In re Coinmint, LLC.

• Decision Date: 10 May 2021
• Docket Number: C.A. No. 2019-0983-MTZ
• Citation: 261 A.3d 867
• Parties: IN RE COINMINT, LLC.
• Court: Court of Chancery of Delaware

261 A.3d 867

IN RE COINMINT, LLC.

C.A. No. 2019-0983-MTZ

Court of Chancery of Delaware.

Date Submitted: April 15, 2021

Date Decided: May 10, 2021

Date Issued: August 12, 2021

Evan O. Williford, THE WILLIFORD FIRM LLC, Wilmington, Delaware, Attorney for Petitioner Mintvest Capital Ltd.

Kenneth J. Nachbar and Elizabeth A. Mullin, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware, Attorneys for Respondent Coinmint Living Trust.

OPINION

ZURN, Vice Chancellor.

This case presents an oft-repeated fact pattern with a legal wrinkle. Two friends together developed a successful enterprise: from the outset, they agreed that they would be equal partners, with one providing labor and know-how, and the other providing funds. The sweat equity partner acknowledged his interest in the company would likely be diluted as the financial partner contributed capital. They memorialized this understanding in the limited liability company's operating agreement, which outlined procedures to effectuate dilution via capital contribution, among other things. Each partner held his respective membership interest through an investment vehicle and each was represented on the company's board of managers. The company flourished, but the friendship fractured, and litigation followed.

In this iteration of this fact pattern, the enterprise is a bitcoin mining firm. In 2016, the company dove into the fast-paced business of bitcoin mining. The sweat equity partner requested rapid and frequent cash infusions from the financial member, who provided those funds upon request. They conducted the company's business informally, disregarding the operating agreement's formalities. As a result, the financial member's cash infusions did not follow the operating agreement's strictures for dilutive capital contributions, but the sweat equity member never objected. Instead, in 2017, the sweat equity member agreed it had been diluted below five percent, and negotiated to have its equity increased and fixed at roughly eighteen percent. To preserve that percentage, the financial member agreed that its future cash infusions would be categorized as nondilutive loans. The parties proceeded with the mutual understanding that the financial member controlled over eighty percent of the company.

As the company grew, the friends strategized to redomesticate the company in Puerto Rico. They converted the company to a Puerto Rican limited liability company in 2018. Consistent with the members’ history of ignoring the operating agreement's formalities, they did not conduct a formal vote or solicit written consents to effectuate that conversion. Nonetheless, the sweat equity partner championed this plan, and he affirmed his consent to it as recently as 2019.

The friends’ relationship thereafter unraveled, and the financial member leveraged its majority interest to unilaterally amend the operating agreement and remove the sweat equity partner from his managerial role. The sweat equity member now challenges its dilution, the conversion, and the partner's removal from management, and requests an order dissolving the company. This post-trial opinion concludes that the sweat equity member waived the operating agreement's formalities for dilution and conversion; acquiesced in that dilution and the company's conversion; and is estopped from asserting that he controls half of the company's equity and from challenging the conversion.

Because of the conversion and the company's 2018 redomestication in Puerto Rico, the sweat equity member's challenge to the partner's removal and request for dissolution present an issue of first impression: whether the Court of Chancery has subject matter jurisdiction to dissolve or to declare the proper managers of a foreign entity. This opinion concludes that (1) the company's conversion to a Puerto Rican entity stripped this Court of statutory jurisdiction to declare the company's present managers and to order judicial dissolution under the Delaware Limited Liability Company Act, as those statutory grants are cabined to domestic entities; and (2) this Court is without subject matter jurisdiction to work an equitable dissolution of a Puerto Rican entity.

Accordingly, judgment is entered in favor of the financial member as to the company's conversion, and the sweat equity member's requests to declare the Puerto Rican entity's proper managers and order dissolution are dismissed.

I. BACKGROUND¹

Having weighed the evidence and evaluated the credibility of the witnesses, I find that the following facts were proven by the preponderance of the evidence presented at trial.

Nominal Respondent Coinmint, LLC ("Coinmint" or the "Company") is a private bitcoin mining firm that operates one of the largest digital currency centers in the world.² It was founded by two childhood friends, nonparties Prieur Leary and Ashton Soniat.³ Leary and Soniat formed Coinmint as a Delaware limited liability company in August 2016.⁴ Leary and Soniat hold their interests in Coinmint via their respective entities: Petitioner Mintvest Capital Ltd. ("Mintvest") and Respondent Coinmint Living Trust ("CLT").⁵ Leary is president of Mintvest, a Delaware corporation.⁶ Soniat is the owner and controller of CLT, a Puerto Rican entity.⁷ Mintvest and CLT are and always have been Coinmint's only Members,⁸ and at all relevant times, those entities acted by and through their human decisionmakers, Soniat and Leary.

At the time of formation, the parties agreed Leary would run Coinmint's day-to-day operations, contributing labor and know-how, while Soniat would fund those operations.⁹ Leary and Soniat agreed that Mintvest and CLT would be Coinmint's 50% owners,¹⁰ that the friends would "work together agreeing on all material decisions and expenditures," and that Soniat would eventually contribute more capital and Leary would be diluted.¹¹ For example, Leary stated to Soniat,

At some point, given your financial resources are great[er] than mine, it is contemplated you will contribute more. It is agreed that I accept equity dilution as this happens, in a manner that is directly related to the capital put in. Long story short, it is my hope that this is a big success and I am a minority interest holder here.¹²

Mintvest and CLT memorialized their 50-50 equity split and dilution mechanisms in Coinmint's Limited Liability Company Agreement dated November 21, 2016 (the "Operating Agreement").¹³

As agreed, Leary operated Coinmint and Soniat bankrolled those operations via CLT. The parties now dispute how certain of CLT's cash infusions should be classified (i.e. , whether they are capital contributions or loans under the Operating Agreement) and whether those cash infusions diluted Mintvest's stake in the Company.¹⁴ Leary maintains that Mintvest was never diluted, but instead maintained its 50% equity interest notwithstanding CLT's nearly continuous funding.¹⁵ CLT contends that Mintvest was significantly diluted to the point that its interest in the Company was under 5%, but then Leary and Soniat renegotiated and increased Mintvest's stake to 18.2%. The facts presented at trial support CLT's position.

A. The Parties Memorialize Their Understanding In The Operating Agreement, But Eschew Its Formalities.

Under the Operating Agreement, Coinmint is manager-managed with a Board of Managers (the "Board"), and all Company actions and decisions flow through the Board.¹⁶ While Members retain the right to vote on certain major decisions, like effectuating a merger,¹⁷ they have no "authority or power to act for or on behalf of the Company."¹⁸ Section 4.3(f) of the Operating Agreement states that "any Board action shall require the approval of a Majority of the Managers then serving on the Board."¹⁹ Sections 4.3 through 4.6 of the Operating Agreement describe (1) how the Managers may take action on the Company's behalf, including at a formal meeting or by written consent, and (2) what vote is required to take such action, including when majority Board approval and majority Member approval are needed.²⁰

Under Section 4.1(b), Mintvest appointed Leary to serve as a Manager and its Board designee; CLT appointed itself to serve as a Manager and Board designee.²¹ Under Section 4.2(a), those Managers could be removed "with or without cause, only by the Member who designated such Manager to serve on the Board."²²

Each Manager's voting power is determined by its appointing Member's respective equity stake:²³

Each Manager shall have the voting power equivalent to the Sharing Ratio of the Member that appointed such Manager and, unless otherwise expressly stated in this Agreement, all actions by or requiring the consent or approval of the Board shall require the consent or approval of a Majority of the Board.²⁴

The Member's Sharing Ratio, or equity interest, and its correlating voting power may be increased or diluted via cash infusion.²⁵ The Operating Agreement contemplates that cash infusions may take the form of either a loan or capital contribution.²⁶ Cash infusions in the form of loans are not contributions; they cannot increase a Member's equity stake, and do not have dilutive effect.²⁷ Capital contributions affect voting power of the Members and their appointed Managers.²⁸

The Operating Agreement prescribes certain formalities to effectuate a capital contribution and adjustment; the parties do not meaningfully dispute those formalities. Section 3.2(a) of the Operating Agreement contemplates that if there are "insufficient Available Funds to cover operating deficits or other capital needs of the Company, the Board shall notify the Members in writing of such deficits and other cash needs," after which each Member is required to make an additional capital contribution to the Company.²⁹ In other words, the Board must determine that a capital call is required, vote to make the capital call, and approve written notice to the Members.³⁰ The Board must do so in compliance with the Operating Agreement's procedural requirements.³¹...