One to One Interactive, LLC v. Landrith, 18 Mass. L. Rptr. No. 4, 85 (MA 7/8/2004)
| Decision Date | 08 July 2004 |
| Docket Number | No. 024137BLS.,024137BLS. |
| Citation | 18 Mass. L. Rptr. No. 4, 85 |
| Parties | One to One Interactive, LLC et al. v. David K. Landrith. |
| Court | United States State Supreme Judicial Court of Massachusetts Supreme Court |
Contracts — Mutual Consent — Letter of Intent — Signed Statement Containing the Anticipated Terms for a Member's Withdrawal from a Limited Liability Company Is Enforced Even Though Uncertainties Remain. A signed statement containing terms intended to be included in a more formal document to be drafted by attorneys may constitute an enforceable contract even though the formal document is never executed. This opinion enforces a "term sheet" setting out the anticipated terms for the withdrawal of a member of a limited liability company executed on the eve of a major transaction for which the company needed the withdrawing partner's consent. The opinion notes that contract law should be flexible enough to accommodate the need to enter into enforceable agreements in the face of some uncertainties.
This matter is before the Court, pursuant to Mass.R.Civ.P. Rule 56, on the motion of the defendant, David K. Landrith ("Landrith") (Paper #29), for summary judgment on the complaint of the plaintiff, One to One Interactive, LLC ("OTO"), and on Counts I, II, V, VI, VIII and X, and for liability on Count IX, of the third amended counterclaim.
The uncontested facts reveal the following.
In 1997, OTO was co-founded by Landrith and certain of the counterclaim defendants,1 Ian Karnell, Jeremi Karnell and Michael Donnelly.
OTO did not execute its first LLC Operating Agreement until September 1, 2000.
In the fall of 2000, SSB Investments, Inc. ("SSB"), a subsidiary of State Street Bank Corporation and OTO's largest account, offered to invest $1 million in OTO in return for a 6% ownership interest. In order for the SSB investment to occur, OTO needed to amend its Limited Liability Company Agreement ("Operating Agreement") to allow for the issuance of Preferred Class A membership to SSB. This amendment required the signatures of all of OTO's Class A members, including Landrith.
In connection with the SSB investment, OTO's Class A members issued a "Manager's Resolution Effective September 28, 2000" ("Manager's Resolution"). The Manager's Resolution stated, among other things, that OTO "is valued at $16,700,000" and that such valuation is "an appropriate and equitable value for the firm." The $16,700,000 figure was not the product of an appraisal but was "arrived at based on
the purchase price (of $1,000,000) offered by SSB for 6% of the equity . . ."2
The Manager's Resolution also reflected the proportional dilution of each member's Class A ownership interest to be caused by the SSB investment. Landrith's interest, diluted from 21% of the company to 18% of the company, was $3,518,017.38.
Also in the fall of 2000, the other members of OTO decided to reduce Landrith's position with the company. Landrith was offered two alternatives: first, he could continue working as an employee with a small ownership stake in OTO; or second, he could surrender his employment and sell his membership units back to OTO. Landrith chose the latter.
At this time Landrith was aware that OTO had an Operating Agreement that, in Section 8.1, directed the manner of redemption of shares. On advice of his brother, a lawyer, Landrith advised OTO that he "wanted to negotiate better terms" and "did not feel comfortable proceeding with the State Street agreement until [he] had negotiated those terms and put them in writing, along with the purchase price."
Donnelly, an OTO member and himself an attorney, served as intermediary in negotiations between Landrith and the other Class A members. The negotiations between Landrith and Donnelly took place in 2 or 3 meetings over the course of 7 to 10 days late in November 2000. The items discussed included when Landrith would leave the firm, under what conditions, meaning what would the employees be told, and drafting the agreement.
At the time of the negotiations, the closing of the SSB $1 million investment was fast approaching. Landrith advised Donnelly that he would not sign an Amended Operating Agreement authorizing the issuance of Class A shares to SSB unless he first received the terms of his redemption in writing. For that reason OTO gave Landrith a signed and detailed term sheet, in return for Landrith's signature on the execution page of the Amended Operating Agreement. Landrith signed the term sheet on November 28, 2000, and he signed the Amended Operating Agreement on the following day.
The term sheet was drafted by Donnelly and sent to Landrith on November 27, 2000. The cover letter in the facsimile transmission reads as follows:
These are the terms we discussed. Tomorrow I will put this into the form of a term sheet for signature and we can send it out to our attorneys for the creation of the appropriate documents to execute the transition. Let me know if you have any questions.
Thanks,
Because of its significance to this case, the Court here quotes in its entirety the term sheet, including its title.
Pursuant to Section 8.1 of the One to One Interactive Operating agreement that governs the repurchase of Class A units, the following terms are provided with respect to the proposed repurchase of Class A Units from you:
1. That the value of the shares is established per the capitalization schedules as executed at the closing of the State Street Investment, approximately $3,510,968.
2. That the annual interest rate applied to this amount or any amount outstanding be set at Prime as defined by the prime interest rate for January 1 in advance of the year in question.
3. That One to One Interactive agrees to a repayment period of five (5) years, provided that there is the potential for an extension in the event of exigencies, such exigencies to be negotiated by the parties, but that in the event of any extension, the interest rate would increase by one full percentage point for the following year on any outstanding balance for which an interest payment would be due.
4. That One to One Interactive agrees to a payment schedule that is linked to the financial performance of One to One Interactive for each year ending as follows:
a. When revenue equals or exceeds twenty million dollars ($20,000,000) but is less than or equal to twenty five million ($25,000,000) that a principle [sic] payment of $250,000 in addition to the then due interest payment will be made.
b. When revenue equals of exceeds twenty five million dollars ($25,000,000) but is less than or equal to thirty five million dollars ($35,000,000) that a principle [sic] payment of $750,000 in addition to the then due interest payment will be made.
c. When revenue equals of exceeds thirty five million dollars ($35,000,000) but is less than or equal to forty five million dollars ($45,000,000) that a principle [sic] payment of $1,000,000 in addition to the then due interest payment will be made.
d. When revenue equals or exceeds forty five million ($45,000,000) that a principle [sic] payment of $1,500,000 in addition to the then due interest payment will be made.
5. That One to One Interactive agrees to consider that as it is able to without jeopardizing the financial stability of the firm but within the boundaries
of reasonableness, to seek external debt funding to retire DKL's liability as quickly as is practically possible.
6. That One to One Interactive agrees to pay off the note in cash or in kind upon the occurrence of a liquidity event defined as the purchase by an external entity such that the Class A Unit holders, not including the Series A preferred unit holders, hold less than 50% of the Firm Class A or Class A convertible equity.
7. Other
a. One to One interactive agrees to provide positive references for DKL3
b. DKL will abide by cooperate with and support One to One Interactive decision regarding how to manage the announcement of DKL's departure
c. DKL agrees to sign a release and covenant not to compete/confidentiality and non-solicitation agreement with One to One Interactive.
d. DKL agrees to support and cooperate with an orderly and deliberate transition with a replacement technology leader.
e. One to One Interactive Agrees to indemnify DKL following completion of the transaction.
f. The class A unit holders agree to explore the position of personally guaranteeing the note to DKL
g. One to One Interactive agrees to discuss the possibility of making monthly interest payments in lieu of an annual interest payment.
h. One to One Interactive agrees that DKL may give 4 weeks notice at any point after January 1.
/s/ David King Landrith David King Landrith
Section 8.1 of the OTO Operating Agreement in effect on November 28, 2000, reads in relevant part as follows:
Upon the occurrence of any Redemption Event for a Class A Member (as defined below), the Company shall redeem such Member's Units in the Company, When the Company exercises redemption pursuant to this Section 8.1, the Company shall obtain, as soon as practicable after the occurrence of the Redemption Event, a valuation of the Units of the member in question by an independent third party appraiser. Said appraisal shall use an enterprise methodology for personal service companies on a minority basis (and not a net asset value method), measured on the date of the occurrence of the Redemption Event, in determining the value of the Units of the Member in question.
The SSB $1,000,000 investment in OTO closed on November 29, 2000.
Landrith resigned his...
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