Chancery Finds Some Amendments to LLC Agreement Adversely Modified Members’ Rights, Triggering Consent Right—Lehr v. Aspen Power

In Lehr v. Aspen Power Partners LLC (Mar. 30, 2026), the Delaware Court of Chancery addressed amendments made to the LLC agreement governing Aspen Power Partners LLC (the "Company"), which were adopted in connection with a new capital infusion by the Company's controller-sponsor (the "Sponsor"). The agreement provided that the consent of affected members was required for amendments that would adversely modify certain of the members' rights. At the pleading stage of litigation, the court rejected dismissal of the claims relating to two of the amendments, finding it reasonably conceivable that consent was required for them.

Key Points

• Even where an LLC agreement provides broad rights to restructure the company's governance and economics in connection with new capital infusions, certain actions may trigger member consent rights. Drafters of an LLC agreement must anticipate and then clearly provide for members' rights, or lack of rights, with respect to actions that may be taken in connection with new equity infusions or other restructuring events. LLC managers, before taking action, must consider carefully whether the actions will be in compliance with the agreement's specific requirements; and LLC members should understand the specific practical contexts in which their rights under the agreement (such as consent rights) may, or may not, become applicable.

• Certain members' rights may have been adversely modified by amendment of the "MOIC Uplift Schedule"-although the base multiplier and total annual amount were kept the same. The amendment provided for application of one-fourth of the multiplier on a quarterly basis rather than application of the multiplier annually. The court stated that how the MOIC functions and whether this change may have structurally disadvantaged junior unit members were factual questions that could not be resolved at the motion to dismiss stage of litigation.

• The members' preemptive rights may have been adversely modified by an expansion of the definition of "Excluded Securities"-although the new exclusions were of securities that did not exist under the prior agreement. The amendment provided that the securities to be issued to the Sponsor were included in the definition of "Excluded Securities." The court observed that the agreement being amended provided for broad preemption rights, potentially capturing all future securities other than those already specified in the definition.

• The court dismissed the plaintiffs' claims that: the member-officers of the fund's management company breached their fiduciary duties by transferring control of the fund to the Sponsor; adversely modified members' rights by transferring the management company's drag-along rights to the Sponsor; and adversely modified members' rights by issuing "phantom preferred units."

Background. The Company, a renewable energy company, was founded in 2020 by plaintiff "JL" and defendant "JV." The Company was managed by a management company ("ManagementCo"), which held the Company's membership units (and was designed to pass along to each of its members the rights it would have if it directly owned the units). ManagementCo had five members: plaintiffs JL and "DB," defendants JV and "SD," and another individual. Under ManagementCo's operating agreement, approval by a majority of the members was required to effectuate ordinary decisions, but their unanimous approval was required to grant any consent, or to waive or exercise any rights, under the Company's operating agreement.

Fourth LLC Agreement. In 2022, the Company's "Fourth LLC Agreement" took effect, designed to admit the Sponsor (a private equity firm) as a member in connection with its $200 million contribution to the Company in exchange for Preferred Units of the Company. The Fourth LLC Agreement transferred management from ManagementCo to a seven-member board of managers of the Company (the "Board"), with ManagementCo having majority control of the Board. The Fourth LLC Agreement provided that it could be amended with the consent of the Sponsor and the Board. However, in addition, the prior consent of an "affected Member (or class of Members)" was required if an amendment would (i) "alter the interest of a Member in Company Distributions, other than as a result of the admission or withdrawal of a Member, or issuance or Transfer of any Equity Securities"; (ii) "adversely and disproportionately affect the rights or obligations of any class"; or (iii) "adversely modify or waive the preemptive rights" of any member.

Fifth LLC Agreement. In late 2024, amendments to the Fourth LLC Agreement were adopted in connection with a new equity infusion from the Sponsor. The amendments, which created the "Fifth LLC Agreement," (i) transferred control of the Board from ManagementCo to the Sponsor; (ii) transferred ManagementCo's "drag-along rights" to the Sponsor; (iii) created "Phantom Preferred Units" (PPUs) to be issued to certain employees; (iv) modified the "MOIC Uplift Schedule" for the Sponsor; and (v) altered members' preemptive rights. The plaintiffs-both of whom were members and officers of the Company and ManagementCo, as well as Board members-filed suit, contending that the amendments adversely modified their rights under the Fourth LLC Agreement and therefore that their consent had been required.

After briefing and oral argument, Vice Chancellor Lori W. Will granted the defendants' motion to dismiss with respect to most of the claims, but let survive two "narrow" claims for breach of contract (relating to modifications to the MOIC Uplift Schedule and the members' preemptive rights).

Discussion

MOIC Uplift Schedule-The court found it reasonably inferable that the members' distribution waterfall rights may have been adversely modified by a change in the MOIC Uplift Schedule. Under the Fourth LLC Agreement's distribution waterfall, the Sponsor (as the sole Preferred Unit holder) was allocated 100% of certain Distributions until it received an amount equal to the MOIC Uplift. The MOIC Uplift was determined by multiplying unreturned capital contributions against a multiplier, which set initially at 0.15 and subject to annual increases of 0.10 over a seven-year period. The Fifth LLC Agreement maintained the base multiplier of 0.15, but altered the MOIC Uplift schedule to increase the multiplier by 0.025 at quarterly intervals. The plaintiffs asserted that this change "steer[ed] more distributable proceeds to [the Sponsor] faster, before funds can trickle down to the lower levels of the distribution waterfall." The defendants responded that the Fifth LLC Agreement "merely apportioned the existing schedule from annually to quarterly, while keeping the aggregate annual and total MOIC Uplift multiplier the same." The court responded that it "must credit the plaintiffs' allegation that the change structurally subordinates or delays the distributions reaching the junior Class B units," which would make it reasonably conceivable that the plaintiffs' interest in Company Distributions was adversely modified.

The defendants also argued that even if the plaintiffs' interests were altered, the Fourth LLC Agreement provided a safe harbor that exempted changes that occurred "as a result of the issuance or Transfer of any Equity Securities." As the MOIC Uplift changes were a direct result of the Sponsor's new equity investment, the defendants argued, the safe harbor applied. The plaintiffs, in response, alleged that the Company had alternative capital available and the Sponsor had opportunistically demanded these changes as a condition of its investment.

The court declined to resolve the issue on a motion to dismiss, writing: "Resolving how the MOIC Uplift functions and whether its modification…was a mechanical result of issuing new equity is a factual dispute…."

Preemptive Rights-The court found it reasonably inferable that the members' preemptive rights may have been adversely modified. The Fourth LLC Agreement granted members preemptive rights when new securities were issued by the Company, other than "Excluded Securities." The Fifth LLC Agreement added new exclusions to the definition of "Excluded Securities." The defendants argued that this change did not "adversely modify or waive" members' preemptive rights because the new exclusions applied to categories of securities that did not exist under the Fourth LLC Agreement. The court responded that the preemptive right was "broad" under the Fourth LLC Agreement. "It functioned as a catch-all, granting members the right to participate in any equity issuance not expressly excluded. Because the baseline right captured all unspecified future securities, adding new categories to the exclusion list-even those that did not previously exist-shrunk the universe of securities to which it applies." Moreover, the court noted, another provision in the Fifth LLC Agreement added a specific waiver by the members of any rights to notice and participation in the planned issuance of securities to the Sponsor, which "achieved the same practical result of removing the plaintiffs' preemptive rights for such issuances."

Phantom Preferred Units-The court found that the plaintiffs' consent was not required for the issuance of the PPUs. The PPUs, which the Company issued as part of a management incentive program, represented a right to receive a cash bonus in an amount equal to the fair market value of a Preferred Unit, on a sale of the Company or other liquidation event occurring within ten years of the PPUs' issuance. A term sheet attached to the Fourth LLC Agreement stated that, for the avoidance of doubt, the PPUs were "not an equity interest" and their award would not by itself in any way entitle the recipient to any rights as an equityholder of the Company. Also, the Fourth LLC Agreement defined Distributions to exclude remuneration paid in a member's capacity as an employee of the Company. The court wrote: "Because PPUs are explicitly defined as a 'cash bonus' established as an incentive arrangement for 'certain key employees,' they fall within this exclusion."

Drag-Along Rights-The court found that the plaintiffs' consent was not required for the transfer of ManagementCo's drag-along rights to the Sponsor. The Fourth LLC Agreement provided drag-along rights to the "Member having Control of the Company." The plaintiffs claimed that the Fifth LLC Agreement's transfer of the drag-along rights from ManagementCo (which the plaintiffs controlled) to the Sponsor adversely and disproportionately affected them. The court, however, stressed that the Fourth LLC Agreement provided drag-along rights to "the holder of the Member Having Control of the Company." That title now applied to the Sponsor rather than ManagementCo "by virtue of the changes to the Board composition and voting power." The drag-along right was not a "class right," the court stated, but "an individual right belonging to whichever member holds 'Control' of [the Company]." The drag-along right therefore "never belonged to the Class A Unit holders as a class," so "transferring it from [ManagementCo] to [the Sponsor] does not trigger [the] class consent protections."

Change of Control-The court found that the member-officers of ManagementCo who approved the Fifth LLC Agreement did not breach their fiduciary duties. The plaintiffs claimed that SD and JV (both of whom were members and officers of ManagementCo) breached their fiduciary duties to ManagementCo by "eviscerating [ManagementCo]'s right to control the [Company's Board], in exchange for personal monetary gain through lucrative compensation packages." The plaintiffs noted that the ManagementCo LLC Agreement provided that ManagementCo's officers, "in the performance of their duties as such," owed the same fiduciary duties as officers of a Delaware corporation. The defendants pointed to another section of that agreement, which waived fiduciary duties for members to the fullest extent of the law. The court reconciled the two sections by viewing them as "contemplat[ing] two spheres of conduct-one in which members owe fiduciary duties, and the other in which fiduciary duties are disclaimed." The first section made it clear that members of ManagementCo only owed fiduciary duties in the "performance of their duties as Officers"-that is, "the provision applies when one is acting in his official capacity." The second section made it clear that when members were not functioning as ManagementCo officers, they owed no fiduciary duties. The plaintiffs complained only of actions SD and JV took while acting as Company managers in amending the Fourth LLC Agreement. As they were acting as directors of the Company, not as officers of ManagementCo, when they evaluated and approved the Fourth LLC Agreement, the claim for breach of fiduciary duty to ManagementCo failed, the court held.

Practice Points

• MOIC schedule-When a change is made to a waterfall distribution, consideration must be given to whether the change is restricted by the LLC agreement or otherwise. A change to the MOIC schedule that provides for proceeds to be distributed to a sponsor more quickly (for example, a change from annual application of the multiplier to quarterly application of one-fourth of the same multiplier) could be interpreted by the court as being an adverse modification to the rights of members farther down in the waterfall.

• Preemptive rights-Drafters should consider clarifying whether a consent requirement for adverse modification of preemptive rights does, or does not, apply when securities are issued that did not exist at the time the rights were granted. Drafters should keep in mind, based on Aspen, that, unless an agreement provides otherwise, a "broad" preemptive right-such as one that provides a "catch-all" granting the right to participate in any equity issuance not specifically excluded-may well be interpreted by the court as applying to securities even that did not exist at the time the right was granted.

• Phantom units-A company could consider the feasibility of issuing "phantom units" (representing the right to receive the fair market value of specified equity securities) when an LLC agreement prohibits or grants preemptive rights with respect to the issuance of equity. Importantly, in Aspen, where the court held that phantom units were not equity for purposes of the members' preemptive rights, the phantom units were issued to key employees under a management incentive plan providing cash bonuses upon certain liquidation events; the LLC agreement specifically excluded from preemptive rights any remuneration or bonuses to employees; the phantom units were clearly defined in the incentive plan as "not an equity interest"; and that definition was included in an agreement that was attached to the LLC agreement.

• Drag-along or other rights. Where specific rights (such as, in Aspen, drag-along rights) are granted in an LLC agreement to a defined party (such as, in Aspen, "the Member having Control of the Company"), drafters should consider clarifying whether the rights apply to any party who at any time meets the definition or, instead, applies only to the specific party who at the time the agreement is entered into meets the definition.

• Fiduciary duties-Where multiple provisions in an agreement or related agreements refer to fiduciary duties, the interrelationship between them should be clarified in the agreements. Where, as in Aspen, the LLC agreement provides that the company's directors or managers will not have fiduciary duties, and the management agreement provision states that the management company's officers will have fiduciary duties, and there may be overlap of the individuals to whom these provisions apply, the agreements should state clearly how the provisions interrelate and a contemporaneous record should be established (such as through meeting minutes) clarifying the capacity in which an individual is acting.

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