The sole member of an LLC asked his friend to invest in the LLC by acquiring a share in it. The friend replied that it would later be difficult to sell the share at a favorable price. Then, the friends entered into an oral agreement that stipulated the repurchase of the share at a price to be calculated according to certain financial indicators. Five years later, the friend asked to have his share in the LLC repurchased, but was refused. Subsequently, the court established that the LLC's management agreement had been duly amended unilaterally to include a clause stating that all prior oral agreements were void. The court denied the claim, acknowledging that it allowed one party to a contract to unilaterally extinguish his contractual obligation.
In the case
Behler v. Kai-Shing Tao, the New York Court of Appeals ruled that a merger
clause in a limited liability company (LLC) agreement under Delaware law
replaced a previous oral agreement between the parties, despite their past
dealings through oral contracts.
The facts of the
case began in 2012 when Kai-Shing Tao, CEO and Chairman of Remark Holdings,
Inc., asked his friend Albert Behler to invest in Digipac LLC, a company
created to hold shares of Remark. Although worried about the investment's liquidity,
Behler agreed to invest $3 million for a 24.14% stake in Digipac. They made an
oral agreement that included two exit strategies based on Remark’s stock price
over the following five years. At this time, Digipac was still governed by its
original LLC agreement, with Tao having the sole power to amend it.
In 2014, Tao
amended the LLC agreement independently. This new agreement included terms
about investments and asset liquidation but did not provide automatic exit
options for members. It also had a merger clause stating that the amended
agreement represented the entire agreement, overriding any prior agreements,
including the oral one.
After not
achieving the $50 per share stock price within five years and not receiving an
exit opportunity, Behler claimed Tao breached their contract and sought to
enforce the oral agreement. The New York Supreme Court dismissed his case,
stating that the merger clause overrode earlier agreements. This dismissal was
affirmed by the First Department and the Court of Appeals.
The Court of
Appeals disagreed with Behler’s argument that the oral and amended agreements
were different, noting that the oral agreement provided part of the
consideration for his investment as a Digipac member. The court emphasized that
both agreements dealt with investments in Digipac, thus the merger clause in
the amended agreement voided the oral agreement.
Behler’s
promissory estoppel claim was also rejected because Delaware law does not allow
this when there is a fully integrated, enforceable contract. The Court pointed
out that the oral and amended agreements were related, negating the claim.
A dissenting
opinion argued that the two agreements did not cover the same subject matter
because the oral agreement was more personal and protective, while the amended
LLC agreement focused on Digipac's governance. The dissent believed Behler’s
arguments warranted further consideration rather than outright dismissal.
