Operating Agreement Trumps Postnup in High Stakes Battle Over Transfer of LLC Interest
April 17, 2023
Husband owns 99% membership of manager-managed LLC. Children own remaining 1%. Postnuptial agreement says husband’s “interest” in LLC goes to wife. LLC agreement says any transferee is not admitted as a member absent the manager’s discretionary consent. Postnup gets triggered when marriage breaks up. Husband-appointed manager withholds consent to wife’s admission as member, relegating her to holder of an economic interest. Wife sues to enforce postnup, arguing it encompasses husband’s “entire” LLC interest including voting and other rights appurtenant to membership. Children-members argue mother merely holds economic interest in LLC. Who wins?
The Bich Family. Société Bic S.A., the French maker of the ubiquitous BiC ballpoint pen and disposable lighter, was founded at the end of WWII by Marcel Bich. The Bich family, among the wealthiest in France, reportedly owns around 46% of the company’s stock and maintains voting control. Around the time of Marcel’s death in 1994, his son Bruno took over as CEO.
The Postnup. In 2008, Bruno and his then-wife of 30 years, Veronique, entered into a First Amended Postnuptial Agreement concerning the ownership and distribution of marital property. The Postnup, which was made in New York and is governed by New York law, reflects the parties’ express intent to implement an equal division of marital property upon the happening of certain “Operative Events” including written notice of intent to separate. The parties were counseled by highly experienced matrimonial lawyers including the renowned Raoul Felder for Veronique.
Grenelle. The assets addressed in the Postnup include Bruno’s approximate 99% membership interest in a Delaware limited liability company called Grenelle, LLC that holds around 400,000 Bic shares apparently worth tens of millions, as well as ownership of a Paris apartment then valued over $10 million.
Paragraph 19(f) of the Postnup simply provides that “the Wife shall receive the Husband’s 98.983798% interest in Grenelle, LLC . . ..” Similar phraseology appears in Paragraph 20(a) in which the parties “acknowledge that as a result of the 98.983798% interest in Grenelle, LLC, the Wife shall have the effective beneficial ownership” of the Grenelle-owned Bic shares.
The Postnup does not feature a required form of assignment of the Grenelle interest to Veronique. Nor does it reference Grenelle’s operating agreement.
Grenelle’s Operating Agreement.Grenelle’s operating agreement (the “OA”), which pre-dates by a year and a half the Postnup, identifies Bruno and their three adult sons as Grenelle’s members, with the sons collectively owning the 1% interest not owned by their father. The OA identifies Grenelle as manager-managed and names Veronique as the initial sole Managing Director. The OA reserves to Bruno the power to remove the Managing Director and to appoint a replacement, other than himself or someone related or subordinate to him.
The OA’s definitional section includes the term “Interest” defined as “a Person’s share of the profits and losses of the Company and a Person’s right to receive distributions of the Company’s assets in accordance with the provisions of this Agreement and the [Delaware LLC] Act.” Note the omission of any reference to non-economic rights including member voting rights. The OA contains no definition of “Member” (other than by reference to the four members listed in its cap table) or “Membership Interest.”
The OA gives the Managing Director sole, unfettered discretion to approve the transfer of any “Interest” in Grenelle as well as the admission of any transferee as a “Member.”
The Separation and Divorce. In 2017, Veronique triggered an Operative Event under the Postnup by sending Bruno written notice of her intent to separate. Bruno apparently contested the effectiveness of the notice, prompting Veronique to sue him in New York Supreme Court in May 2020 for specific enforcement of the Postnup, including Paragraph 19(f) for the transfer of Bruno’s Grenelle interest. Later in 2020, Veronique sued Bruno for divorce.
Bruno Removes Veronique as Grenelle’s Manager. Shortly before Veronique sued for specific performance of the Postnup, Bruno exercised his right under the OA to remove Veronique as Managing Director of Grenelle. In her place he appointed Antoine Treuille, allegedly a longtime friend of his. Veronique’s removal as Managing Director would appear to have been intended to deny her authority under the OA to consent to her own admission to member status upon the possible transfer of Bruno’s 99% interest in Grenelle to Veronique.
Bruno and the Sons Amend the OA. In January 2021, the three sons as members of Grenelle moved to intervene in the lawsuit. In February 2021, a final judgment of the Biches’ divorce was entered. A month later, allegedly while Bruno was terminally ill — he died in May 2021 — and without notice to Veronique, Bruno and his three sons comprising all the members of Grenelle executed an amendment to the OA transferring to the sons holding the 1% minority membership Bruno’s authority to remove and appoint Grenelle’s Managing Director. In August 2021, the sons substituted into the lawsuit as personal representatives of Bruno’s estate. The court later granted the sons’ application to intervene and to file counterclaims concerning the Grenelle interest. Wife vs. husband became mother vs. children.
The Court Orders the “Entirety” of Bruno’s Interest Transferred. In February 2022, Manhattan Supreme Court Justice Gerald Lebovits issued a decision and order granting Veronique’s motion for partial summary judgment enforcing the Postnup based on his finding that Veronique’s 2017 written notice of separation constituted an Operative Event. The court ordered and entered judgment that “defendant specifically perform by transferring to [Veronique] the entirety of his 98.983798% interest in Grenelle.”
The Sons Transfer an Economic Interest Only. After the Court’s ruling, the sons filed a partial satisfaction of judgment attaching a document entitled Instrument of Transfer and Assignment in which, as trustees of their late father’s revocable trust, they assigned to Veronique “all of the assignor’s membership interest in GRENELLE LLC . . . which is equal to a 98.983798% interest . . . subject to the terms of the Operating Agreement of the Company . . .” including the right to receive her allocable share of profits, losses, and distributions. It then goes on to qualify the assignment as entitling Veronique to “the rights of a non-member assignee under the Delaware [LLC] Act and a non-member Transferee under the Operating Agreement.”
Veronique Moves to Hold the Sons in Contempt. In May 2022, Veronique moved to hold her sons in contempt of the February 2022 order for failing to transfer to her the “entirety” of Bruno’s Grenelle interest. She also contended that the Postnup’s provision that “the Wife shall receive the Husband’s 98.983798% interest in Grenelle, LLC” does not refer to a “transferee interest” as distinct from a “membership interest” nor otherwise define the “interest” to be anything less than Bruno’s entire 98.983798% ownership including control of Grenelle with the power to appoint and remove Grenelle’s Managing Director.
In other words, Veronique argued that the Postnup as well as the court’s order mandated recognition of her full member status and also rendered invalid the “secret” amendment of the OA shortly before Bruno’s death giving the sons the authority to remove and appoint the Managing Director.
Subsequently the sons filed a pair of motions for reargument and both sides filed dueling motions seeking dispositive rulings on a number of claims and counterclaims including those concerning Grenelle. Justice Lebovits heard oral argument in August 2022 and, earlier this month, handed down his decision and order deciding all five motions.
The Court Sides with the Sons. Right off the bat, Justice Lebovits disposes of Veronique’s contention that the court’s February 2022 order, directing transfer of the “entirety” of Bruno’s Grenelle interest, determined her entitlement to member status. Rather, he writes, “the court’s order held only that Mr. Bich was required to transfer all the interest in Grenelle addressed by ¶ 19 (f) of the postnuptial agreement. It did not also resolve what that interest consisted of.”
Justice Lebovits next offers a two-part analysis of the Grenelle dispute, examining first the definition of “interest” in the OA and, second, deciding whether to interpret “interest” as used in the Postnup in light of the OA’s definition of that term.
On the first issue, Justice Lebovits cites basic Delaware caselaw for the proposition that Bruno’s interest in Grenelle “derives from, and is governed by, the terms of Grenelle’s operating agreement.” He notes that Veronique’s counsel had the OA when they negotiated the Postnup and that the OA defines the term Interest “solely in economic terms.” He also notes as undisputed the OA’s provisions requiring Managing Director consent for a transferee’s admission to membership and giving Bruno personally, and not as the holder of his economic or membership interest in Grenelle, the authority to appoint, remove, and replace the Managing Director.
Justice Lebovits sums up his interpretation of “Interest” under the OA as follows:
The operating agreement thus runs counter in two respects to Ms. Bich’s position that “interest” in ¶ 19 (f) of the postnuptial agreement “refers to the entirety of [Mr. Bich’s] ‘interest’ in Grenelle as a whole, without “differentiat[ing] or qualify[ing] that interest.” First, the unadorned term “interest,” as used in the operating agreement, means only an economic interest in Grenelle’s profits, losses, and distributions—not also membership. Second, Mr. Bich could not have transferred his “membership interest with the right to appoint, remove and replace the Managing Director” consistent with the operating agreement, because membership and authority over the managing director were not his to transfer unilaterally in the first place.
Justice Lebovits’ secondary analysis is equally unfriendly to Veronique’s position. He rejects Veronique’s argument that the Postnup’s provision for the transfer of Bruno’s Grenelle interest should be interpreted “in isolation” and as having “superseded” the OA. As he further explains,
Put differently, Ms. Bich’s position is that the default understanding of “interest” in the postnuptial agreement is that it necessarily incorporates both an economic and a membership interest in Grenelle, and therefore that “had the parties intended for Ms. Bich to be only a ‘Transferee’ as defined in the earlier Operating Agreement, they could have (and would have) made that explicit in the later, superseding marital agreement.” This court concludes that the default interpretive presumption runs the other way—especially (but not only) because of the First Department’s decision in Eichner. That is, “interest” in the postnuptial agreement should be understood as carrying the same meaning as in the operating agreement unless otherwise defined, which it was not. And here, as in Eichner, absent the requisite consent to admitting a transferee as a new member, the transfer itself did not convey with it membership status.
Justice Lebovits then offers several additional reasons to reject Veronique’s “read-it-in-isolation” approach:
Any reading that disregards the OA affects not only Veronique and Bruno’s estate, but also the rights of the other Grenelle members — the sons — who are not parties to the Postnup.
The arguable inequity of giving the 1% owners of Grenelle, “in league” with the new Managing Director, the power to deprive Veronique of dividends or other benefits of the Grenelle Bic shares does not overcome her position’s “fatal interpretative and practical difficulties.”
Even assuming that when the parties executed the Postnup in 2008, at which time Veronique was Grenelle’s Managing Director with authority to admit new members, they failed to anticipate the contingent possibility that she would not be Managing Director at the time of an Operative Event, “it would be inappropriate for the court to make a “new contract” for the parties under the guise of interpreting the writing.
Veronique had over two years from the trigger event in 2017 until her removal as Grenelle’s Managing Director in March 2020 during which she did not attempt to force a transfer of Bruno’s Grenelle interest, prompting Justice Lebovits to comment, “Ms. Bich’s apparent lack of action to protect her rights with respect to Grenelle further calls into question her argument that the only fair course is to interpret the 2008 postnuptial agreement in light of circumstances that did not exist until March 2020 at the earliest.”
In the final analysis, Justice Lebovits concludes that the court:
must construe ¶ 19 (f) of the postnuptial agreement as it is written. In doing so, this court concludes that the only reasonable reading of that provision is that it did not require Mr. Bich, upon the happening of an operative event, to make Ms. Bich a member of Grenelle, or to give to her his power to appoint and remove Grenelle’s managing director. Ms. Bich emphasizes that “a contract must be enforced so as to give the parties their benefit of the bargain as set forth in the agreement.” That is true. But the bargain set forth in ¶ 19 (f) of the postnuptial agreement—as drafted to be mutually acceptable to two sophisticated parties—is not as Ms. Bich would have it.
Closing Thoughts. I saw no mention in the court’s decision or the parties’ briefs of drafting history or any other contemporaneous writings shedding any additional light on what the parties intended by “interest” as that term is used in Paragraph 19(f) of the Postnup. We’ll never know if the matrimonial lawyers for the Biches appreciated the legal nuances of the term in relation to the transfer of membership rights in that adolescent period of LLC jurisprudence. It would be a different story today, when lawyers have the benefit of a much richer body of caselaw interpreting transfer restrictions of the sort.
We also will never know if the Biches and their lawyers anticipated what, at the time, was merely a theoretical, future possibility that following an Operative Event, Veronique would no longer be the Managing Director. Certainly from Bruno’s side of the table, I don’t think we can assume he wanted to craft the Postnup so as to rule out that possibility and, instead, he sought to assure Veronique post-divorce control of such a large block of Bic shares.
Contract law rightly exalts the subscribed, written word as the most reliable evidence of the parties’ contractual intent, even when subsequent events yield a seemingly inequitable outcome for one of the counterparties. And that is my best take on the moral of the Bich case.