Finger Lakes Capital Partners, LLC v. Honeoye Lake Acquisition, LLC, et al.

The Delaware Supreme Court was asked to review a Court of Chancery decision that determined the profits of a successful investment entity would be distributed in accordance with the dictates of an LLC Agreement only. Ancillary documents, including a term sheet and clawback agreement, would not be considered. The Court determined that such ancillary documents were secondary agreements, which applied only to reallocate the distributions made pursuant to the LLC operating agreement.

BOTTOM LINE: If transaction documents do not properly establish a hierarchy of authority among them, unintended consequences may result. As a result, when entering an investment venture, it is vital to understand the intertwining relationship among transaction documents.