206 A.3d 807
Del.2018Background
- CompoSecure (a Delaware LLC after 2015) and CardUX (co-founded by CompoSecure director Kevin Kleinschmidt) executed a Sales Agreement in November 2015 under which CardUX would market CompoSecure’s metal cards for a 15% commission. Both Kleinschmidt and CEO Michelle Logan signed for their respective entities.
- CompoSecure’s LLC Agreement contains (a) a Related Party Provision (Section 5.4) requiring Board, Investors, and Class A Majority approval for interested transactions, and (b) a Restricted Activities Provision (Section 4.1(p)(ix)(A)) that makes certain contracts void if they require > $500,000 in annual expenditures and lack prior approval.
- No formal approvals (Board, Investors, Class A Majority) were recorded for the Sales Agreement; yet the parties treated the agreement as valid and CardUX performed marketing, including efforts involving a large Amazon order.
- After the Amazon sale closed and sizeable commissions were at issue, CompoSecure refused to pay, removed Kleinschmidt from the Board, and litigated, asserting the Sales Agreement was invalid for lack of required approvals.
- The Court of Chancery held the Sales Agreement was voidable under the Related Party Provision but enforceable because CompoSecure impliedly ratified it under New Jersey law; it also rejected CardUX’s reliance on the LLC’s Third Party Reliance clause because CardUX was imputed with knowledge via Kleinschmidt.
- On appeal, the Delaware Supreme Court affirmed in part, reversed in part, and remanded: it directed the Chancery Court to determine whether the Restricted Activities Provision applies (which would render the Sales Agreement void and incapable of ratification) and otherwise upheld the voidable/ratification analysis and the Third Party Reliance ruling.
Issues
| Issue | CompoSecure’s Argument | CardUX’s Argument | Held |
|---|---|---|---|
| Whether the Sales Agreement is void (not voidable) under the LLC Agreement’s Restricted Activities Provision | The Sales Agreement is a Restricted Activity requiring prior approval; the provision’s language makes such contracts "void and of no force or effect whatsoever," so it cannot be ratified | The Sales Agreement is not a Restricted Activity (was in the ordinary course or did not require >$500,000 at signing); alternatively, issue was not fairly raised below | Remanded: Supreme Court declined to decide; remanded for Chancery Court factual findings on whether the Sales Agreement falls within the Restricted Activities Provision because that determination would be dispositive if answered affirmatively |
| Whether the Related Party Provision renders the Sales Agreement void (vs. voidable) and whether equitable defenses (e.g., ratification) apply | Related Party Provision invalidates the agreement because interested fiduciary acted; the agreement cannot be ratified without formal approvals | Related Party Provision makes the contract voidable (not void) because CompoSecure had the power to authorize the deal and the defect can be cured by equitable doctrines | Affirmed (as to Related Party Provision): the Sales Agreement is voidable, not void, and subject to equitable defenses |
| Whether CompoSecure impliedly ratified the Sales Agreement | Ratification is invalid because proper formalities (Board, Investors, Class A Majority) were required and were never satisfied | CompoSecure treated the agreement as valid, accepted benefits, and failed to disaffirm within a reasonable time; under New Jersey law implied ratification applies | Affirmed: under New Jersey implied-ratification law, CompoSecure impliedly ratified the Sales Agreement (assuming Restricted Activities provision does not apply) |
| Whether the LLC’s Third Party Reliance Provision protects CardUX | Not argued as CompoSecure; court should not apply provision to shield CardUX where CardUX is an affiliate and had imputed knowledge | CardUX is not a Member and therefore was entitled to rely on Board/officer authority under Section 4.1(j) | Affirmed: Third Party Reliance does not protect CardUX because Kleinschmidt’s knowledge (as a member/manager) is imputed to CardUX, precluding reliance |
Key Cases Cited
- Nemec v. Shrader, 991 A.2d 1120 (Del. 2010) (parties can make good or bad contracts; courts enforce clear contract terms)
- Gatz Props., LLC v. Auriga Capital Corp., 59 A.3d 1206 (Del. 2012) (appellate review standard—factual findings upheld unless clearly erroneous)
- Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153 (Del. 2010) (questions of law and contractual interpretation reviewed de novo)
- Dieckman v. Regency GP, LP, 155 A.3d 358 (Del. 2017) (limits on using implied covenant to defeat contractual safe harbors; context for conflicts and approvals)
- Klaassen v. Allegro Dev. Corp., 106 A.3d 1035 (Del. 2014) (distinction between void and voidable corporate acts and availability of equitable defenses)
- Thermo Contracting Corp. v. Bank of New Jersey, 354 A.2d 291 (N.J. 1976) (acceptance of benefits is evidence probative of implied ratification)