Does an email constitute a binding contract with regard to LLC Ownership Transfer?

Question

I'm one of three cofounders of an LLC incorporated in Delaware. The LLC is very much a startup and has not been profitable nor has any assets. Because of lack of sales, one of our founders told us that he didn't want to continue working on the business and we parted ways. It was very informal, and we didn't go through the process of getting him off the LLC.

Later, the other remaining founder and I started working with a friend and wanted to bring him into the company as a replacement for the founder who left. We began a long chain of emails with my friend and the ex-founder and eventually agreed to pay a certain price for 1/3 of the company. The conversation ended by him accepting our price in exchange for a transfer of 33% ownership of the LLC. We told him next steps were we would set up a time to meet, sign the necessary documents and transfer the money.

About a week after that, the business lost our most valuable account whom was responsible for ~90% of the sales. That combined with some other factors led to my friend deciding that he didn't want to pursue ownership in the company and walked away from the potential transfer. The ex-founder is understandably upset, considering he thought he was about to get a nice payday from this and is now threatening legal action against us. I'm assuming he means to file a civil lawsuit to get the agreed upon sum for his shares of the company.

I'm wondering if he actually has a case here. Are we legally obligated to pay him and force the LLC transfer even though we no longer want it? No documents signed or filed and no money has been exchanged. I have read that in certain situations, email correspondence CAN BE interpreted as a binding legal contract. I'm unsure if that applies to this situation. Interested to hear what you all think. Thanks!

Answer 1

TL; DR: It is possible you might have a binding, enforceable contract. It depends on the facts. A trial court will determine the facts unless there is a settlement. Hire an attorney.

1. Contracts require certain elements in order to be enforceable.

This website defines the elements of a contract to include the following:

The requisite elements that must be established to demonstrate the formation of a legally binding contract are (1) offer; (2) acceptance; (3) consideration; (4) mutuality of obligation; (5) competency and capacity; and, in certain circumstances, (6) a written instrument.

2. Emails are not the contract. They are evidence of a contract.

The emails themselves would not necessarily constitute a contract. However, they could be offered as evidence to prove there was a contract and what the terms were — thereby establishing a rebuttable presumption of a contract. In order to win a rebuttal, the litigating party would need to establish by a preponderance of evidence that one or more of the elements of a contract did not exist.

3. Contracts do not need to be written to be enforceable.

Contracts do not always need to be written (or signed) in order to be enforceable. Oral contracts are just as enforceable in many cases as written agreements. The classic exception to this rule is that many (if not all) states require contracts to transfer real estate be written, not oral agreements.

4. Courts consider the behavior of the parties as evidence of a contract.

Another category of evidence courts consider when deciding contract cases is the behavior of the parties. There is a legal theory called estoppel which Google defines as:

...the principle that precludes a person from asserting something contrary to what is implied by a previous action or statement of that person or by a previous pertinent judicial determination.