Delaware Law Update—Delaware Law Permits the Removal of an LLC Manager and Officer by Written Consent of Managers of Limited Liability Company Without Unanimous Consent, but Provision Is Not Self-Executing

01/17/19

In Godden v. Franco, C.A. No. 2018-0504-VCL (Del. Ch. Aug. 21, 2018), the court applied basic contract principles in construing a limited liability company operating agreement under Delaware’s Limited Liability Company Act (the “LLC Act”) to determine the impact of an action by written non-unanimous consent of the board of managers of the ultimate parent limited liability company to remove a limited liability company manager from his positions at each level of the multi-tiered structure. However, the court’s analysis provides an important reminder that limited liability companies are not merely “creatures of contract.” While the foregoing statement may be primarily true, if both the operating agreement and the LLC Act are silent, then salient Section 18-1104 of the LLC Act reverts to equity and rules of law for resolution.

In this case, the board of directors of Harley Marine Services, Inc. (“HMS”), a Washington corporation, and a subsidiary of a three-tiered holding company structure comprising three Delaware limited liability companies (each an “LLC,” and collectively the “LLCs”), held a meeting to remove an individual from his positions as the chairman of the board and as an officer at each level of the structure. Following the meeting, the terminated individual challenged the vote as lacking quorum, as only two of the four directors were present. In an attempt to remedy the alleged defective action, the foregoing two present members acted by written consent on behalf of the board of managers of each of the three tiers of LLC holding companies, and the board of directors of HMS, to again remove the individual at each entity level.

Each of the three LLCs was governed by an operating agreement established by one of the LLCs, which owned majority interests in the other LLCs that, at the bottom of the tier, owned 100% of HMS. Each LLC had adopted an operating agreement requiring its respective subsidiary entities to adopt substantially identical operating agreements.

The court limited its analysis to the one LLC agreement signed by the terminated individual, on the basis that he was a party to such agreement, thereby creating a personal obligation on his behalf. The court reasoned that the action taken by non-unanimous written consent availed itself of the flexibility afforded by Section 18-404(d) of the LLC Act and was consistent with the provisions of the LLC’s operating agreement.

The court found that while the actions taken by written consent were effective to remove the individual, such actions were not self-executing provisions. The law must respect the fundamental principle of corporate separateness. Accordingly, the individual and the LLCs had a contractual obligation to implement the actions taken at each of the subsidiary levels.

Finally, the question of whether the action would be implemented at the HMS level was a matter for the Washington state court to decide.