Paul v. Delaware Coastal Anesthesia, LLC, et al., Civil Action No. 7084-VCG (May 29, 2012).
Whether the language of an LLC agreement which prescribed the sole manner by which an LLC’s members could vote their shares, preempts the statutory default which allows action by written consent.
Short Answer: No.
Plaintiff, Dr. Leena Paul, was a shareholder and one of four equal members of Delaware Coastal Anesthesia, LLC. On April 25, 2011, the three individual Defendants, representing 75% of the shares, voted or agreed by written consent to terminate Dr. Paul’s membership in the LLC. The individual Defendants then sent Dr. Paul written notice of her termination. Exhibit E, Section 8(a) of the LLC’s operating agreement states that a member of the LLC can be terminated without cause “at any time upon ninety (90) days written notice by . . . the Company acting by vote of seventy-five percent (75%) of the holders of the Company’s Shares.”
Dr. Paul argued that the individual Defendants’ vote was void because no membership meeting was held and because proper notice of the action was not given to the members. Paul filed suit asserting that the individual Defendants breached the operating agreement (and in particular Section 7.8, which addresses “Notice of Meetings”, and Section 7.12, which addresses “Voting of Membership Shares”) because that agreement did not permit the LLC members to vote by written consent but rather only allows members to vote their shares at a member meeting. Section 7.8 provides that notice of meetings must be given to each member “not less than seven (7) days before the date of the meeting” and that the notice must state the “place, date, and hour of the meeting, and in the case of a special meeting, the purpose or purposes for which the meeting is called.” Section 7.12 states, in part, that “[a]t a meeting of Members at which a quorum is present, the affirmative vote of Members holding a majority of the Membership Shares and entitled to vote on the matter shall be the act of the Members, unless a greater number is required by the Act.”
The Defendants argued that their action by written consent was effective under § 18-302 of the Delaware Limited Liability Company Act, which provides:
Unless otherwise provided in a limited liability company agreement, on any matter that is to be voted on, consented to or approved by members, the members may take such action without a meeting, without prior notice and without a vote if consented to, in writing or by electronic transmission, by members having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all members entitled to vote thereon were present and voted.
The Court noted that the LLC Act was a “gap filler” meant to supply terms not fully explained in the LLC Agreement and that the default rules in the Act may be displaced by a provision of the LLC agreement, but in the event that there is a conflict, the LLC Agreement prevails. Here the Court had to decide whether the operating agreement “otherwise provided” (as per the language in § 18-302) for the manner in which votes must be taken, thus preempting the statute. In finding that the LLC Agreement did not “otherwise provide,” so as to preempt actions by written consent to terminate a member, the Court determined that the members could and did act by written consent and the vote to terminate Dr. Paul as a member was valid. The Court granted the motion to dismiss.