CURRENT MONTH (June 2019)
Limited Liability Companies
Ineffective Removal of Managers of LLC
By Huston Firment and Michael Maxwell
In Llamas v. Titus, C.A. No. 2018-0516-JTL, 2019 WL 2505374 (Del. Ch. June 18, 2019), the Delaware Court of Chancery (the “Court”) determined the proper composition of the board of managers of a Delaware limited liability company (the “LLC”) pursuant to Section 18-110(a) of the Delaware Limited Liability Company Act. Stuart Titus (“Titus”) served as the sole member and manager of the LLC. Pursuant to pressure from an interested third party, Titus executed a written consent appointing additional managers (collectively, the “Additional Managers”) of the LLC. However, soon after executing the consent, Titus attempted to amend the LLC’s limited liability company agreement (the “Amendment”) to make clear that Titus was the sole manager of the Company. Shortly after the Amendment, Titus executed a written consent (the “Consent”) appointing two new managers (the “Replacement Managers”) to fill the manager positions that Titus alleged the Additional Managers vacated due to the Amendment. The Court found the proper composition of the LLC’s board consisted of Titus and the Additional Managers because the Additional Managers were not properly removed by the Amendment or the Consent and therefore the Replacement Managers were not properly appointed. The Court rejected the argument that references to Titus as “the sole Manager and sole Member” contained in the Amendment were effective to remove the Additional Managers, in part, because such references were contained in the introductory clauses and the recitals and did not have “substantive” or “operative” effect. The Court also rejected, as “internally inconsistent,” the argument that the Amendment served as a “governance reset.” Finally, the Court rejected the argument that the Consent served as a “managerial bump-out” (i.e. automatically removing the Additional Managers, without explicitly stating so, and replacing them with the Replacement Managers), noting that the theory “lack[ed] any support under Delaware law…an individual cannot be appointed to a board with no vacancies.”
Judicial Dissolution of Delaware LLC Due to Manager Deadlock
By Huston Firment and Michael Maxwell
In Acela Investments LLC v. DiFalco, C.A. No. 2018-0558-AGB, 2019 WL 2158063 (Del. Ch. May 17, 2019), the Delaware Court of Chancery (the “Court”) ordered the dissolution of a Delaware Limited Liability Company (the “Company”) pursuant to Section 18-802 of the Delaware Limited Liability Company Act (the “DLLCA”). Raymond DiFalco (“DiFalco”), Manish Shah (“Shah”) and Stefan Aigner (“Aigner”) formed the Company and, collectively, served as three of the four managers on the initial board of managers (the “Board”), with DiFalco and Shah being “aligned with each other.” After persistent deadlock of the Board due to a “turbulent” relationship between the managers, DiFalco and Shah sought relief from the Court in the form of judicial dissolution of the Company. The Company’s LLC agreement contained two provisions that ultimately contributed to the deadlock in the form of (1) a veto provision that allowed either Aigner, or DiFalco and Shah together, to veto any action of the Board (the “Veto”) and (2) an intended deadlock provision that allowed for a “Independent Representative” to vote in place of a conflicted manager (the “Deadlock Provision”). The Court noted that when “an LLC agreement requires that there be agreement between two managers for business decisions to be made, those two managers are deadlocked over serious issues, and the LLC agreement provides no alternative basis for resolving the deadlock, it is not reasonably practicable to continue to carry on the LLC business.” The Company’s managers were “at loggerheads over issues of fundamental importance to the company.” The Court also found that the Deadlock Provision failed to provide for when an Independent Representative should step in to vote for a conflicted manager. Accordingly, the Court held that the Deadlock Provision did not provide a workable solution to the deadlock issues and that judicial dissolution of the Company was appropriate.