Common sense might lead one to expect that a controlling stakeholder has the power to replace the manager of a limited liability company (LLC), but this might not be the case when the underlying LLC agreement provides otherwise. A recent Delaware decision highlights the importance of thoughtful consideration when drafting LLC Agreements to make sure that the agreement actually provides for what the LLC members intended.
In 2009 Caiola Family Trust v. PWA, LLC (April 30, 2014), the Delaware Chancery Court decided that the plaintiffs, the non-managing members of an LLC holding a 90 percent interest in the LLC, did not have the power to remove the LLC’s managing member or a property manager appointed by the LLC’s managing member. The court made this determination even though the LLC’s managing member only held 10 percent of the LLC’s interests. The defendants in the case were the LLC’s managing member and that entity’s own managing member.
The plaintiffs argued to the court that the non-managing members had authority to cause the managing member to remove the property manager through a majority vote of the non-managing members. The managing member defendant argued that the LLC agreement did not give the non-managing members this power. The plaintiffs then argued that they had grounds to remove the managing member for “cause” due to its failure to comply with the direction to remove the property manager, as voted on by the non-managing members.
In making its decision to grant the defendants summary judgment, the court focused solely on the LLC agreement’s language. The court found that the language of the agreement was unambiguous and that the language only gave the non-managing members a limited veto power over certain listed actions and did not allow them to direct the managing member to remove the property manager. Because the court found that the non-managing members did not have this authority, the court also found that the managing member should not be removed because there was no “cause” for removing the managing member, as required by the LLC Agreement.
In its review of the threshold inquiry, the court stated that “ambiguity does not exist . . . simply because the parties disagree about what the contract means. Furthermore, extrinsic, parole evidence cannot be used to manufacture ambiguity in a contract that facially has only one reasonable meaning.” The court did not take into consideration that the plaintiff was the 90 percent interest holder of the LLC and that as such, the idea that the plaintiff could not remove the property manager and managing member seems counter-intuitive.
It seems that the plaintiffs, as 90 percent interest holders over the LLC, intended that they would have the powers over the LLC that they were arguing for in court. Somehow, this intention did not flow through to the LLC Agreement that they ended up agreeing to, resulting in surprise and loss for the plaintiffs.
The lesson to be learned from the Caiola case is that LLC agreements need to be drafted thoughtfully and with attention to detail based on what the parties to the agreement intend. Drafters of LLC agreements should be careful about using “form agreements” without thoroughly checking each provision to make sure the language in the agreement is what the parties have in mind. As this case emphasizes, even if an LLC agreement provision does not make a lot of sense intuitively, Delaware courts will enforce the language in the document.