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Master agreement not superseded by operating agreement, agrees Delaware Supreme Court

A master agreement of sorts, styled as a “term sheet,” was held to take precedence over a contrary “sub”-agreement in Finger Lakes Capital Partners, LLC v. Honeoye Lake Acquisition, LLC, No. 42.2016 (Del. Nov. 14, 2016), affirming in pertinent part C.A. No. 9742-VCL (Del. Ch. Oct. 26, 2015).

The parties signed a term sheet to govern their overarching business relationship, under which they would make investments using funds provided mainly by one of the parties. The term sheet called for the parties to organize a limited liability company (LLC) for each invest­ment they made together; each LLC would be governed by an opera­ting agreement.

The term sheet specified how proceeds from the LLCs would be allocated among the parties. The LLC operating agreement form, though, specified a different allocation of proceeds.

Looking to parol evidence, the chancery court held that the parties did not intend for the LLC operating agreement’s allocation of proceeds to override the allocation in the term sheet. The court did so despite the fact that the LLC operating agreement included an entire-agreement provision, a.k.a. an “integration clause” or “zipper clause”:

The primary issues litigated at trial did not involve the Revolabs [LLC] Agreement itself, but rather what other agreements existed between the parties and whether those contracts survived the execution of the Revolabs Agreement. …

The question for trial was the scope of the Revolabs Agreement and whether it superseded portions of the Term Sheet affecting the parties’ overarching business relationship.

  • Finger Lakes claimed it did, such that Finger Lakes was not bound by provisions of the Term Sheet or the Clawback Agreement.
  • The record proved it did not.

The plain language of the integration clause in the Revolabs Agreement stated that it superseded all prior agreements “with respect to the subject matter hereof.” JX 51 at § 9.6. The “subject matter hereof” was the investment in Revolabs. …

Chancery-court opinion at part II.C.1, slip op. at 37-39 (extra paragraphing and bullets added).

Lesson learned: The drafter(s) of the LLC operating agreement form could have been more specific about the integration clause and its relationship to the parties’ term sheet — or alternatively they might have stated in the term sheet itself that the term sheet’s provisions would control over any contrary provisions in the LLC operating agreements.

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