This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.
The Court of Chancery recently ruled that the President/CEO of Skyline Energy Renewables LLC’s parent could not wield that holding company’s power to oust a rival Skyline director because it was not his specifically delegated governance power under the operating agreements of three related limited liability energy companies’ in Roccia et al. v. Mugica, et al., No. 2020-0641-MTZ order granting motion, (Del. Ch. Dec. 29, 2020).
Vice Chancellor Morgan Zurn’s Dec. 29 summary judgment ruling sided with plaintiff Lorenzo Roccia, Skyline’s Chairman of the board and the head of Transatlantic Ultiner LLC, one of two equal managing members of Skyline’s owner, Transatlantic Group Partners LLC. He successfully argued that his removal was void because CEO Martin Mugica, his counterpart as head of TGP’s other controlling member, Ultiner LLC, lacked authority to act on behalf of the holding company, Transatlantic Power Holdings LLC.
According to the opinion, after Mugica in May 2020 notified the Skyline board that he was using his authority to remove Roccia, Roccia in July filed suit seeking an injunction barring Mugica’s removal action.
In deciding dueling summary judgment motions Vice Chancellor Zurn said it is clear that the holding company had the power to remove a director of one of the nested companies but there was no language in the agreements that enabled a top officer like Mugica to use that power on the company’s behalf.
Even though LLC’s have the freedom to generally set rights and responsibilities by contract rather than statute like traditional corporations, when LLC’s do not specifically delegate powers to officers they act through a board of directors, the court said.
“Holdings could delegate to Mugica any or all of the powers and duties to manage and control its business and affairs,” the opinion said. “As it happened, Holdings granted plenary power to its board, and only limited authority to Mugica, as president and CEO, analogized to the authority held by a corporate officer in the same position,”
Four arguments rejected
The vice chancellor rejected each of the four categories of board-granted powers that Mugica claimed gave him removal authority power:
(1) “The general powers of management usually are typically vested in the office of president of a corporation.” Removing a director of an affiliated company is neither “usual and ordinary” nor part of Holdings’ core business and “Doing so is inherently an extraordinary event, outside of Holdings’ ordinary business,” Vice Chancellor Zurn ruled.
(2) Control of Holdings’ “business and operations.” In Miramar Police Officers Retirement Plan v. Murdoch, this Court interpreted the meaning of the term “business and operations.” Miramar Police Officers’ Ret. Plan v. Murdoch, 2015 WL 1593745, at *12–13 (Del. Ch. Apr. 7, 2015). The Murdoch Court, relying on “commonly used dictionaries,” found that “the word ‘business’ means the commercial enterprise of a company, and the word ‘operations’ means the commercial activities of a company,” she said, distinguishing these commercial activities from “corporate governance matters.”
(3) Control over Holdings’ “officers and employees.” Because Holdings’ designees on the Skyline Board are not officers or employees of Holdings, that branch of Mugica’s power does not reach them, she ruled.
(4) “Other duties as assigned by the Holdings Board.” There is no evidence that the Holdings Board otherwise delegated to Mugica authority by which he could exercise the company’s removal power, the vice chancellor said, because the ten enumerated restrictions the board placed on Mugica’s power were not a comprehensive list of limits. “This language does not broaden Mugica’s authority,” the vice chancellor ruled in ordering summary judgment for the plaintiff.