In this memorandum opinion, the Delaware Court of Chancery found that a member of a limited liability company wrongfully tried to remove a fellow member and fire the limited liability company’s president and CEO. The Court also held that limited liability companies, like corporations, are not subject to the outdated common law rule that an interested director is incapable of voting on a transaction’s approval.
The Delaware limited liability company at issue was Oculus Capital Group, LLC (the “Company”). The Company consisted of two members, NHAOCG, LLC, a New York limited liability company (“NHA”), and AK-Feel, LLC, a Delaware limited liability company (“AK-Feel”), who also acted as the manager of the Company (the “Managing Member”). The President and CEO of the Company was Christopher J. Feeley (“Feeley”), who was also the managing member, and 55% owner, of AK-Feel. Andrea Akel (“Akel”) was the 45% owner of AK-Feel and was also an employee of the Company.
For unknown reasons, NHA wanted to remove Feeley as President and CEO and remove AK-Feel as manager of the Company. Pursuant to Section 4.1 of the limited liability company agreement of the Company (the “LLC Agreement”), however, the Managing Member, not NHA, had the authority to remove officers. In addition, Section 4.7 of the LLC Agreement (“Section 4.7”) stated that AK-Feel could only be removed as manager of the Company by (A) a unanimous vote of the members, or (B) by NHA alone if either (i) Akel was terminated for “Good Cause,” (ii) Feeley was no longer an employee of the Company, or (iii) AK-Feel defaulted on its obligations as Managing Member and the default was not cured within ten days after AK-Feel received a notice of default from NHA. Ultimately, NHA advised Feeley, in a series of correspondence, that he had been terminated as President and CEO and that AK-Feel was removed as manager of the Company.
After entering into a stipulation with NHA that resolved some but not all disputes, Feeley, AK-Feel and the Company (the “Plaintiffs”) filed a complaint alleging that NHA breached the terms of the LLC Agreement and that the purported removals of Feeley and AK-Feel were invalid. The Court agreed with the Plaintiffs. Under the clear terms of the LLC Agreement, NHA lacked the authority to remove officers by itself; only the Managing Member possessed such authority. Because AK-Feel did not vote to fire Feeley, Feeley’s purported termination was invalid. The Court also held that Section 4.7 clearly did not permit NHA to remove AK-Feel as manager of the Company. AK-Feel never voted to remove itself as manager, and, because Akel was not terminated for “Good Cause,” Feeley’s termination was invalid, and NHA never sent AK-Feel a notice of default, NHA lacked authority to remove AK-Feel unilaterally.
NHA, however, argued that Akel validly caused AK-Feel to vote with NHA in favor of removing AK-Feel as the manager of the Company, even though Feeley, not Akel, was the managing member and majority owner of AK-Feel. In making this argument, NHA relied on Section 6.3 of AK-Feel’s limited liability company agreement (“Section 6.3”), which provides that Akel could execute agreements on behalf of AK-Feel if Feeley was “unavailable.” Feeley was unavailable, according to NHA, because he had a conflict of interest. The Court rejected this argument, finding that this provision only permitted Akel to execute documents when Feeley could not “hold the pen.” According to the Court, Section 6.3 did nothing to give Akel the authority to make decisions on behalf of AK-Feel by herself.
In rejecting NHA’s argument that Feeley was unavailable, the Court also stated that limited liability companies, like corporations, are not subject to the outdated common law rule that an interested director is incapable of voting on a transaction’s approval. According to the Court, the Delaware General Assembly altered this common law rule in 1967 by adopting Section 144 of the Delaware General Corporation Law. Section 144(a) provides that a transaction which falls into one of three safe harbors will not be invalidated solely because of director self-interest. Section 144(b) states explicitly that “[c]ommon or interested directors may be counted in determining the presence of a quorum at a meeting of the board of directors or of a committee which authorizes the contract or transaction.” According to the Court, nothing in the Delaware Limited Liability Company Act suggests a desire on the part of the General Assembly to transplant into a new and flexible form of entity an old and rigid common law rule that has been displaced over the prior century. Further, the Court noted, it is less likely that the General Assembly sought to reject Section 144(b)’s specific authorization of voting by interested parties in favor of the abandoned common law approach. The Court stated that the parties to the LLC Agreement had the contractual freedom to adopt the old common law rule but chose not to. As such, the “unavailability” provision did not provide authority by which Akel could unilaterally cause AK-Feel to vote to remove itself as manager of the Company.
Finally, the Plaintiffs sought a determination that they were entitled to indemnification as provided in the LLC Agreement. The Court stated that a claim for indemnification was typically premature prior to the final disposition of the underlying action and that the Plaintiffs did not provide sufficient grounds for addressing the indemnification issue at that particular time.
The full opinion is available here.