Pearl City Elevator, Inc. v. Rod Gieseke, Jay Butson and Dan Holland (Adkins Energy, LLC, Nominal Defendant)

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

PEARL CITY ELEVATOR, INC., )
an Illinois cooperative, )
)
Plaintiff, )
)
v. ) C.A. No. 2020-0419-JRS
)
ROD GIESEKE, JAY BUTSON and )
DAN HOLLAND, )
)
Defendants, )
)
and )
)
ADKINS ENERGY, LLC, a Delaware )
limited liability company, )
)
Nominal Defendant. )

MEMORANDUM OPINION

Date Submitted: January 21, 2021
Date Decided: March 23, 2021

Kurt M. Heyman, Esquire and Aaron M. Nelson, Esquire of Heyman Enerio
Gattuso & Hirzel LLP, Wilmington, Delaware and Eric M. Fogel, Esquire,
Victor Peterson, Esquire and Nikhil Mehta, Esquire of SmithAmundsen LLC,
Chicago, Illinois, Attorneys for Plaintiff Pearl City Elevator, Inc.

David A. Felice, Esquire of Bailey & Glasser, LLP, Wilmington, Delaware and
Brian A. Glasser, Esquire, Elliott McGraw, Esquire and Britney A. Littles, Esquire
of Bailey & Glasser, LLP, Washington, DC, Attorneys for Defendants Rod Gieseke,
Jay Butson and Dan Holland.

Laura G. Readinger, Esquire of Potter Anderson & Corroon LLP, Wilmington,
Delaware, Attorney for Nominal Defendant Adkins Energy, LLC.

SLIGHTS, Vice Chancellor
 Adkins Energy Cooperative (the “Coop”) was formed to operate as a dry mill

corn-to-ethanol and biodiesel production facility owned by local farmers in or

around Lena, Illinois. 1 In 2011, Plaintiff, Pearl City Elevator, Inc., made a cash

investment in the Coop in exchange for 50% of the outstanding membership units of

the reorganized Adkins Energy, LLC (“Adkins” or the “Company”), with the

previous unitholders of the Coop (the “General Members”) holding the other half of

Adkins’ units. Under Adkins’ Third Amended Operating Agreement

(the “Agreement”), both Pearl City and the General Members were entitled to

appoint three members each to Adkins’ board of governors (the “Pearl City

Governors” and the “General Governors,” respectively, and together, the “Board”).2

Neither faction was permitted to cast a vote in the election of the other’s designated

Governors.3 Thus, the Agreement divided ownership and control equally between

Pearl City and the General Members.

1
Joint Pre-Trial Stip. and Order (D.I. 122) (“PTO”) ¶ 10; Trial Tr. (D.I. 133–34) (“Trial
Tr. __ (witness name)”) 12:7–10, 33:23–34:2 (Ramsel), 345:4–6 (Huffman); Joint Trial
Ex. (“JX”) 156 ¶ 8. I cite to the Verified Compl. pursuant to 6 Del. C. §§ 18-109, 18-110
and 18-111 (D.I. 1) as “Compl. __,” the Post-Trial Tr. (D.I. 154) as “Post-Trial Tr. __,”
and lodged depositions as “(Name) Dep. __.”
2
JX 1 (“OA”).
3
The current General Governors are Defendants, Rod Gieseke, Jay Butson and
Dan Holland (“Defendants”).

1
 Pearl City initiated this action under 6 Del. C. § 18-110 (“Section 18-110”) to

obtain a declaratory judgment that it has lawfully altered Adkins’ 50/50 governance

structure by acquiring sufficient equity in the Company to justify its designation of

a seventh Governor to the Board. The lawfulness of Pearl City’s claim to control

depends upon its compliance with the control-related provisions of the Agreement.

Section 5.2 of the Agreement, by all accounts a heavily negotiated provision, entitles

either faction to elect an additional Governor upon its accumulation of more than

56% of Adkins’ units. To cross the 56% threshold, Pearl City and the General

Members could acquire additional Adkins units through private sales or sales

facilitated by a qualified matching service (“QMS”). Transfers can be made between

existing Adkins members, or between existing members and new members

conditioned upon the new member’s execution of a Joinder Agreement, as defined

in the Agreement, in which the new member commits, among other things, to be

bound by the Agreement.

In May 2020, roughly nine years after the Agreement was executed, Pearl City

notified the General Governors that it had acquired over 56% of Adkins’ units.

Citing Section 5.2, Pearl City further notified the General Governors that it intended

to seat a seventh Governor on the Board. The General Governors responded by

advising Pearl City it had improperly acquired units, did not meet the 56% ownership

2
threshold and could not, therefore, designate a seventh Governor to the Board. Pearl

City filed this action shortly thereafter.

The General Governors argue Pearl City’s attempt to reach the 56% threshold

was ineffective on four grounds. First, they read the Agreement to require

affirmative Board approval of all transfers of Adkins’ units, which Pearl City did not

obtain (or even request). Second, they read the Agreement to require Pearl City to

provide a satisfactory legal opinion to the Board in connection with unit transfers

that confirms the transferee’s acquisition of units does not jeopardize Adkins’ tax

status or otherwise violate the Agreement, which Pearl City failed to provide. Third,

they read the Agreement to require advance notice of transfers prior to their

consummation, which Pearl City failed to timely deliver. Fourth and finally, the

General Governors invoke the affirmative defenses of unclean hands and material

breach to argue that, even if Pearl City complied with the Agreement, the Court

should exercise its equitable powers to cancel Pearl City’s acquisition of units.

Pearl City responds that the Agreement says nothing of “advance” notice to

the Board of unit transfers and requires Board approval and delivery of a legal

opinion only when units are transferred to new Members. Because each of its unit

purchases were from existing Members to existing Members, those requirements do

not apply. In any event, says Pearl City, even if the Agreement required legal

opinions in support of intra-Member transfers, Pearl City delivered three legal

3
opinions to the Board in satisfaction of that requirement. Pearl City thus argues it

has complied with the Agreement in all respects.

The matter was tried to the Court in October 2020. After careful consideration

of the trial evidence and arguments of counsel, I find that: (1) affirmative Board

approval is not required for intra-Member transfers; (2) the Board may defer a

transfer pending a legal opinion to verify compliance with discrete areas of law

enumerated in the Agreement; and (3) advance notice of transfers is not required.

Pearl City has complied with the Agreement in its acquisition of Adkins’ units, it is

entitled under the Agreement to seat a seventh Governor on the Board, and the

General Governors’ affirmative defenses do not bar Pearl City from exercising that

bargained-for right. Accordingly, judgment will be entered in favor of Pearl City.

My reasoning follows.

I. BACKGROUND

The facts are drawn from the parties’ pretrial stipulation and the evidence

admitted at trial. The trial record consists of seven lodged depositions, 194 joint trial

exhibits and testimony given during a two-day trial. The following facts were

proven by a preponderance of the competent evidence.

4
 A. Parties and Relevant Non-Parties

Non-party, Adkins, is a Delaware LLC that owns and operates an ethanol plant

in Lena, Illinois. 4 Adkins’ Members, as defined in the Agreement, hold varying

amounts of the 115,020 total units outstanding.5 Adkins treats its Members as

“partners” for federal income tax purposes, conferring upon them favorable pass-

through taxation.6

Plaintiff, Pearl City, is an Illinois cooperative and Adkins’ largest unitholder.7

It provides Adkins with grain needed to produce ethanol. 8 Pearl City’s cooperative

members, or “patrons,” are primarily farmers who buy product from Pearl City.9

Most of Pearl City’s 2,000 patrons live near Lena.10 Approximately 280 Pearl City

patrons also own Adkins’ units. 11

4
PTO ¶ 4; Trial Tr. 12:7–10 (Ramsel), 345:4–6 (Huffman); JX 156 ¶ 8.
5
OA; Trial Tr. 25:14–16 (Ramsel).
6
JX 182 at 6; Trial Tr. 346:9–18 (Huffman).
7
PTO ¶ 5; Trial Tr. 25:7–13 (Ramsel).
8
Trial Tr. 11:18–23 (Ramsel).
9
See id. at 10:20–11:6, 81:11–82:1 (Ramsel).
10
Id. at 83:3 (Ramsel), 414:20–415:6 (Foley).
11
Id. at 85:13–24 (Ramsel).

5
 Defendant, Rod Gieseke, is a General Governor and Chairman of the Board.12

He has continuously served on the Board since 2008.13 He indirectly owns

approximately 1,700 units through his company, RB Gieseke, Inc., making him one

of the largest unitholders among the General Members.14

Defendant, Jay Butson, has been a General Governor since 2000. 15 He is also

a Member and indirectly owns his units through the Butson family trust.16

Specifically, he owns approximately 2,000 units, making him one of the largest

individual unitholders among the General Members.17

Defendant, Dan Holland, is a Member and General Governor who also serves

as Adkins’ treasurer.18 He has served on the Board since 2010.19

12
Id. at 115:5–11 (Gieseke).
13
Id. at 115:15–20 (Gieseke).
14
Id. at 116:15–23 (Gieseke).
15
Id. at 472:12–13 (Butson).
16
Id. at 471:5–8 (Butson).
17
Id. at 507:17–24 (Butson).
18
PTO ¶ 8; JX 16.
19
(Holland) Dep. 23:16–18.

6
 Non-party, Elmer Rahn, is a Pearl City Governor.20 He is also Pearl City’s

President and serves on the Pearl City Board. 21 He is a full-time farmer.22

Non-party, Matt Foley, is also a Pearl City Governor. 23 He is vice chairman

of the Pearl City Board. 24 He is a full-time farmer and lives in Lena.25 Foley has

been a Pearl City patron for more than 20 years.26

Non-party, David Schenk, is the third Pearl City Governor.27 He is the current

secretary for the Board. 28

Non-party, Phil Ramsel, is Pearl City’s General Manager and Chief Executive

Officer.29

20
PTO ¶ 5.
21
(Rahn) Dep. 14:10–15.
22
Id.
23
PTO ¶ 5; Trial Tr. 395:23–396:9 (Foley).
24
Trial Tr. 395:20–22 (Foley).
25
Id. at 414:13–415:9 (Foley).
26
Id. at 414:5–7 (Foley).
27
PTO ¶ 5; Trial Tr. 179:23–180:3 (Gieseke).
28
Trial Tr. 179:21–22 (Gieseke)
29
Id. at 10:8–18 (Ramsel).

7
 Non-party, Ray Baker, is Adkins’ General Manager.30 He has worked for

Adkins since 2001 and has served as General Manager since 2011.31 Baker is also

a Member and owns 50 units.32 He actively monitors activity on FNC and advises

the General Governors, but not the Pearl City Governors, regarding the availability

of units for purchase on FNC.33

Non-party, Locke Lord LLP, has been Adkins’ outside counsel since 2000

and participated in the negotiation and drafting of the Agreement. 34 Keith Parr and

David Kendall are attorneys at Locke Lord who have provided legal advice to

Adkins relevant to this dispute.35

Non-party, FNC, is an intermediary bulletin board for thinly traded equity

interests in agricultural companies.36 Selling Members can list a nonbinding price

request for their units on FNC, and buyers can place nonbinding blind offers to

30
Id. at 227:2–4 (Baker).
31
Id. at 227:5–20 (Baker).
32
JX 28 at 4.
33
Trial Tr. 251:6–252:18 (Baker); JX 44 at 688.
34
Trial Tr. 117:8–118:7 (Gieseke), 276:1–13 (Baker).
35
Id. at 117:8–14 (Gieseke).
36
JX 156 ¶ 48.

8
purchase units on the bulletin board. 37 A bidder will be notified of any higher bids

and given the opportunity to increase his original bid. 38 A Member who lists his

units for sale does not know the identity of the bidder—including whether it is a

member of the Board. 39

B. The Formation of Adkins

On December 17, 1999, Adkins was formed as a Delaware limited liability

company.40 As noted, Adkins operates a dry mill corn-to-ethanol and biodiesel

production facility in Lena, Illinois,41 and confers upon its Members favorable pass-

through taxation treatment for federal income tax purposes.42 Adkins relies on Pearl

City for its corn which is supplied through an exclusive supply arrangement captured

in a Grain Delivery Agreement.43

37
(Butson) Dep. 44:5–19; Trial Tr. 221:4–21 (Gieseke); JX 182 at 8.
38
(Butson) Dep. 44:7–12, 46:3–11.
39
Trial Tr. 252:19–22 (Baker); JX 14.
40
PTO ¶ 9.
41
Trial Tr. 12:7–10 (Ramsel), 345:4–6 (Huffman); JX 156 ¶ 8.
42
JX 182 at 6; Trial Tr. 346:9–18 (Huffman).
43
Trial Tr. 95:18–24 (Ramsel).

9
 On August 31, 2011, Pearl City acquired 7.778% of the outstanding units from

the Coop. 44 Pearl City and the Coop executed the Agreement the following day.45

At that time, the Coop was liquidated and dissolved, and its ownership interests in

Adkins were distributed to the General Members. 46 That distribution resulted in

both Pearl City and the General Members each owning 57,510 units, or 50% each of

Adkins’ issued and outstanding units. 47

C. The Parties Negotiate a Unit Threshold for Board Control

The Agreement serves as Adkins’ constitutive document. 48 Pearl City and the

Coop are signatories to the Agreement. 49 Each Member must sign a Joinder

Agreement upon first acquiring Adkins units, which binds the Member to the

Agreement. 50

Under Section 5.2 of the Agreement, Pearl City and the General Members

agreed that each would appoint, as 50% unitholders, three Governors to Adkins’ six-

44
OA; JX 182 at 5.
45
See OA.
46
PTO ¶¶ 11–12; OA.
47
PTO ¶ 22.
48
OA; PTO ¶ 14.
49
OA at 46.
50
Trial Tr. 119:17–120:8 (Gieseke); OA § 4.4.

10
member Board—the Pearl City Governors and the General Governors,

respectively.51 This division of power was refined in Section 9.7, where the parties

agreed that only General Members are entitled to vote in the election of the General

Governors, and only Pearl City is entitled to vote in the election of the Pearl City

Governors.52

While Adkins is a manager-managed LLC, with Baker at the helm,53 the

Board is charged under Sections 5.10 and 6.1 of the Agreement with general

“authority to supervise and control all operations of the Company,” except as

expressly provided in the Agreement.54 For the avoidance of doubt, Baker’s

employment agreement stipulated that, “Manager understands that ultimate

discretion and control over the Business shall remain vested in the [Board] and

Manager shall do nothing inconsistent therewith.”55

With two factions holding equal representation on the Board, the parties were

confronted with the question of how one side might one day assume majority control

51
OA § 5.2; JX 156.
52
OA § 9.7; see also id. at § 5.1(a).
53
Trial Tr. 227:2–7 (Baker).
54
OA § 5.10; see also id. § 6.1 (providing that “[t]he business and affairs of the Company
[are] managed by and under the direction of the Board,” and “[t]he management of the
Company is vested in the Board”).
55
JX 28 at 304.

11
of Adkins’ governing body. By all accounts, this issue was a central focus of the

parties’ negotiations. 56 The negotiations culminated in Section 5.2 of the

Agreement, which sets out the procedural mechanism by which either Pearl City or

the General Members (as a group) may take control of the Board. Locke Lord, as

Company counsel, participated in these negotiations. 57 Section 5.2 states:

In the event that either Pearl City or the General Member Group
increase their Percentage Interest to more than fifty-six percent
(56%) . . . the size of the Board of Governors shall be increased from
six (6) members to seven (7) members and the Member (or group of
Members, as applicable) whose Percentage Interest has increased to
fifty-six percent (56%) or more shall be entitled to appoint or elect four
(4) of the seven (7) members of the Board of Governors.58

Through Section 5.2, the parties “very clearly” understood that one faction may

someday seek to gain majority control of the Board through the accumulation of

units.59

Section 12.1 of the Agreement describes the procedures for transferring

Adkins’ units. 60 First, under Section 12.1(i), in connection with all “proposed

Transfer[s],” the parties must provide a “written notice” of transfer to the Company,

56
Trial Tr. 222:1–9 (Gieseke); Pl.’s Opening Post-Trial Br. (D.I. 143) at 4.
57
Id. at 276:7–13 (Baker).
58
OA § 5.2.
59
Trial Tr. 222:1–9 (Gieseke).
60
See OA § 12.1.

12
which must take the form of a “Notice of Proposed Transfer” (“Transfer Notice”).61

The Transfer Notice, attached as Exhibit C to the Agreement, expressly

contemplates two “[m]ethod[s] of proposed transfer”: “[p]rivate sale[s]”

(with “no public solicitation”) and public, qualified matching service (“QMS”)

sales.62 For Adkins, QMS sales occur on FNC and provide safe harbor under IRS

regulations for continued favorable tax treatment. 63 Adkins’ contract with FNC is

governed by an executed engagement agreement called the Trading Services

Agreement (“TSA”),64 which required Adkins to maintain a Trading Service

Operational Manual (the “Trading Manual”) on its website and a Trading Service

Summary (the “Trading Summary,” together with the TSA and Trading Manual, the

“FNC Documents”).65 True to form, Members historically have transferred units

through both private sales and the FNC. 66

61
Id.; see also Trial Tr. 21:23–24:8 (Ramsel).
62
Trial Tr. 39:2–11 (Ramsel), 151:18–152:10 (Gieseke), 238:20–23 (Baker).
63
26 C.F.R. §1.7704–1(g); Trial Tr. 40:1–4 (Ramsel) (“So Adkins is organized as a limited
liability company, and they are taxed as a privately -- private partnership. So they enjoy
single taxation.”).
64
JX 3.
65
JX 35; JX 4.
66
JX 156 ¶ 31; JX 20; Trial Tr. 122:21–123:8 (Gieseke); see also id. at 239:24–240:14
(Baker).

13
 Second, under Section 12.1(ii), “to the extent that the proposed Transfer is not

to an existing Member,” the transferring Member must obtain the “affirmative

consent and approval” of the transfer from the Board by simple majority vote.67

With the Board split equally between Pearl City and General Governors,

Section 12.1(ii) expressly requires bipartisan approval of transfers to non-existing

Members. Section 12.1(iii) provides that, “[w]ithout limitation to the foregoing,”

transfers become effective upon the start of the next fiscal quarter “following the

approval of such Transfer by the Board of Governors.” 68

Third, Section 12.1 acknowledges “that the restrictions set forth in

Section 12.2 may limit the number of LLC Units that may be Transferred in a given

period and, in such case, the Board shall consider such approval requests in the order

in which they are received . . . and may defer” their approval “until a later date in

order to comply with such limitations.”69 Section 12.2 enumerates eight categories

of transfers which are, “[n]otwithstanding anything herein [the Agreement] to the

contrary,” prohibited. 70 The final four categories prohibit transfers that would

violate the then existing provisions of certain debt financing documents, violate

67
OA § 12.1.
68
Id.
69
Id.
70
Id. § 12.2.

14
federal or state securities laws, or threaten Adkins’ tax status.71 To police

compliance with those four legal imperatives, Section 12.2 states, “[n]o issuance or

Transfer . . . may be made unless (a) an opinion of counsel, satisfactory in form and

substance to the Board and counsel for the Company [is delivered to the Board]

(which requirement for an opinion may be waived, in whole or in part, at the

discretion of the Board).”72 It also requires “the recipient of the LLC Units [to have]

executed a Joinder Agreement.”73

The parties dispute whether Section 12.2 requires an opinion of counsel

(an “Opinion”)—costing in this case several tens of thousands of dollars 74—for

every transfer under Section 12.2, or only for those transfers requiring the

“execut[ion of] a Joinder Agreement,” i.e., only for transfers to new members. The

Board has never requested nor been provided an Opinion in the past.75 It also has

never formally waived any requirement for an Opinion for any transfer of any type

or scale.76

71
See id.
72
Id.
73
Id.
74
Trial Tr. 53:12–54:2 (Ramsel).
75
Id. at 121:12–19 (Gieseke), 423:12–22 (Foley).
76
Id. at 121:20–24 (Gieseke), 424:3–6 (Foley).

15
 Fourth and finally, the parties agreed under Section 16.4 that any amendment

to the Agreement, including amendments to the means by which a Member could

effectively transfer units, must be in writing, adopted by the Board and approved by

a majority of the Members.77 Only two amendments have been made to the

Agreement since it was adopted; neither concerned provisions implicated by this

litigation. 78

D. Pearl City Crosses the Unit Threshold

In February 2020, Pearl City initiated a campaign to accumulate units in an

effort to cross Section 5.2’s 56% threshold and earn the right to seat a seventh

Governor. From February through May 2020, Pearl City acquired 863 units through

the QMS, which were approved by the Board as required under the Trading

Manual. 79 Most unit transfers, however, were facilitated through private sales.80

On March 5, 2020, Pearl City announced to its patrons two initiatives it was

launching for the purpose of attaining the right to elect a seventh Governor (its

77
OA § 16.4.
78
See JX 2.
79
PTO ¶¶ 27–28; JX 35 (“All transfers of Membership Units must be approved by the
Board and must meet all of the conditions and requirements of the Operating Agreement.”).
80
Pearl City believed that private sales did not require approval from the Board under the
Agreement. Whether that belief was well-founded is disputed in this litigation and will be
addressed below.

16
fourth) to the Board. 81 First, Pearl City offered to purchase units from the 280 Pearl

City patrons holding Adkins’ units (the “Purchase Offer”). 82 Under the Purchase

Offer, Pearl City patrons could sell their units to Pearl City for $412.25 per unit, a

price equal to the then-current highest offer price per Adkins Unit on FNC, less the

3% cost per unit for executing a transaction on FNC.83 The Purchase Offer

culminated in around 40 private sales transferring 6,475 units to Pearl City.84 Those

purchases, combined with the 863 units acquired in the FNC sales, gave Pearl City

64,848 units, representing 56.38% of the outstanding units.85 In other words, the

FNC acquisitions and Purchase Offer acquisitions alone gave Pearl City sufficient

units to install its fourth Pearl City Governor under Section 5.2 of the Agreement.

Second, Pearl City formed Alliance Ethanol, LLC (“Alliance Ethanol”),

a wholly-owned subsidiary formed solely to exchange units of its own LLC

membership interests for Adkins’ units held by Pearl City patrons (the “Exchange

81
JX 54; Trial Tr. 15:15–16:19, 43:22–24 (Ramsel); id. at 181:3–19 (Gieseke).
82
Trial Tr. 85:5–86:8 (Ramsel). The Purchase Offer did not extend to General Members.
Id.
83
PTO ¶ 24; JX 95. No commission or fee was charged or collected for such purchases.
JX 95; Trial Tr. 19:13–15 (Ramsel). The purchases were memorialized through a Bill of
Sale, which were written to “be deemed accepted upon [] execution on behalf of
[Pearl City] below. [Pearl City] shall pay the purchase price specified above [$412.25] to
Seller within thirty (30) days after such acceptance.” JX 56 at 8867.
84
JX 7; PTO ¶ 26; JX 165.
85
Trial Tr. 25:14–22 (Ramsel).

17
Offer”). 86 Each Alliance Ethanol unit entitled its holder to a pass-through of all

distributions received by Alliance Ethanol from Adkins. 87 Patrons also received

benefits not offered by Adkins, such as an annual dividend rate of 4% per year

guaranteed by Pearl City, and costs and expenses of Alliance Ethanol borne by Pearl

City.88 Any Alliance Ethanol unitholder could either sell their units to Pearl City or

require Pearl City to post its allocable share of units on FNC for sale and to pass on

the sale proceeds (net FNC fees) to the unitholder.89 While devised with some effort,

the Exchange Offer ultimately was never executed, meaning Pearl City did not

acquire any Adkins units through this means.90

The General Governors learned of Pearl City’s initiatives days after they were

revealed to Pearl City’s Members. 91 Invoking the assistance of Locke Lord, who as

Company counsel also represented the Pearl City Governors, the General Governors:

• Prevented the Pearl City Governors from sharing any Adkins information with
Pearl City; 92

86
JX 56; (Ramsel) Dep. 168:8–170:8.
87
JX 56.
88
Id.
89
Id.
90
Trial Tr. 27:15–28:21 (Ramsel).
91
Id. at 181:1–4 (Gieseke), 498:3–5 (Butson); JX 17 at MMS Msg on March 7, 2020,
at 8:46 A.M.; JX 111; see also JX 5, JX 55, JX 56, JX 63, JX 67.
92
JX 24

18
 • Discussed forming their own LLC to “bid up” the price of units Pearl City
was attempting to acquire;93
• Formed a Special Committee consisting of only General Governors
empowered to evaluate the Exchange Offer without consulting the Pearl City
Governors;94
• Engaged in a public letter writing campaign against the Exchange Offer
(the “Fight Letters”). The Fight Letters stated Defendants’ opposition to the
Exchange Offer and asserted: (a) all transfers must occur on FNC; (b) Pearl
City was putting Adkins’ favorable single taxation status at risk; (c) Pearl City
was violating federal and state securities laws; and (d) the Exchange Offer
required the approval of the General Governors as a Related Transaction
under Section 5.15; 95
• Drafted a Joinder Agreement for Alliance Ethanol that differed from the
standard form in several material respects; 96 and
• Revealed at the Board’s monthly meeting on April 21, 2020, that the General
Governors had privately decided the Pearl City Governors were not entitled
to vote on whether the transfers to Alliance Ethanol would be recognized.97

Despite the General Governor’s efforts, as noted, Pearl City was able to

accumulate sufficient units to cross the threshold to take control of the Board. It then

sought to assert its newfound control position.

93
JX 55, JX 57; see also JX 17.
94
JX 84.
95
JX 74; JX 111; Trial Tr. 150:16–152:21 (Gieseke). The Fight Letters were drafted by
Baker, with help from Locke Lord. JX 69; JX 93.
96
Trial Tr. 263:1–264:18 (Baker).
97
JX 70.

19
 E. The General Governors Refuse to Recognize Pearl City’s Transfers

On May 29, 2020, hours after Pearl City filed its Complaint in this Court

(in apparent anticipation of the General Governors’ resistance), 98 Pearl City emailed

a letter to the General Governors stating that it had increased its stake in Adkins to

64,848 units, that these acquisitions caused it to cross the 56% threshold set out in

Section 5.2, and that it was now entitled to seat its fourth Governor on the Board.99

Pearl City designated David Daly as its fourth Governor.100 The same day, Pearl

City mailed the Bills of Sale and Transfer Notices for the private sales from Pearl

City patrons, which were delivered to Adkins on or around Tuesday, June 2, 2020.101

The General Governors subsequently refused to recognize Daly as a Governor

because, in their view, Pearl City’s transfers did not comply with the procedures set

out in the Agreement. 102

Although Pearl City believed it unnecessary under the terms of the

Agreement, on August 10, 2020, Pearl City provided the General Governors and

98
See Compl. at 1. The General Governors had made clear prior to Pearl City’s filing of
the Complaint that they would not recognize Pearl City’s transfers. See JX 74; JX 108;
JX 111.
99
PTO ¶ 32; JX 132.
100
JX 132.
101
PTO ¶ 33; JX 7; JX 132.
102
See Trial Tr. 424:7–425:5 (Foley).

20
Adkins with three separate legal opinions (the “PC Opinions”) addressing the five

relevant legal matters flagged under Section 12.2.103 The PC Opinions concluded

that the private sales were not prohibited by the Agreement.104 In the cover letter,

Pearl City offered to dismiss its lawsuit if the General Governors dropped their

opposition to Daly’s appointment as Adkins’ seventh Governor. 105 Although the

General Governors were in possession of the Transfer Notices, Bills of Sale and the

PC Opinions as of the next Board meeting (August 18, 2020), they remained

steadfast in their refusal to recognize the seventh Governor.106 Following the

August 18 meeting, Locke Lord advised the General Governors that they could

approve the private sales to Pearl City on the basis of the PC Opinions. 107

F. The General Governors Call Two Special Meetings

On August 31 and September 6, 2020, Defendants provided the Pearl City

Governors with notices of two special meetings of the Board.108 Though the notices

103
PTO ¶ 34; JX 163.
104
JX 163.
105
Id.
106
Trial Tr. 425:22–426:23 (Foley), 535:10–537:4 (Butson).
107
JX 176; (Gieseke) Dep. 64:15–18.
108
JX 174; JX 184.

21
purported to call the meetings “with the intention to approve” the private sales,109

the General Governors actually planned to establish a quorum at the meetings, block

a vote on the transfers and impose conditions to preserve the General Governors’

equilibrium. 110 Suspecting an ambush was afoot, and believing Board approval

unnecessary under the Agreement, the Pearl City Governors did not attend either

special meeting.111

G. Procedural History

Pearl City filed its Complaint with this Court on May 29, 2020, asserting three

counts. Count I seeks a declaratory judgment under Section 18-110 that Pearl City

is entitled to designate Daly as the seventh Governor of Adkins’ Board. 112 Count II

asserts breach of contract against the General Governors under the Agreement for

their refusal to recognize Daly as a properly designated Governor.113 Count III

asserts breach of the covenant of good faith and fair dealing against the General

Governors for refusing to comply with the Agreement’s terms in bad faith. 114 In the

109
(Gieseke) Dep. 105:4–16.
110
Trial Tr. 166:1–171:17 (Gieseke), 238:6–239:7 (Baker); JX 62.
111
JX 177; JX 185; Trial Tr. 59:3–23 (Ramsel), 426:2–16 (Foley).
112
Compl. ¶¶ 73–77.
113
Compl. ¶¶ 78–83.
114
Compl. ¶¶ 84–88.

22
Pre-Trial Stipulation and Order, Plaintiff narrowed its prayer for relief to a

declaration that its disputed transfers were effective and a declaration that it is

entitled to appoint a seventh Governor. 115 It also seeks attorneys’ fees.116

The Court convened a two-day trial on October 21 and 22, 2020. 117 The

matter was deemed submitted following post-trial briefing and closing arguments on

January 21, 2021. 118

II. ANALYSIS

Pearl City alleges the General Governors’ refusal to recognize Pearl City’s

designation of a seventh Governor after its accumulation of more than 56% of

Adkins’ units breached the unambiguous terms of the Agreement. Its request for a

declaratory judgment seeks both a declaration of its rights under the Agreement and

a judgement declaring that the General Governors must recognize Pearl City’s fourth

designated Governor. In the Pretrial Order, Pearl City appears to have collapsed its

breach of contract and implied covenant claims into its claim for relief under

Section 18-110. There is no claim for damages and no evidence was presented to

115
PTO at 12–13.
116
Id.
117
D.I. 145–46.
118
D.I. 143 (“Pl.’s Opening Post-Trial Br.”); D.I. 147 (“Defs.’ Post-Trial Br.”); D.I. 149
(“Pl.’s Reply Post-Trial Br.”).

23
support such a claim. To obtain the declaration it seeks under Section 18-110,

Pearl City must demonstrate that its construction of the Agreement is superior and

that the Agreement supports the relief it seeks—the placement of a seventh Governor

on the Board.

The General Governors resist Pearl City’s request for declaratory relief on two

grounds. First, they assert Pearl City failed to adhere to the Agreement’s protocols

for the effective transfer of Adkins’ units, including by failing to seek or obtain

Board approval and failing to secure a timely Opinion endorsing the transfers.119

Second, even if the Court finds Pearl City complied with the procedural and

substantive requirements for unit transfers under the Agreement, Defendants invoke

the affirmative defenses of material breach and unclean hands as grounds to

foreclose any declaratory relief in this action.120

“The primary goal of contract interpretation is to attempt to fulfill, to the

extent possible, the reasonable shared expectations of the parties at the time they

contracted.”121 The contract is the first, and often last, place the court looks to

119
Defs.’ Post-Trial Br. at 5.
120
Id.
121
Comrie v. Enterasys Networks, Inc., 837 A.2d 1, 13 (Del. Ch. 2003) (internal quotations
omitted).

24
discern the parties’ “shared expectations.” 122 “If, on its face, the contract is

unambiguous, extrinsic evidence may not be used to interpret the intent of the

parties, to vary the terms of the contract or to create an ambiguity.” 123

As is often the case, the parties assert the Agreement is unambiguous while

simultaneously proffering very different constructions of its terms.124 Of course,

dissensus regarding a contract’s meaning among its signatories does not an

ambiguous agreement make; “a contract is ambiguous only when the provisions in

controversy are reasonably or fairly susceptible of different interpretations or may

have two or more different meanings.”125 By contrast, a “contract is unambiguous

when the agreement’s ordinary meaning leaves no room for uncertainty, and the

plain, common, and ordinary meaning of the words . . . lends itself to only one

reasonable interpretation.”126 As the court assesses whether ambiguity exists, the

122
Greenstar IH Rep, LLC v. Tutor Perini Corp., 2019 WL 6525206, at *9 (Del. Ch. Dec. 4,
2019).
123
S’holder Representative Servs. LLC v. Gilead Scis., Inc., 2017 WL 1015621, at *16
(Del. Ch. Mar. 15, 2017) (internal quotations omitted).
124
Pl.’s Opening Post-Trial Br. at 35; Defs.’ Post-Trial Br. at 38.
125
Rhone-Poulenc Basic Chems. Co. v. Am. Motorist Ins. Co., 616 A.2d 1192, 1196
(Del. 1992) (emphasis supplied).
126
Greenstar, 2019 WL 6525206, at *9 (emphasis in original) (internal quotations and
footnote omitted).

25
contract must be “read in full and situated in the commercial context between the

parties.”127

I begin the contract construction exercise by considering “[t]he basic business

relationship between [the] parties” so that I may “give sensible life” to the

Agreement when construing its terms. 128 With the Agreement’s commercial context

in hand, and mindful that my understanding of the parties’ contractual relationship

cannot overwrite an unambiguous contract,129 I then construe the Agreement’s

terms.

A. The Basic Business Relationship Between These Parties

To start, the Agreement is undisputedly the product of a compromise between

two factions who, at least initially, contemplated equal ownership and control of

Adkins.130 The parties agree that Section 5.2 provides that the size of the Board

“shall be increased” to seven members when either faction (the General Members or

Pearl City) obtains more than a 56% stake in Adkins.131 The parties also agree they

127
See Chicago Bridge & Iron Co. v. Westinghouse Elec. Co. LLC, 166 A.3d 912, 926–27
(Del. 2017).
128
Id. at 927.
129
See Solomon v. Fairway Cap, LLC, 2019 WL 1058096, at *9 (Del. Ch. Mar. 6, 2019).
130
OA § 5.2; Trial Tr. 222:1–9 (Gieseke); Pl.’s Opening Post-Trial Br. at 33.
131
OA § 5.2.

26
recognized at signing that one side may someday attempt to gain majority control of

the Board. 132 The parties’ shared understanding stops there, leaving for decision:

(1) whether the parties agreed that notice to the Board was required prior to

attempting a transfer; (2) whether either side could move to block the transfer of

units such that neither faction could cross the 56% unit threshold absent the other’s

consent; and (3) why the parties would agree to such an absolute structural

impediment to attaining control through voluntary unit transfers.

The contractual lay of the land is straightforward. Section 12.1 (titled “Notice

and Approval of Transfers”) provides that a transferring Member who wishes to

transfer its units “must first [] give written notice” in a specified form.133 The

provision goes on to provide that, “to the extent that the proposed Transfer is not to

an existing Member,” the transferring Member must “obtain the affirmative consent

and approval of such Transfer from the Board of Governors, which consent shall be

determined by a simple majority vote of the Board and shall not be unreasonably

withheld.” 134 In the very next sentence, Section 12.1 acknowledges that Section 12.2

sets forth certain restrictions that “may limit the number of LLC Units that may be

Transferred in a given period and, in such case, the Board shall consider such

132
Trial Tr. 222:1–16 (Gieseke).
133
OA § 12.1.
134
Id.

27
approval requests in the order in which they are received.” 135 Section 12.2 states

that, “[n]otwithstanding anything herein to the contrary,” a transfer may not

“be made unless (a) an opinion of counsel [on four discrete legal topics] . . .

which . . . may be waived . . . is delivered to the Board . . . and (b) the recipient of

the Units has executed a Joinder Agreement.” 136

While Section 12.1 and 12.2 clearly reference Board approval and legal

opinions, the parties dispute how these requirements fit within the larger governance

framework contemplated by the Agreement. Pearl City explains that Adkins’

Members are a collection of close-knit farmers who live in or around small-town

Lena, Illinois. Wary of adding new Members from outside this community, the

parties agreed that, “to the extent” a transfer was to a new Member, Board approval

would be required.137 An Opinion might also be appropriate for transfers to non-

Members to ensure that the introduction of a particular new member would not raise

compliance issues. 138 But the parties agreed that intra-Member transfers would not

require an Opinion or Board approval, not only because that process would be cost

prohibitive but also because, more fundamentally, the requirement of majority Board

135
Id.
136
Id. §12.2.
137
Id.
138
Post-Trial Tr. 32:11–33:22.

28
approval for every transfer would serve as an unworkable impediment to either

faction ever being able to assume control of the Board.139 Had the parties intended

the Board’s Governors to remain in a perpetual state of equilibrium by arming either

faction with de facto veto power over unit transfers, they would not have agreed in

Section 5.2 to a means by which one side might gain control through the acquisition

of additional equity.140

Defendants paint a different “big picture.” As they see it, the signatories to

the Agreement confronted a serious problem: they had to ensure Adkins’ pass-

through tax status was preserved for its Members. 141 That status would be threatened

if unit transfers exceeded a certain volume per year.142 With this threat in mind,

Defendants assert the parties empowered the Board to approve all unit transfers ex

ante and to require that the transferring parties provide an Opinion that the transfer

139
Id.; Trial Tr. 53:22–54:2 (Ramsel).
140
I note that neither party has grappled with the final dictate of Section 12.1(ii), namely
that the Board’s affirmative consent “shall not be unreasonably withheld.” OA § 12.1.
This language arguably answers Plaintiff’s concern that the Board might exercise its veto
authority arbitrarily. Of course, this fact-intensive standard encourages serial disputes and
litigation were it to apply to every transfer. Because the parties chose not to engage on this
point, I will follow suit and not dwell on it further.
141
See Defs.’ Post-Trial Br. at 26; Post-Trial Tr. 76:1–3.
142
Defs.’ Post-Trial Br. at 16–17. But see Trial Tr. 358:1–359:16 (Huffman) (explaining
that the 2 percent safe harbor is not a “cap” on trades for purposes of a partnership’s trading
status, as there are many safe harbors and a “facts and circumstances” test that would apply
in any event).

29
complied with the Agreement.143 To avoid inefficient review of every transfer

(where the cost of obtaining an Opinion could easily exceed the economic benefit of

any individual transaction), the Board was authorized to waive the Opinion in

particular cases.144 While the General Governors recognize their proffered

construction—where the Board is endowed with the right to approve all transfers at

its leisure—“may sound harsh,” they insist “that’s what they [Pearl City] agreed to

when they signed onto the [Agreement].” 145

A subtheme of Defendants’ view of the Board’s role in the transfer procedure

is the degree of transparency with which the two competing factions would have to

operate. Under Defendants’ construction of Board approval and advance notice, the

Agreement would enable either party to know when the other made a move for

control and counter accordingly. Pearl City’s effort to obscure its acquisition of

units by, for example, providing delayed notice of the transfers, violated that

understanding.

Neither party’s portrayal of transactional context is impeccable. The problem

with Defendants’ claim that Board approval was necessary for transparency and to

preserve Adkins’ tax status is that transparency evidently was available without any

143
Post-Trial Tr. 76:2–19.
144
See OA § 12.2; Post-Trial Tr. 66:10–16; Trial Tr. 53:22–54:2 (Ramsel).
145
Post-Trial Tr. 77:9–11.

30
contractual requirement and the protection of Adkins’ tax status was already built

into the Agreement. More specifically, the record reveals that the General

Governors knew of Pearl City’s plan to assume majority control of Adkins’ Board

almost as soon as it was revealed to Pearl City’s patrons; in fact, they quickly went

to work with “Company counsel” to consider countermeasures to “fight back.”146

The apparent ease with which either side could monitor the other without any

contractually hardwired transparency comes as no surprise, given both Pearl City

and the General Members of Adkins comprise a small group of farmers in or around

the Lena, Illinois area, a small agricultural town with a population of around 2700.147

146
See JX 17 (text messages between Baker and the General Governors discussing
Pearl City’s offer dated as early as March 7, 2020); see also JX 24; JX 55; JX 57; JX 74;
JX 76; JX 79; JX 111. In this regard, Locke Lord (who participated in drafting the
Agreement) advised the General Governors that, in its opinion, Pearl City has grounds to
“argue that . . . Transfers to an ‘existing Member’ [are] not subject to board approval under
[the Agreement].” JX 70 at 8943. With that said, I do not share Pearl City’s view of this
communication as a “smoking gun.” Post-Trial Tr. at 96:3–5. While it appears Locke
Lord may have had some questions regarding the validity of the General Governor’s
reading of the Agreement, the import of this evidence is nil since the Court is charged with
construing the Agreement as a matter of law and has concluded the provisions at issue are
unambiguous.
147
Trial Tr. 12:12–13 (Ramsel). Defendants argue the FNC Documents’ requirement for
Board approval of intra-Member transfers shows the parties contemplated Board approval
in all instances. Defs.’ Post-Trial Br. at 29–33. As explained in more depth below,
the FNC Documents were never integrated into the Agreement and do not govern private
sales. See OA §§ 16.4, 16.14. Thus, they have no bearing on the bargain struck by the
parties in the Agreement.

31
 As for the parties’ need to protect Adkins’ tax status, Section 12.2 prohibited

any transfer that would cause the Company to be a publicly traded partnership.148

The provision goes on to state clearly: “Any purported issuance or Transfer which

would otherwise violate the requirements of this Section 12.2 shall be void and of

no effect.”149 Thus, the parties agreed to make any unit transfer threatening Adkins’

tax status or violating Section 12.2’s other imperatives void ab initio.150 There was

no need under the Agreement for the Board to weigh in on that point before a transfer

was consummated.

This lends credence to Pearl City’s proffered contextual framework, where

the parties agreed neither faction would be allowed to stonewall the other’s attempt

to accumulate more than 56% of Adkins’ equity. Even so, Pearl City’s explanation

is wanting for a means by which the Board could discover a “void” transfer. And

Pearl City’s distinction between inter- and intra-Member transfers appears contrived

under Section 12.2, as Pearl City admits intra-Member transfers implicate the legal

matters flagged in Section 12.2 the same as extra-Member transfers.151

148
OA § 12.2
149
Id.
150
See Southpaw Credit Opportunity Master Fund, L.P. v. Roma Rest. Hldgs., Inc., 2018
WL 658734, at *7 (Del. Ch. Feb. 1, 2018) (enforcing a void ab initio clause).
151
See Post-Trial Tr. 33:4–14.

32
 In any event, the Court must be mindful that “Delaware has long adhered, and

continues to adhere, to the objective theory of contracts.” 152 “While [our courts]

have recognized that contracts should be read in full and situated in the commercial

context between the parties, the background facts cannot be used to alter the

language chosen by the parties within the four corners of their agreement.” 153 Here,

the background facts point to a construction that favors Pearl City, but they are by

no means definitive in that regard. As is the Delaware way, I turn to the words the

parties agreed to in their contract as the best evidence of their intent.

B. The Agreement’s Procedure to Transfer Units is Unambiguous

For reasons explained below, I find the Agreement unambiguously provides

the following: (1) prospective affirmative Board approval is required only for

transfers to non-Members as a means to vet the admission of new Members; (2) the

152
Solomon, 2019 WL 1058096, at *9 & n.89 (citing Eagle Indus., Inc. v. DeVilbiss Health
Care, Inc., 702 A.2d 1228, 1232–33 (Del. 1987)).
153
Town of Cheswold v. Cent. Del. Bus. Park, 188 A.3d 810, 820 (Del. 2018) (internal
quotations and footnote omitted). As contract scholars have pointed out, the specificity
with which provisions are written in a contract may affect the extent to which the court
relies on commercial context when construing the contract’s terms. See Robert E. Scott &
George G. Triantis, Anticipating Litigation in Contract Design, 115 YALE L.J. 814, 818–
20 (2006) (arguing that parties can design contracts ex ante to provide for rule-like terms
that reduce potential litigation costs ex post, suggesting that the extent to which the court
will inquire into contextual factors is, in part, driven by the clarity with which a provision
is written (i.e., as a rule or standard)); Cathy Hwang & Matthew Jennejohn, Deal Structure,
113 NW. U. L. REV. 279, 279 (2018) (making Scott and Triantis’ argument explicit and
explaining how, beyond using a rule or standard, contract structure may influence the role
of commercial context in contract construction).

33
Board may require a conforming Opinion verifying that any transfer, both as

between Members and as between Members and non-Members, complies with the

legal considerations identified in Section 12.2, and may defer recognition of the

transfer until such Opinion is delivered; and (3) advance notice to the Board is not

required before the parties to a transfer may effect their transaction, but notice is

required before the transfer will be deemed effective by the Company.

The Board Has Limited “Approval” Rights for Transfers of Units
Between Members

Article 12 of the Agreement governs “Transferability,” and the key provision

to this dispute—appropriately titled “Notice and Approval of Transfer”—is

Section 12.1. 154 That Section provides in full:

Before a Transferring Member may Transfer its
Membership Interest (including all associated LLC Units) to any
Person (including another Member), such Member must first
(i) give written notice of such proposed Transfer to the Company which
notice shall describe the terms and conditions of the proposed Transfer
(and, to the extent applicable, shall contain a copy of the proposed
contract of sale) and shall be in the form of the Notice of Proposed
Transfer included as Exhibit C hereto and (ii) to the extent that the
proposed Transfer is not to an existing Member, obtain the
affirmative consent and approval of such Transfer from the Board
of Governors, which consent shall be determined by a simple majority
vote of the Board and shall not be unreasonably withheld. It is
acknowledged that the restrictions set forth in Section 12.2 may
limit the number of LLC Units that may be Transferred in a given
period and, in such case, the Board shall consider such approval
requests in the order in which they are received (i.e., on a "first

154
OA § 12.1.

34
 come, first served" basis) and may defer the approval of Transfer
requests until a later date in order to comply with such limitations.

Without limitation to the foregoing, the Board, may require the
Transferring Member or its transferee to execute a Joinder Agreement
and such other certificates, representations and documents and to
perform such other acts as the Board may in its reasonable discretion
deem reasonable or advisable (i) to verify the Transfer; (ii) to confirm
that the person desiring to acquire an interest in the Company, and to
be admitted as a Member, has accepted, assumed and agreed to be
subject and bound by all of the terms, obligations and conditions of this
Operating Agreement; (iii) to maintain the status of the Company as a
partnership for federal tax purposes; and (iv) to assure compliance with
any applicable state and federal laws including securities laws and
regulations. Any Transfer of Membership Interests in accordance
with this Operating Agreement shall become effective upon
commencement of the Company's next fiscal quarter following the
approval of such Transfer by the Board of Governors.155

Pearl City asserts that Section 12.1(ii)’s “to the extent that” language makes

clear that the Board has the right to exercise prospective approval rights only with

respect to unit transfers between existing Members and non-Members. The General

Governors respond that Section 12.1(ii) merely clarifies that a prospective

transferring Member would first have to seek Board approval of the admission of a

new Member before seeking Board approval of the transfer to that new Member.

According to the General Governors, that pre-approval right is separate and apart

from the Board’s right prospectively to approve all unit transfers, whether between

existing Members or between existing Members and non-Members.

155
Id. (emphasis added).

35
 The plain text of Section 12.1’s first sentence (encompassing 12.1(i) and (ii)),

in isolation, indicates that the Board’s “affirmative consent and approval” by simple

majority vote is required only “to the extent that” the transfer is to a non-Member.

That language—“to the extent that”—indicates the Agreement contemplates two

separate procedures based on the membership status of the recipient: (1) if the

transfer is to a non-Member, “affirmative consent and approval” is required; and

(2) by implication, “affirmative consent and approval” of the Board is not required

for transfers among existing Members.156

Defendants’ arguments based on the text of Section 12.1(ii) alone do nothing

to change that analysis. Defendants point out that Section 12(i) and (ii) are

connected with the conjunctive “and,” not the disjunctive “or.” 157 According to

Defendants, this means the first sentence of Section 12.1 merely clarifies that

transfers to a non-Member require Board approval; it does not purport to set out a

156
See Extent, MERRIAM-WEBSTER, https://www.merriam-webster.com/dictionary/extent
(last visited March 14, 2021) (defining “extent” as, “the range over which something
extends”); see also Freeman v. X-Ray Assocs., P.A., 3 A.3d 224, 227–28 (Del. 2010)
(“Because dictionaries are routine reference sources that reasonable persons use to
determine the ordinary meaning of words, we often rely on them for assistance in
determining the plain meaning of undefined terms.”).
157
Defs.’ Post-Trial Br. at 25 n.3.

36
separate procedure exempting transfers between existing Members from Board

approval. 158

The problem with Defendants’ argument is that the conjunctive connector

between Section 12.1(i) and (ii) is qualified immediately by the phrase “to the extent

that.” That phrase can only reasonably be understood to contemplate a distinction

between transfers to non-Members—requiring “affirmative consent and approval”

of the Board—and transfers to existing Members, which are implicitly reviewed

under a different process.159 Otherwise, there would be no need to distinguish

between transfers by the membership status of its recipient; the drafters would

simply have written something to the effect that “all transfers require affirmative

Board approval by simple majority vote.” Defendants’ reading would thus render

Section 12.1(ii)’s “to the extent that” language superfluous, contrary to well-settled

canons of contract construction.160

158
Id. at 20.
159
Cf. Feeley v. NHAOCG, LLC, 62 A.3d 649, 661–62 (Del. Ch. 2012) (“The introductory
phrase ‘[t]o the extent that’ in Section 18-1101(c) does not imply that the General
Assembly was agnostic about the ontological question of whether fiduciary duties exist in
limited liability companies. . . . [T]he phrase ‘[t]o the extent that’ embodies efficiency in
drafting.”). While it does not affect the Court’s independent interpretation of the
provision’s terms, I note that Company counsel, Locke Lord, came to the same conclusion
about Section 12.1’s operation in its legal memorandum to the General Governors. JX 70.
160
See NAMA Hldgs., LLC v. World Mkt. Ctr. Venture, LLC, 948 A.2d 411, 419 (Del. Ch.
2007), aff’d, 945 A.2d 594 (Del. 2008).

37
 Defendants also emphasize Section 12.1(i)’s reference to “proposed

Transfer[s],” which they argue implies Board approval is required for any transfer

to become effective. But the language “proposed Transfer” appears in both

Section 12.1(i) and 12.1(ii), and yet Section 12.1(ii) still clarifies that a proposed

transfer “not to an existing Member” requires affirmative Board approval. 161 Thus,

reading “proposed Transfer” to imply a requirement for “the affirmative consent and

approval of such Transfer from the Board” in all cases would again render

Section 12.1(ii)’s language superfluous. 162

Of course, contractual provisions cannot be read in isolation, and Defendants’

argument that prospective Board approval of intra-Member transfers is required

based on other language in Section 12.1 could carry more force. 163 The second

sentence in Section 12.1 states that the “restrictions set forth in Section 12.2 may

limit the number of LLC units that may be Transferred in a given period and, in such

case, the Board shall consider such approval requests in the order in which they are

161
See OA § 12.1.
162
See NAMA Hldgs., 948 A.2d at 419.
163
See Elliott Assoc., L.P. v. Avatex Corp., 715 A.2d 843, 854 (Del. 1998) (“It is well
established that a court interpreting any contractual provision, including preferred stock
provisions, must give effect to all terms of the instrument, must read the instrument as a
whole, and, if possible, reconcile all the provisions of the instrument.”).

38
received (i.e., on a ‘first come, first served’ basis) . . . .” 164 Defendants argue that

this sentence, in tandem with an analysis of Section 12.2, makes clear Board

approval is necessary for all transfers.

Pearl City responds that the Court need not refer to Section 12.2 to construe

Section 12.1 for two reasons. First, Section 12.1’s heading (“Notice and Approval

of Transfer”) makes clear it is the only operative provision governing how to

effectuate transfers.165 This argument, however, runs headlong into Section 16.7 of

the Agreement, titled “Headings,” which states that “[t]he headings in this Operating

Agreement are inserted for convenience only and are in no way intended to describe,

interpret, define, or limit the scope, extent or intent of this Operating Agreement or

any provision hereof.” 166 Pearl City’s position is also contrary to the canon of

construction that requires the Court to read and interpret the Agreement as a

whole. 167

164
OA § 12.1.
165
Pl.’s Reply Post-Trial Br. at 13.
166
OA § 16.7.
167
See GMG Cap. Invs., LLC v. Athenian Venture P’rs I, L.P., 36 A.3d 776, 779–84
(Del. 2012) (“In upholding the intentions of the parties, a court must construe the
agreement as a whole, giving effect to all provisions therein.”) (internal quotations
omitted).

39
 Pearl City retreats to a textual argument, asserting the selection of determiner

in Section 12.1’s second sentence to modify approval—“approval of such Transfer”

(as opposed to “any Transfer”)—can only be understood to refer back to

Section 12.1(ii)’s procedure for “proposed Transfer[s] . . . not to an existing

Member.”168 Thus, Section 12.1’s discussion of the Board’s right to “defer the

approval of Transfer requests until a later date” must be understood to limit only

“such Transfer[s]” discussed in Section 12.1(ii), namely transfers to non-Members.

I disagree with this construction. The subject of Section 12.1’s second

sentence is “the restrictions set forth in Section 12.2,” which “may limit the number

of [] Units that may be transferred in a given period.”169 If the “limit[s]” imposed

by Section 12.2 empower the Board to “defer the approval” of all transfer requests

“until a later date,” as Section 12.1 suggests, then “such approval requests” must be

understood to refer to “the restrictions set forth in Section 12.2.” Indeed, the Board’s

ability to “limit” transfers in a period by “defer[ring] the approval” of transfers on a

168
OA § 12.1(ii) (emphasis added). See Donaghy v. State, 100 A. 696, 700 (Del. 1917)
(“In the present instance it cannot be seriously contended that the framers of the
Constitution meant to include any or all misdemeanors, for not only did they specify certain
species of the genus which they had in mind, but they also qualified ‘other misdemeanors’
not by the word ‘any’ but by the word ‘such.’ The first or primary definition of the word
‘such’ in the Century Dictionary and Cyclopedia is ‘of that kind’; ‘of like kind or degree’;
‘like’; ‘similar.’ A secondary meaning of the word is given as ‘the same as previously
mentioned or specified’; ‘not other or different.’”) (emphasis added).
169
See OA § 12.1.

40
“first come, first served” basis implies that Section 12.2 confers on the Board a

constrained power of approval (i.e., the power to “defer”) separate from, and more

limited than, the Board’s power to reject by “affirmative consent and approval”

transfers to a non-Member, as contemplated in Section 12.1(ii). 170 If, however,

Section 12.2 cannot be understood to set forth any requirements for “approval

requests,” then Pearl City’s reading becomes the only logical one. In either event,

an analysis of Section 12.2 is warranted.

Section 12.2 states in relevant part:

12.2 Prohibited Transfers. Notwithstanding anything herein to the
contrary, the Members acknowledge and agree that no issuance by the
Company or Transfer by any Person of LLC Units or any other interest
in the Company may be made which would . . . (iv) violate the then
existing provisions of the Primary Debt Financing Documents (unless
a written unconditional consent and waiver is first obtained from the
Lender); (v) violate any federal securities laws or any state securities or
“blue sky” laws (including any investor suitability standards)
applicable to the Company or the interest to be Transferred; (vi) cause
the Company to be required to register as an “investment company”
under the U.S. Investment Company Act of 1940, as amended;
(vii) cause the Company to be considered as terminated pursuant to
Section 708 of the Code (or any successor thereto); or (viii) cause the
Company to be a publicly traded partnership within the meaning of
Section 7704 of the Code (or any successor thereto) [26 U.S.C. § 7704].
No issuance or Transfer of LLC Units or any other interest in the
Company may be made unless (a) an opinion of counsel,
satisfactory in form and substance to the Board and counsel for the
Company (which requirement for an opinion may be waived, in whole
or in part, at the discretion of the Board), is delivered to the Board

170
Id. Presumably, the Board’s affirmative vote entitles them to reject (not merely defer)
a transfer to non-Members.

41
 opining that such issuance or Transfer, as applicable, meets the
requirements of clauses (iv) through (viii) of this Section 12.2 and
(b) the recipient of the LLC Units has executed a Joinder
Agreement. Any purported issuance or Transfer which would
otherwise violate the requirements of this Section 12.2 shall be void
and of no effect.171

Defendants argue Section 12.2 empowers the Board to police transfers in all

instances to ensure that unit transfers will not result in the legal consequences

identified in that section. To that end, Section 12.2 states in broad terms,

“[n]o issuance or Transfer” of units “may be made” without “an opinion of counsel,

satisfactory in form and substance to the Board and counsel for the Company” which

“may be waived . . . at the discretion of the Board.”172 Defendants assert there would

be no way for the Board or the Company to police compliance with Section 12.2 if

intra-Member transfers are independently effective absent Board review.173

171
Id. § 12.2 (emphasis added).
172
Id.
173
Defs.’ Post-Trial Br. at 42. Defendants also argue that the FNC Documents expressly
identify that all transfers require Board approval. Id. at 3 (citing JX 34; JX 35; JX 36). But
the Agreement contains an integration clause requiring that any amendment to its terms be
in writing and approved by a majority of the Members. See OA §§ 16.4, 16.14.
The Agreement has been amended twice, but neither amendment addressed the FNC
Documents. JX 2. Moreover, there is no evidence in the record to suggest that all parties
to the Agreement intended that the FNC Documents would modify the means by which
unit transfers are authorized under the Agreement. See Trial Tr. 246:8–13 (Baker)
(admitting the FNC Documents are not part of the Agreement); JX 96 (an attorney for
Company counsel Locke Lord stating, “[u]nless each member who wishes to utilize the
system executes the document, I don’t see how the members had been bound by these
[FNC] rules”). In this regard, Defendants cite to Ramsel’s highlighted and underlined copy
of the Trading Service Operational Manual as evidence that Pearl City appreciated the
42
 Pearl City responds that the “and” conjoining the Board’s right to a legal

opinion and a Joinder Agreement implies that the former is required only when the

latter is required. Because only new Members must execute a Joinder Agreement,

Pearl City reasons that Section 12.2 requires an Opinion only for transfers to non-

Members. According to Pearl City, this would be consistent with Section 12.1(ii),

which states “affirmative” Board approval is required “only to the extent that”

a transfer is to a non-Member. 174

Neither party’s proffered interpretation harmonizes all provisions across the

Agreement. Defendants’ argument that Section 12.2 empowers the Board to

affirmatively approve all transfers simply cannot be squared with Section 12.1(ii),

Trading Service Operational Manual’s provision that, “Transfers that are not made through
the Trading Service will be null and void unless they are approved by the Adkins Energy’s
Board of Governors and comply with [the Agreement].” See JX 122. But Ramsel
underlined language that appeared to incorporate by reference the Agreement, which he
credibly asserts in this litigation conflicts with the FNC Documents’ Board approval
requirement. I agree that JX 122 does not evidence that Ramsel somehow acknowledged
that the FNC Documents would supersede the Agreement with respect to unit transfers.
Thus, the FNC Documents do not govern the transfers through which Pearl City
undisputedly accumulated more than 56% of Adkins’ Units. See ev3, Inc. v. Lesh,
103 A.3d 179, 185 (Del. 2014), opinion revised and superseded, 114 A.3d 527 (Del. 2014),
as revised (Apr. 30, 2015) (noting that parties intending for separate agreements to modify
contractual rights should expressly identify those agreements as carve-outs to the
integration clause).
174
Pl.’s Opening Post-Trial Br. at 18–19. Pearl City also argues Opinions were never
required in the past, but Sections 12.2 and 16.8 of the Agreement together make clear the
Board had discretion to waive its right to a legal opinion and waiver of such a condition
does not prevent a party from later exercising its right to insist on compliance.
See OA §§ 12.2, 16.8.

43
which, as explained above, states plainly that “affirmative consent and approval” by

a majority of the Board is required only “to the extent that” a transfer is made to a

non-Member. Defendants’ argument also does not sit well within the Agreement’s

Chicago Bridge big picture: it is unreasonable to think the parties would carefully

negotiate how one faction could expand their Board membership under Section 5.2

while, at the same time, hinder the possibility of expansion by allowing either faction

to stonewall the other with de facto discretionary veto rights over all unit transfers.

As for Pearl City’s construction, Section 12.2’s choice of the past tense

(“has executed a Joinder Agreement,” as opposed to the present tense “executes”)

signals that the provision contemplates the transferee “has,” at some point in time

but perhaps not contemporaneously, executed a Joinder Agreement. 175 Further,

Section 5.2 states in relevant part:

Any change in the number of Governors appointed or elected by Pearl
City or the General Member group shall be effective simultaneously
with the effectiveness of the Transfer of Membership Interest giving
rise to such change (i.e., upon commencement of the Company’s
next fiscal quarter following the approval of the Transfer by the
Board of Governors). 176

175
OA § 12.2 (emphasis added).
176
Id. § 5.2 (emphasis added).

44
The term “i.e.” or “id est” is a Latin phrase meaning “that is,” which expands or

explains the thing to which it refers. 177 The parenthetical “i.e.” defines when a

transfer becomes effective—“upon commencement of the Company’s next fiscal

quarter following the approval of the Transfer by the Board of Governors.”178

At first glance, this language appears to contemplate Board “approval” for all

transfers.

In response to this provision, Pearl City contends it must be disregarded

because it renders Section 12.1(ii)’s express requirement for affirmative Board

approval meaningless and conflicts with the spirit of the Agreement. 179 I disagree.

Sections 5.2, 12.1 and 12.2 can all be harmonized when the Court gives life to

Section 12.1’s distinction between “affirmative consent and approval . . . determined

by a simple majority vote of the Board”—required “to the extent that” transfers

involve a non-Member under Section 12.1(ii)—and mere tacit “approval,” or

recognition of the unit transfer, that occurs after the Board is provided notice of the

transfer under Section 12.1(i) and either receives or waives the Opinion required

under Section 12.2. Section 12.1 states expressly in its second sentence that the

177
i.e., MERRIAM-WEBSTER, https://www.merriam-webster.com/dictionary/i.e. (last
visited March 8, 2021).
178
OA § 5.2.
179
See Pl.’s Opening Post-Trial Br. at 39 (citing Chicago Bridge, 166 A.3d at 926–27 &
n.61).

45
limits in Section 12.2 are subject to “approval requests” as contemplated in that

section. 180 Section 12.1 also makes clear that the Board may request an Opinion for

the sole purpose of ensuring that prohibited transfers are not consummated; the

Board may then only “defer” (not reject) a transfer under Section 12.2 until it

receives an Opinion “satisfactory in form and substance.” 181

Thus, the transfer process contemplated by the Agreement functions as

follows: 182

• Section 12.1(i) requires notice of all proposed transfers to be provided to the
Board. 183
• Section 12.1(ii) states, “to the extent that the proposed Transfer is not to an
existing Member,” the Board must pre-approve “such Transfer” by a simple
majority vote. 184
• The following sentence of Section 12.1 acknowledges, however, that all
transfers are subject to the limitations set forth in Section 12.2, “the Board
shall consider such approval requests in the order in which they are

180
OA § 12.1.
181
See id. §§ 12.1, 12.2.
182
I note that the Agreement’s lack of ambiguity removes all force from Defendants’
argument that Section 5.10 (empowering the Board with general “authority to supervise
and control all operations of the Company,” “[e]xcept as otherwise provided”) should be
understood as a gap-filler that entitles the Board to vote on all transfers. See Defs.’ Post-
Trial Br. at 23.
183
OA § 12.1. I address the timing of this notice below.
184
Id.

46
 received . . . and [the Board] may defer the approval of Transfer requests until
a later date in order to comply with such limitations.” 185
• Section 12.2 proceeds to outline eight types of “Prohibited Transfers.” It then
empowers the Board to ensure transfers comply with Section 12.2(iv)–(viii)
by authorizing the Board to request an “opinion of counsel, satisfactory in
form and substance to the Board and counsel for the Company (which
requirement may be waived . . . at the discretion of the Board)” for transfers
prior to their becoming effective.186
• If the Board takes no action with respect to the unit transfer(s) “upon
commencement of the Company’s next fiscal quarter,” then it has waived its
right to a legal opinion under Section 12.2, thereby “approv[ing]” the transfer
such that it “shall become effective.”187
• In the event the Board opts not to seek an Opinion for a transfer prohibited
under Section 12.2, it would nevertheless be void ab initio under the last
sentence of Section 12.2 upon discovery that it violates Section 12.2. 188

Certainly, the Agreement could have more clearly distinguished between the

“affirmative consent and approval” required for transfers to new Members and the

tacit “approval” right conferred upon the Board after it receives or waives its right

185
Id. (emphasis added). To be clear, the right to defer approval is limited; once the
conditions (e.g., delivery of a conforming notice and/or Opinion) are satisfied, the right to
defer or withhold approval disappears.
186
Id. § 12.2.
187
See id. § 12.1 (emphasis added). Contrary to Defendants’ suggestion, the Agreement
does not require “prospective waiver” of an Opinion. Post-Trial Tr. 49:20–50:1. Such a
requirement would impose the sort of “affirmative consent and approval” reserved
specifically for transfers to non-Members under Section 12.1. Instead, Section 12.2 states
that the “requirement for an opinion may be waived, in whole or in part, at the discretion
of the Board.” OA § 12.2. Reading Sections 12.1 and 12.2 together, the requirement for
an Opinion would be deemed waived either upon an express waiver or once the Board opts
not to defer the transfer upon commencement of the next fiscal quarter. See id. §§ 12.1,
12.2.
188
See id. § 12.2.

47
to request a conforming Opinion. But the above sequence is the only reasonable

construction that harmonizes each of the provisions flagged as relevant by either

party.189 Section 5.2’s definitional reference to Board approval—“i.e., upon

commencement of the Company’s next fiscal quarter following the approval of the

Transfer by the Board of Governors”—can be understood to acknowledge that all

transfers are “approv[ed]” by the Board in the sense that the Board has the right to

defer recognition of the transfer and to seek an Opinion that the transfer is not among

those prohibited under Section 12.2. 190

189
See GMG Cap. Invs., 36 A.3d at 779–84 (noting that the meaning inferred from a
particular contract provision cannot control the meaning of the entire agreement if such an
inference conflicts with the agreement’s overall scheme or plan).
190
See OA §§ 5.2, 12.1, 12.2. Defendants also make passing reference to another provision
of the Agreement, Section 12.6, as supporting their proffered construction. Section 12.6
states in relevant part: “Treatment of Transferees. . . . [T]he Board may only change such
method of allocation [losses, income, gains and expense deductions] on a prospective basis
to take effect for the Transfers submitted to the Board for approval in the fiscal quarter
following the fiscal quarter in which the Board approves the change in the method of
allocation.” JX 2 § 12.6. Defendants do not endeavor to explain how this provision
supports their construction, but presumably they take the language “for the Transfers
submitted to the Board for approval” as textual evidence that Board approval was
contemplated with respect to all transfers. Again, Defendants’ argument that affirmative
Board approval was required in all cases cannot be squared with the clear and unambiguous
language Section 12.1(ii). Reading the Agreement to allow the Board to defer recognition
of the transfer pending receipt of an Opinion under Section 12.2 as a form of passive
approval, however, makes sense of Section 12.6’s reference to “approval.”

48
 *****

The Agreement confers upon the Board a right to approve unit transfers that

will bring new members into the Company, limited only by the requirement that the

Board exercise its approval authority reasonably. The Agreement also confers upon

the Board the right to request that parties to all unit transfers supply an Opinion to

the Board that confirms the transfer does not implicate any of the legal concerns

expressly called out in the Agreement. The Board may defer approval of the unit

transfer until it receives the Opinion, or it may waive the requirement to supply the

Opinion. Upon satisfying the Opinion condition, the unit transfer shall be deemed

“approved.”191

Before addressing whether Pearl City complied with the requirements of

Section 12.2, I address the parties’ dispute regarding the contours of the “notice”

requirement under the Agreement.

191
Though the parties disagreed on the Board’s approval rights vis-à-vis intra-Member
transfers, it was clear the General Governors objected to the unit transfers that Pearl City
relied upon to cross the 56% threshold, and Pearl City was aware of the General Governors’
concerns prior to the commencement of fiscal quarter beginning June 1, 2020. See JX 108
(April 27, 2020 letter from Gieseke stating the General Governors’ intent to deny the
transfers); JX 134 (May 29, 2020 notification letter from Pearl City arguing “[i]n no way
do these purchases jeopardize the tax status of Adkins”). Thus, contrary to Pearl City’s
argument, there is no basis to find that the General Governors waived their right to an
Opinion concerning the transfers. See Pl.’s Opening Post-Trial Br. at 53–55.

49
 Section 12.1 Does Not Require “Advance” Board Notice of Transfers

Defendants argue that, even if affirmative Board approval is not required for

all transfers under the Agreement, Pearl City failed to comply with Section 12.1’s

requirement that a Member seeking to transfer units provide prior notice of that

intent to the Board.192 Pearl City responds that Section 12.1(i) merely requires a

putative transferee to provide “written notice” to the Company, without regard to

timing, through a Transfer Notice and accompanying Bill of Sale, for recording on

the Company’s register. 193

In support of its position, Pearl City cites the plain text of Section 12.1, which

reads: “Before a Transferring Member may Transfer its Membership Interest . . .

such Member must first (i) give written notice of such proposed Transfer . . . .” 194

Pearl City emphasizes the conspicuous absence of an adjective preceding “notice”

akin to “advance”—a term the drafters used several times throughout the

Agreement. 195 A requirement for “advance notice” would impose on transferors the

sort of timing sequence Defendants ask the Court to read into Section 12.1(i); the

drafters chose not to include such language.

192
Defs.’ Post-Trial Br. at 43.
193
Pl.’s Reply Post-Trial Br. at 22.
194
OA § 12.1.
195
See id. §§ 5.3(c), 5.9.

50
 Further, Section 16.1 provides that, “[a]ny notice, demand, or communication

required or permitted to be given by any provision of this Agreement shall be

deemed to have been sufficiently given or served for all purposes . . . two days after

the date of its mailing or deposit with such delivery service.” 196 The notion that the

Board is entitled to receive notice before a unit transfer is even attempted does not

jibe with the self-executing notice contemplated by Section 16.1.

Defendants respond that the words “first” and “proposed” serve a functionally

equivalent role to “advance,” imposing a requirement on transferors to provide

notice to the Board prior to initiating a unit transfer so that the Board can approve

the transfer. And, according to Defendants, if the Court accepted Pearl City’s

argument under Section 16.1, then it would be allowing “Pearl City [to] grant itself

effective transfers of thousands of Adkins Units before Adkins even knew the

identities of the Transferring Members.” 197 Defendants maintain that by

understanding the words “first” and “proposed” to relate to when a transfer would

be effective (i.e., notice must “first” be given of a “proposed” transfer in order for

the transfer to be effective), as Pearl City would have it, the Court would have to

196
Id. § 16.1.
197
Defs.’ Post-Trial Br. at 45.

51
read into Section 12.1 the word “effective.” According to Defendants, that would

alter the meaning of the parties’ chosen language.

Defendants’ arguments misconstrue the provisions they cite and seek to

expand the limited role those provisions play within the larger Agreement.

Section 16.1 speaks only of effectuating “notice,” which is just one “box” that a

transferor must check before the transfer will be deemed effective. Another box to

be checked, as already explained, is the Board’s right under Sections 12.1 and 12.2

to “defer . . . approval” of a “proposed” transfer pending the production of a

satisfactory Opinion confirming the transfers’ compliance with Section 12.2(iv)–

(viii). 198 Thus, contrary to Defendants’ construction, lack of advance notice does

not conflict with the Board’s authority to supervise and control the Company’s

operations. Nor does it authorize Members to bind the Company to changes in its

ownership and allocations without the Board’s knowledge. Rather, the Board defers

by default the effectuation of certain transfers pending production of a satisfactory

Opinion, which it may waive expressly or by recognizing the transfer upon

commencement of the next fiscal quarter.199 Indeed, there would be little logic

198
OA §§ 12.1, 12.2.
199
In the same vein, Defendants miss the point when they argue notice was ineffective
because, under the Bills of Sale, Pearl City was required to pay the seller the purchase price
30 days after the date written. Defs.’ Post-Trial Br. at 15 (citing JX 56). The effective date
of notice is separate from the effective date of transfer. As explained, the effective date of
transfer would be September 1, 2020. The consideration memorialized by the Bills of Sale
was undoubtedly exchanged by that time. See JX 56. Under Section 12.1, the transfers
52
behind requiring “advance” notice to the Board when, under Sections 12.1 and 12.2,

the Board defers by default, but cannot blithely deny, intra-Member transfer

requests. And, for reasons explained, unit acquisitions were already transparent to

Adkins Members and the General Governors, who could (and in fact did) learn of

privately placed purchases days after they were solicited. 200

Defendants’ argument that “effectiveness” cannot be read into Section 12.1 or

the Notice of Transfer attached as Exhibit C to the Agreement similarly ignores

Section 12.1’s role within the Agreement’s overall structure. As Defendants

themselves acknowledge, Section 12.1 is the only provision that describes how to

effectuate a transfer.201 Section 12.1 makes clear that every transfer is “first”

“proposed” and then “become[s] effective upon commencement of the Company’s

next fiscal quarter following the approval of such Transfer by the Board of

Governors.” 202 Whether the Board receives notice in advance of a transfer’s

themselves are effective “upon commencement of the Company’s next fiscal quarter.”
OA § 12.1; see also id. § 5.2 (“Any change in the number of Governors . . . shall be
effective simultaneously with the effectiveness of the Transfer of Member Interest giving
rise to such change (i.e., upon commencement of the Company’s next fiscal quarter
following the approval of the Transfer by the Board of Governors).”).
200
JX 17 (text messages between Baker and the General Governors discussing Pearl City’s
offer dated as early as March 7, 2020).
201
See Defs.’ Post-Trial Br. at 21 (characterizing Section 12.1 as setting out “two must-
do’s”).
202
OA § 12.1.

53
negotiations or after those negotiations are complete but before approval (whether

discretionary for transfers to non-Members or implicit upon receipt or waiver of the

requisite Opinion for all transfers) makes no difference.

*****

The Agreement unambiguously requires “written” notice of transfers to be

submitted at a time chosen by the transferring Members. While Pearl City’s strategy

of stockpiling proposed private transfers before delivering them en masse may be

suboptimal in most scenarios, it does not frustrate the Board’s limited oversight role.

Rather, a bulk delivery of notices likely increases the chance the Board will defer

recognition of some (if not all) of those transfers pending production of a costly

Opinion, given transfers in bulk pose more legal risk and Section 12.1 provides that

transfers must be accepted on a “first come, first served” basis. 203 Indeed, that is

what happened here; upon receipt of the notices, the Board effectively exercised its

right to receive a conforming Opinion.204

203
See Trial Tr. 213:8–21 (Gieseke), 233:22–235:2 (Baker); see also id. at 358:1–359:16
(Huffman).
204
See JX 74; JX 111.

54
 C. Pearl City Has Complied with the Unambiguous Terms of the Agreement

As explained above, the Agreement imposes two procedural requirements that

bear on Pearl City’s transfers: (1) an Opinion “satisfactory in form and substance,”

and (2) written notice.

1. The PC Opinions

It is undisputed that, on August 10, 2020, Pearl City provided the PC Opinions

to the General Governors addressing all issues flagged by Section 12.2.205 In a letter

to the General Governors, Locke Lord stated it was willing to approve the PC

Opinions.206 The General Governors then called two special meetings purportedly

for the express purpose of “approv[ing]” the private sales.207 Gieseke confirmed that

he was “willing to accept those legal opinions” “based upon the advice [he] received

from [Locke Lord]” and that it was fair to say the only thing remaining for Pearl City

to appoint a seventh Governor was for the Board to approve the private sales.208

205
PTO ¶ 34; JX 163.
206
JX 176.
207
JX 183. Gieseke confirmed that the meeting was called “with the intention to approve”
the private sales, that Pearl City provided a notice of sale with the transfer documents, that
Pearl City provided Bills of Sale in connection with the private sales, and that the PC
Opinions supporting the private sales had been submitted. (Gieseke) Dep. 105:1–111:24;
see also JX 189 (Holland’s personal notes, made after a call with Butson the night before
Holland’s deposition, stating: “[w]e are not opposed to PCE [(Pearl City Elevator)] gaining
an extra Board seat”).
208
(Gieseke) Dep. 105:21–109:19.

55
If the Board approved the private sales at that time, they would have been effective

as of September 1, 2020—the start of the next fiscal quarter.209

Defendants attempt to escape their own sworn testimony affirming that the

PC Opinions were “satisfactory in form and substance” in two ways. First,

Defendants invoke the “mend-the-hold” doctrine to argue the Court should not

permit Pearl City to submit conforming Opinions belatedly after it commenced

litigation. 210 Named after “a nineteenth century wrestling term, meaning to get a

better grip (hold) on your opponent,”211 “the ‘mend-the-hold’ doctrine is an equitable

doctrine intended to prevent a party from asserting grounds for repudiating

contractual obligations and then, in bad faith, asserting different grounds for

repudiation once litigation has commenced and it becomes apparent the original

grounds for repudiation will not work.”212 Writing for the Seventh Circuit, Judge

Posner observed that there is substantial overlap between the “mend-the-hold”

209
Pl.’s Reply Post-Trial Br. at 25 (citing OA §§ 5.2, 12.1).
210
Defs.’ Post-Trial Br. at 47.
211
Harbor Ins. Co. v. Cont’l Bank Corp., 922 F.2d 357, 362–63 (7th Cir. 1990) (Posner, J.)
(discussing the origins of the mend-the-hold doctrine).
212
Health Corp. v. Clarendon Nat’l Ins. Co., 2009 WL 2215126, at *14 (Del. Super. Ct.
July 15, 2009); see also Liberty Prop. Ltd. P’ship v. 25 Mass. Ave. Prop. LLC, 2008
WL 1746974, at *14 (Del. Ch. Apr. 7, 2008) (discussing “mend-the-hold” doctrine but
declining to apply it on equitable grounds); Friel v. Jones, 206 A.2d 232, 235 (Del. Ch.
1964) (“Where a party gives a reason for his conduct and decision touching anything
involved in a controversy, he cannot, after litigation has begun, change his ground, and put
his conduct upon another and a different consideration.”).

56
doctrine and bad faith because when “[a] party . . . hokes up a phony defense to the

performance of his contractual duties and then when that defense fails (at some

expense to the other party) tries on another defense for size [he] can properly be said

to be acting in bad faith.”213

The record before the Court simply does not support a finding that Pearl City

has proceeded in bad faith.214 Rather, Pearl City believed, based on the Agreement’s

text, that an (expensive) Opinion was not necessary for intra-Member transfers.

History supported that view, as the Board has never sought an Opinion with respect

to any unit transfer. 215 Absent evidence of bad faith, the “mend-the-hold” doctrine

is inapt. 216

213
Harbor Ins. Co., 922 F.2d at 363; see also Bank of New York Mellon v. Commerzbank
Cap. Funding Tr. II, 2011 WL 3360024, at *8 n.71 (Del. Ch. Aug. 4, 2011) (citing with
approval Liberty Property’s analysis); Health Corp., 2009 WL 2215126, at *9 n.12 (citing
with approval Harbor Insurance’s analysis).
214
Defendants cite cases where, in the context of advance notice bylaws, Delaware courts
have not permitted stockholders to ignore procedural deadlines and then seek to remedy
them after the fact. See BlackRock Credit Allocation Income Tr. v. Saba Cap. Master Fund,
Ltd., 224 A.3d 964, 980 (Del. 2020). In those cases, however, the parties agreed the
procedure was clear and simply decided not to follow it; in other words, they arguably
proceeded in bad faith.
215
Trial Tr. 121:12–15 (Gieseke), 423:20–424:6 (Foley).
216
See Bank of New York Mellon, 2011 WL 3360024, at *8 n.71 (“[I]t cannot be said, based
on the record before the Court, that [Defendants] have [taken a different position from the
one previously taken] in bad faith, or that the position the Defendants now assert is
somehow phony or trumped up. . . . Under these circumstances, the Court concludes that
the ‘mend-the-hold’ doctrine does not bar the Defendants from asserting that same position
here.”).

57
 Defendants next argue the PC Opinions are not substantively “satisfactory”

under Section 12.2. In this regard, they argue the Court cannot assess the legal

sufficiency of the PC Opinions since they are hearsay and were received in evidence

on the condition they would not be considered for the truth of the matters asserted

therein.217 According to Defendants, the “only substantively admissible expert legal

opinion the Court heard was from Pearl City’s tax expert, Gary Huffman,” who

“opined on only two (2) of the five (5) opinion of counsel deliverables required under

[Section] 12.2 (iv)–(viii).”218 Thus, say Defendants, any declaration by the Court as

to the validity of the PC Opinions would require undue speculation. And, while

Defendants may have been satisfied with the PC Opinions in August 2020, they

insist they have serious doubts about the PC Opinions now. When pressed for an

example, Defendants pointed to Pearl City’s failure to explain why it submitted three

separate opinions from different law firms (as opposed to one). 219 They also

discovered that Pearl City submitted “secret confidential bids on FNC” and, in any

event, “[t]here is no rule that says you can’t change your mind.” 220

217
Defs.’ Post-Trial Br. at 49.
218
Id. at 48.
219
Post-Trial Tr. 82:3–83:3.
220
Id. at 81:15–82:12.

58
 None of the purported problems that Defendants identify with respect to the

PC Opinions have anything to do with the securities and tax matters the Board is

empowered to review under Section 12.2(iv)–(viii).221 To reiterate, Defendants do

not have arbitrary power to deny a transfer under Section 12.2; they may only “defer”

transfers until they have in hand Opinion(s) “satisfactory in form and substance.”222

And, contrary to Defendants’ suggestion, the Court may consider the PC Opinions

for the facts that they exist and say what they say (true or not).223 Further, the fact

Pearl City delivered several legal opinions is hardly suspicious, as Section 12.2

touches on various intricate tax and securities matters that require different legal

expertise. In other words, Defendants’ newfound “reservations” concerning the PC

Opinions are not credible.

In view of Defendants’ acceptance of the PC Opinions at the start of litigation,

their inability to point to a relevant change of circumstance in the interim, and the

221
See OA § 12.2. Defendants’ inability to cite any legitimate objection is striking given
that they have had the PC Opinions throughout this proceeding and maintain regular
contact with counsel, both their own and the Company’s. See JX 176 (Locke Lord email
discussing the PC Opinions, stating that the Board could accept them, and implicitly
acknowledging they were “satisfactory in form and substance” to “counsel for the
Company” under Section 12.2).
222
OA §§ 12.1, 12.2.
223
See 2 MCCORMICK ON EVIDENCE § 249 (8th ed.) (explaining that a statement is “not
subject to attack as hearsay” when its purpose is to establish the statement was made).
On their face, the PC Opinions address each of the matters identified in Section 12.2.

59
Agreement’s clear instruction that the Board may not wield its right to receive an

Opinion as a weapon to strike down transfers arbitrarily,224 the preponderance of the

evidence indicates the PC Opinions satisfied Section 12.2.225 Because the Court has

found an Opinion was required to effectuate the transfers, the relevant date relating

to the parties’ notice dispute is September 1, 2020, the date the PC Opinions were

delivered. Pearl City mailed written notice on May 29, 2020, and the Transfer

Notices and Bills of Sale were received on or around June 2, 2020.226 Thus, Pearl

City’s written notice of its transfers would have been effective by the date Pearl City

was eligible to have the unit transfers recognized by the Company.

2. The Written Notice

The General Governors reflexively invoke the “mend-the-hold” doctrine

again to argue that Pearl City’s notice of the transfers was somehow deficient. But

the Court already has determined that Pearl City reasonably understood notice to be

224
See OA § 12.1.
225
At trial, Pearl City produced credible and unrebutted expert testimony from Gary
Huffman, who testified that Pearl City’s transfers would have no effect on Adkins’ tax
status. Trial Tr. 329:20–389:20 (Huffman). Huffman’s testimony thereby directly
addresses the primary concern raised by the General Governors at every stage prior to trial
as justification for their opposition to Pearl City’s transfers. See Defs.’ Post-Trial Br. in
Opp’n to Pl.’s Mot. to Expedite and Mot. for a Status Quo Order (D.I. 22) at 17–19;
Defs.’ Answer to Verified Compl. (D.I. 39) ¶ 2; see also Trial Tr. at 371:9–22 (Huffman)
(confirming this was not “even a close call”).
226
PTO ¶¶ 32–33.

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required only prior to the time it sought to have the unit transfers recognized by the

Company as of the next fiscal quarter. Consistent with Section 16.1, Pearl City

mailed notice two days prior to the start of the next fiscal quarter. As with the

Opinion requirement, there is no reason to find that Pearl City’s notice was delivered

in bad faith.

The General Governors are left to quibble with the substance of the May 29

Letter and Transfer Notices. Specifically, they assert the May 29 Letter: (1) arrived

one hour after the Complaint in this action was filed, (2) assumed consummation of

all private and public transfers, and (3) demanded acknowledgment of the relief

requested.227 According to Defendants, this is not proper prior notice as required

under Section 12.1.

None of the purported deficiencies identified by Defendants render Pearl

City’s notice substantively void. The Complaint was filed after the General

Governors informed Pearl City they would not recognize Pearl City’s acquisition of

units, a position Pearl City believed in good faith was contrary to the Agreement.228

227
See Defs.’ Post-Trial Br. at 43 (citing JX 134). I note that Defendants did not raise the
argument that Section 12.1 specifies that the transferring Member should provide notice,
while Pearl City was in all cases the transferee. Defendants’ ambivalence is likely due to
the fact that Pearl City delivered notice jointly on behalf of itself and the transferor, making
the argument a distinction without a difference. See JX 132; JX 138. In any event, “[i]ssues
not briefed are deemed waived.” Emerald P’rs v. Berlin, 726 A.2d 1215, 1224 (Del. 1999).
228
See JX 70.

61
Though the Court has held the Board was entitled to defer approving the transfers

until production of a satisfactory Opinion, Section 12.1 prescribes no magic words

Pearl City had to incant in its May 29 Letter—only that it “describe the terms and

conditions of the proposed Transfer.” 229 Confined by the record, Defendants do not

(because they cannot) suggest that the required content was absent from Pearl City’s

notices.

Defendants’ only substantive argument based on the text of the Agreement is

that Section 12.1(i) requires “a copy of the proposed contract of sale” to be

“contain[ed]” with the written notice, but Pearl City mailed the Transfer Notices and

Bills of Sale under “separate cover.” 230 It is undisputed, however, that the executed

Transfer Notices and Bills of Sale were mailed to Adkins and Defendants via Federal

Express the same day, and Adkins received them no later than June 2, 2020.231

Furthermore, the Transfer Notices and Bills of Sale expressly provide that Pearl City

and the Transferring Member were jointly delivering the documents.232 The fact the

documents were delivered in separate envelopes does not violate the Agreement’s

229
See OA § 12.1.
230
Id.; see Defs.’ Post-Trial Br. at 44 (citing JX 134).
231
PTO ¶ 33; JX 7; JX 132; Trial Tr. 49:1–6 (Ramsel), 289:2–9 (Baker); Defs.’ Post-Trial
Br. at 4.
232
JX 7.

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notice requirement.233 Thus, Pearl City substantively complied with all aspects of

the Agreement’s notice requirements.

D. Defendants’ Affirmative Defenses Fail

Defendants raise two affirmative defenses: unclean hands and material

breach. I address each in turn.

Unclean Hands

The doctrine of “unclean hands” provides that “a litigant who engages in

reprehensible conduct in relation to the matter in controversy . . . forfeits his right to

have the court hear his claim, regardless of its merit.”234 “[T]he purpose of the clean

hands maxim is to protect the public and the court against misuse by one who,

because of his conduct, has forfeited his right to have the court consider his claims,

233
I note that my findings regarding Pearl City’s compliance with the Agreement’s
procedural and substantive transfer requirements puts to bed Defendants’ ripeness
argument, namely that the dispute was not ripe when filed because Pearl City failed to meet
all the procedural prerequisites prior to filing its Complaint. See Defs.’ Post-Trial Br. at 37;
see also Stroud v. Milliken Enters., Inc., 552 A.2d 476, 479–80 (Del. 1989) (listing ripeness
as among the four elements required for a Court to exercise its statutory authority to hear
a claim seeking a declaratory judgment). At the time suit was filed, Pearl City had mailed
notices and thus believed at that time that it had fulfilled its obligations under the
Agreement and was entitled to a seventh Governor upon commencement of the new fiscal
quarter two days later, on June 1. The General Governors had informed Pearl City prior to
initiating this action that they would refuse to recognize Pearl City’s newly acquired units.
See JX 108; see also JX 74; JX 105; JX 111. And they continued thereafter to oppose Pearl
City’s right to elect its fourth Governor. See Post-Trial Tr. 81:20–83:18. Accordingly, the
dispute is ripe for adjudication.
234
Nakahara v. NS 1991 Am. Tr., 739 A.2d 770, 791–92 (Del. Ch. 1998) (internal
quotations omitted).

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regardless of their merit. As such it is not a matter of defense to be applied on behalf

of a litigant; rather it is a rule of public policy.” 235 As refined by this court, “[t]he

question raised by a plea of unclean hands is whether the plaintiff’s conduct is so

offensive to the integrity of the court that his claims should be denied, regardless of

their merit.”236 “This court has consistently refused to apply the doctrine of unclean

hands to bar an otherwise valid claim of relief where the doctrine would work an

inequitable result.”237

Defendants assert that the following acts Pearl City took in furtherance of its

“schem[e]” to accumulate units amount to unclean hands: 238

• Pearl City falsely reported the number of units it owned at various times.239
By “sandbagging” the General Members with their accumulation of units
through private transfers, Defendants argue Pearl City: (1) robbed the
minority of their ability to seek a control premium for the units, and (2) robbed
the minority unitholders from deploying their own capital to stave off a change
in control. 240

235
Skoglund v. Ormand Indus., Inc., 372 A.2d 204, 213 (Del. Ch. 1976).
236
Gallagher v. Holcomb & Salter, 1991 WL 158969, at *4 (Del. Ch. Aug. 16, 1991), aff’d
sub nom. New Castle Ins., Ltd. v. Gallagher, 692 A.2d 414 (Del. 1997).
237
Dittrick v. Chalfant, 948 A.2d 400, 408 n.18 (Del. Ch. 2007), aff’d, 935 A.2d 255
(Del. 2007).
238
See Defs.’ Post-Trial Br. at 55. Defendants also argue the doctrine of unclean hands
should apply because Pearl City did not comply with Section 12.1’s notice provision.
See Defs.’ Post-Trial Br. at 56. For reasons already explained, however, Pearl City’s
actions complied with Section 12.1; this argument fails a fortiori.
239
See JX 7.
240
Id.

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 • Pearl City enlisted the help of a broker to place confidential standing offers
on FNC.241 Pearl City’s use of the broker to purchase units for its own account
violated the Adkins’ Trading Service Operational Manual. 242
• Pearl City was offering two different prices on the FNC and to its patrons in
private purchases, thereby breaching its fiduciary duties of loyalty to minority
Members.243

Defendants maintain that the Court “should not and cannot endorse this false and

faithless conduct by granting Pearl City the relief it requests.”244

None of the acts asserted by Defendants justifies this Court’s equitable

intervention to bar Pearl City’s claims. Courts have refused to apply the unclean-

hands doctrine where the conduct at issue involved no intent to deceive, or if the

degree of inequity resulting from the conduct is de minimis.245 For an omission to

be material, there must be “a substantial likelihood that the disclosure of the omitted

fact would have been viewed by the reasonable investor as having significantly

altered the ‘total mix’ of information made available.”246 The purported omission

within Pearl City’s Transfer Notices relates to 277 units purchased in February 2020,

241
JX 41; JX 35 at 2, ¶ 11.
242
JX 35 at 2, ¶ 11.
243
See JX 98; JX 95.
244
Defs.’ Post-Trial Br. at 6.
245
See Wilmont Homes, Inc. v. Weiler, 202 A.2d 576, 580–81 (Del. 1964); Portnoy v. Cryo-
Cell Int’l, Inc., 940 A.2d 43, 81 (Del. Ch. 2008); Gallagher, 1991 WL 158969, at *4.
246
Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944 (Del. 1985).

65
roughly 4% of the 6,475 units it acquired through private sales from existing

Members.247 I do not view this error as material. There is also no evidence of bad

faith, as Pearl City excluded the units because they were not yet reflected on the

Company’s register. 248 Pearl City owned 50% of Adkins’ units since the Company’s

founding. Thus, Pearl City’s patrons (as well as the General Governors) were

presumably aware that Pearl City’s purchase of any more units might warrant a

control premium.

As for the FNC purchases, as noted, there is no reliable evidence on record

that the FNC Documents were made binding on Pearl City or the Members. Thus,

there is no inequity here: Pearl City did not breach the FNC Documents because they

were not binding. At best, they were guidelines for those trading on FNC.

Finally, Pearl City’s purchase of different units at different prices from its

patrons does not warrant equitable intervention under these facts. Delaware law on

this matter is well-settled:

[A]s a general principle our law holds that a controlling shareholder
extending an offer for minority-held shares in the controlled
corporation is under no obligation, absent evidence that material
information about the offer has been withheld or misrepresented or that

247
See JX 7.
248
Trial Tr. 73:1–16 (Ramsel).

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 the offer is coercive in some significant way, to offer any particular
price for the minority-held stock. 249

Defendants cite Unocal Corp. v. Mesa Petroleum Co. to argue that, because Pearl

City embarked on a purely private solicitation to only its patrons, it violated its

fiduciary duties. 250 Unocal, however, was decided in the context of a public tender

offer.251 Pearl City’s transfers were the product of private sales placed among

Members who were on notice of Pearl City’s majority-owner status. Defendants

admitted at trial that any Member was free to offer any price on FNC; in other words,

the parties were free to negotiate price as a matter of course.252 Indeed, the price of

Pearl City’s cash offer was based on an FNC bid posted by Baker. 253 Accordingly,

Pearl City did not violate any obligation, under the Agreement or otherwise, in the

course of its acquisition of units to reach the 56% threshold. Its hands are clean.

249
In re Ocean Drilling & Expl. Co. S’holders Litig., 1991 WL 70028, at *3 (Del. Ch.
Apr. 30, 1991).
250
493 A.2d 946 (Del. 1985).
251
Unocal, 493 A.2d at 956.
252
Trial Tr. 221:8–21 (Gieseke).
253
JX 9 at 403.

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 Material Breach

“A prior material breach by one’s counterparty is an excuse for non-

performance.” 254 “The question whether the breach is of sufficient importance to

justify non-performance by the non-breaching party is one of degree and is

determined by ‘weighing the consequences in the light of the actual custom of men

in the performance of contracts similar to the one that is involved in the specific

case.’”255

The Court has found Pearl City’s conduct comported with the express

contractual requirements set forth in the Agreement. And for reasons explained, the

FNC Documents are not binding. Accordingly, Defendants’ material breach defense

fails.

E. Attorneys’ Fees

Pearl City asks the Court to award its legal fees incurred in this action.256

Under the American Rule, each party typically must bear its own litigation expenses,

including counsel fees.257 “This court has the discretion, however, to shift litigation

expenses, in whole or part, when a party to the litigation has engaged in bad faith

254
Costantini v. GJP Developers, Inc., 2015 WL 5122992, at *8 (Del. Ch. Aug. 24, 2015).
255
In re Mobilactive Media, LLC, 2013 WL 297950, at *13 (Del. Ch. Jan. 25, 2013).
256
Pl.’s Opening Post-Trial Br. at 58.
257
Tandycrafts, Inc. v. Initio P’rs, 562 A.2d 1162, 1164 (Del. 1989).

68
litigation conduct.”258 The bad faith exception may be invoked only where there is

“clear evidence” that the party against whom the sanction is sought has acted in

subjective bad faith. 259 I deny Pearl City’s request for a fee shift as I am satisfied

the General Governors’ asserted defenses fall well short of the “bad faith conduct”

that would warrant an award of attorneys’ fees.260

III. CONCLUSION

For the reasons discussed above, Pearl City is entitled to declaratory

judgments under Section 18-110 that it has complied with the Agreement in all

relevant respects and is entitled to seat Daly as the seventh Governor on the Board.

Pearl City shall submit a conforming final judgment on notice to Defendants within

ten (10) days.

258
Ensing v. Ensing, 2017 WL 880884, at *11 (Del. Ch. Mar. 6, 2017).
259
Arbitrium (Cayman Is.) Handels AG v. Johnston, 705 A.2d 225, 232 (Del. Ch. 1997),
aff’d, 720 A.2d 542 (Del. 1998).
260
See Beck v. Atlantic Coast PLC, 868 A.2d 840, 851 (Del. Ch. 2005).

69