Titan Law PLLC

A recent decision in Behler v. Kai-Shing Tao rendered by the Appellate Division, First Department offers critical insights into the enforceability of oral agreements in business transactions and the impact of amendments to LLC operating agreements. This complex case underscores the importance of precise contract language and diligence when structuring investments in closely held entities.

At the heart of the dispute, plaintiff Albert Behler alleged that he invested $3 million into an LLC controlled by defendant Kai-Shing Tao, based on an oral “exit opportunity agreement.” This agreement promised Behler the right to cash out either upon reaching a stock price milestone or on the fifth anniversary of his investment. Despite Tao’s verbal acknowledgment of the agreement’s terms, Behler claimed that Tao failed to honor the buyout obligation when the specified conditions were met. Tao, however, argued that an amended LLC agreement executed unilaterally in 2014 superseded the oral arrangement, rendering it unenforceable.

The court’s decision hinged on two primary issues: whether the oral agreement survived the amended LLC agreement, and whether Tao’s verbal acknowledgments of the agreement created an enforceable obligation. The court ultimately ruled in Tao’s favor, emphasizing the binding nature of the LLC agreement’s merger clause, which expressly superseded all prior agreements. Importantly, the court highlighted Delaware’s strict contractarian approach to LLC law, reinforcing that members are bound by an LLC agreement regardless of whether they sign it.

This case serves as a cautionary tale for investors and entrepreneurs alike. It underscores the risks of relying on oral agreements in the absence of explicit integration into governing documents. For businesses, it highlights the critical need to ensure that all agreements are clearly documented and consistent with operating agreements. For law firms, this ruling reinforces the necessity of advising clients on the legal ramifications of merger clauses and other boilerplate provisions that might seem secondary but hold significant weight in disputes.

Titan Law PLLC regularly handles disputes involving contract disputes and issues relating to closely-held entities.  Contact us at blog@titanlawny.com if you or a client have questions involving claims like these.

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