operating agreement provides that Delaware law controls. VC Zurn makes it clear that choice-of-law provisions are beside the point, commenting that “[p]arties may agree to submit their persons to the jurisdiction of any given court but may not confer subject matter jurisdiction which is otherwise absent.”
Acknowledging that “Delaware has not directly answered the question of whether this Court may statutorily dissolve, or declare the proper managers of, a foreign limited liability company, even one that was previously a Delaware entity,” VC Zurn concludes that her
reading of the plain language of the Act compels the conclusion that this Court has no such power. As explained, the Act explicitly distinguishes between domestic and foreign limited liability companies. By their terms, both Section 18-110 and 18-802 apply only to “limited liability compan[ies],” defined under the Act as Delaware LLCs. They cannot be invoked to confer upon this Court power over a Puerto Rican entity. . . . [¶] And “Delaware Courts will not exercise subject matter jurisdiction over a dispute that is predicated on foreign law where the foreign state has vested jurisdiction exclusively in its own courts.” The territory of Puerto Rico appears to have vested jurisdiction over the judicial dissolution of a Puerto Rican LLC, and contested matters relating to managers as well, in its Court of First Instance. Under established Supreme Court precedent, this Court lacks subject matter jurisdiction to afford relief that Puerto Rico has vested in its own court.
Leary’s alternative argument, that the absence of a statutory jurisdictional grant to dissolve Coinmint as a Puerto Rican entity does not preclude Chancery Court from granting non-statutory, “equitable dissolution,” also went down to defeat:
[A]s explained in In re Carlisle Etcetera LLC, this Court’s power to effectuate an equitable dissolution is sourced in the State of Delaware’s “interest in having the Court of Chancery available, when equity demands, to hear a petition to dissolve a [Delaware] LLC.” Where the entity is not a Delaware entity, I believe the principles delineating a sovereign’s interest in its native entities compel the conclusion that this Court lacks subject matter jurisdiction to equitably dissolve that entity. Delaware has guarded its jurisdiction over the internal affairs of Delaware entities, and other courts have declined to dissolve Delaware entities. Applying these principles together, I conclude this Court cannot dissolve foreign entities.
VC Zurn observes that “Delaware’s sister courts have declined to extend their jurisdiction to dissolve Delaware entities.” As a primary example, her opinion quotes from Chancery Court’s decision earlier this year in Seokoh, Inc. v. Lard-PT, LLC where the court “explained that under ‘well-settled’ New York law, New York courts ‘lack jurisdiction to issue a decree of judicial dissolution for [a Delaware limited liability company],” adding that “New York does not stand alone.” The opinion also reviews Delaware case precedent reaching back to 1886 in support of “the importance of deferring to the state of formation” in regard to the power to dissolve.
VC Zurn’s opinion in Coinmint, at least on the issue of jurisdiction to dissolve foreign entities, likely will have little impact on Delaware practice for the simple reason that, as mentioned above concerning Delaware’s preeminence as an entity exporter, such cases in Chancery Court are almost as rare as hen’s teeth. Nonetheless, the scholarship VC Zurn brings to her analysis of the issue, typical of that court’s opinion-writing, is an important contribution to this interesting area of the law at the intersection of judicial power and interstate comity.
Coinmint is more likely to influence future litigation involving the not uncommon phenomenon seen in that case, in which company owners make decisions and take actions without paying attention to procedural, voting, and consent requirements in the owners’ agreement, followed by one side or the other, after disputes arise, invoking those self-same requirements to invalidate those self-same decisions and actions. VC Zurns’ thoughtful analysis in Coinmint establishes a helpful framework for consideration of the equitable defenses of waiver, estoppel, and acquiescence successfully raised in the case.