Great Lakes Chemical Corp. v. Monsanto Co.

United States District Court for the District of Delaware · 2000 · Corporations

CorporationsLLC interestsSecurities fraudFederal jurisdictionLLCmembership interestssecuritystock

Facts

Monsanto and STI formed NSC as a Delaware limited liability company and later sold all of their ownership interests in NSC to Great Lakes for $125 million under a Purchase Agreement. Great Lakes alleged that defendants misrepresented or failed to disclose material information about NSC's sales prospects and business condition. The LLC Agreement gave management authority to a board, but members could remove managers with or without cause, vote on certain matters, and transfer interests only subject to restrictions. After the purchase, Great Lakes dissolved NSC and then brought a federal securities claim along with state-law claims.

Issue

Whether the ownership interests in NSC, a Delaware LLC, that Monsanto and STI sold to Great Lakes were "securities" within the meaning of the federal securities laws so that Great Lakes could maintain a Section 10(b) and Rule 10b-5 claim. If not, whether the court should retain jurisdiction over the remaining state-law claims.

Rule

For nontraditional financial instruments such as LLC interests, the court must look to the particular instrument and transaction. LLC interests are not treated as traditional stock merely because they are stock-like; unless they are traditional stock or another specifically enumerated instrument, they must satisfy Howey to qualify as an investment contract, meaning an investment of money in a common enterprise with profits to come solely from the efforts of others. The phrase "any interest or instrument commonly known as a security" does not expand coverage beyond the same basic Howey inquiry.

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Cedar Bluff Materials, Inc., based in Tulsa, agrees to buy all membership interests in Riverbend Processing LLC from its two members for $48 million. The operating agreement gives members pro rata distributions, voting tied to percentage interests, restricted transfer rights, and the ability to pledge interests only with manager approval; the purchase agreement repeatedly calls the interests "equity securities."

If Cedar Bluff later sues under Rule 10b-5 for alleged misstatements in the sale, what is the strongest argument against treating the transferred interests as securities?

Explanation. The majority held that stock-like LLC interests are not treated as traditional stock merely because they resemble stock or are labeled as securities in the transaction documents. Landreth's per se rule applies only to traditional stock. For LLC interests, the court looks to the particular instrument and transaction and generally applies the Howey framework unless the instrument is otherwise specifically enumerated. Transfer restrictions alone do not defeat security status, 100% sales are not categorically excluded, and LLC interests are not never-securities. (Derived from Great Lakes Chemical Corp. v. Monsanto Co. (2000).)