The Delaware Court of Chancery recently addressed the challenged removal of an LLC manager and the validity of written consents. In Godden v. Franco, C.A. No. 2018-0504-VCL (Del. Ch. Aug. 21, 2018), the court explained several important principles that the Delaware courts use to analyze issues in the LLC context and interpretive rules involving LLC agreements.  In the process, the court provided a helpful analysis of the equitable powers of the court to fashion remedies in the context of an LLC notwithstanding the often exaggerated explanation of LLCs as creatures of contract.  For example, the court cited recent scholarship from Professor Mohsen Manesh that explains why LLCs are not wholly contractual and should be described as “only partially creatures of contract.” See Mohsen Manesh, Creatures of Contract: A Half-Truth about LLCs, 42 Del. J. Corp. L. 391 (2018)(noted on these pages.) The court also cites to other exceptions to the exaggerated concept of the LLC as merely a creature of contract. See pages 15-17 and footnotes 16-22.

Other Highlights:

  • An essential point in the court’s analysis is that if an LLC Agreement and the LLC Act do not address an issue, then Section 18-1104 of the Delaware LLC Act reverts to equity and rules of law for resolution. See footnotes 17-19 and accompanying text.
  • The court provides basic contract interpretation principles at page 17 of the slip opinion. An important principle in both the LLC context and the corporate context is articulated as follows: A contract provision that “tends to induce” the violation of a fiduciary duty is not enforceable on grounds of public policy. See footnote 43 and accompanying text.
  • A statement of law that has widespread application in the corporate and commercial context is that under Delaware law, corporate separateness is a bedrock principle. See Slip op. at 25.
  • The court also provided an helpful analysis and a comparison of written consents in different contexts. Specifically, Section 18-404(d) of the LLC Act allows non-unanimous written consents of managers of LLCs, similar to DGCL Section 228(a) for corporate stockholders—but contrariwise, DGCL Section 141(f) requires unanimous written consent for corporate board action.