Chancery Applies DGCL Section 144 to LLCs by Analogy

Feeley v. NHAOCG, LLC, C.A. No. 7304-VCL (Del. Ch. Oct. 12, 2012).

What this case is about: This Delaware Court of Chancery opinion addresses a dispute regarding management and control of an LLC based on an interpretation of the LLC agreement.

Why it is noteworthy: This pithy decision also addresses whether the vote of an interested member of an LLC would be disqualified due to lack of disinterestedness. The Court recalled the old common law rule that the vote of an interested director would not count for purposes of a quorum, but DGCL Section 144 and similar statutes superseded that old common law concept to the extent, for example, that a contract will not be invalid for the sole purpose that one of the directors voting on it has an interest in the transaction (assuming one of three safe harbors in Section 144(a) applies). See slip op. at 19-21. The Court explains why it would not be reasonable to expect that the Delaware General Assembly would have rejected Section 144(b)’s specific authorization of voting by interested parties “in favor of the abandoned common law approach.” See generally, article co-authored by R. Franklin Balotti in the Delaware Lawyer magazine in 2008 that addressed the distinction between liability of an interested director and the separate issue of whether an agreement that she voted on is merely valid based on Section 144. An excerpt from that article follows:

 ”Unless a court must determine the validity of a self-dealing transaction before it considers a director’s equitable conduct and potential liability, [DGCL Section] 144 should not be considered when determining director liability. Until the General Assembly instructs otherwise, Section 144 should be limited to the purpose expressed by Professor Folk 40 years ago–validation of self-dealing transactions.”

The opinion in this case also provides useful contract interpretation principles which are applied in a very businesslike manner to support a cogent result that leads one to believe that there is only one reasonable interpreation of the relevant terms of the LLC agreement.

A prior Chancery decision in this case addressing the issue of in rem jurisdiction for purposes of contesting the rightful managing member of an LLC, similar to a DGCL Section 225 proceeding, was highlighted on these pages here. The prior decision provides additional background details.