In an expedited post-trial decision, the Delaware Court of Chancery recently determined who the proper managers were of an LLC, as well as the validity of the removal of a manager, pursuant to the summary proceedings provided for in Section 18-110 of the Delaware Limited Liability Company Act. In St. Peters, L.P. v. Bold On Boulevard LLC, C.A. No. 2024-0653-MTZ (Del. Ch. Nov. 19, 2024), the court provided a detailed factual recitation of the terms of the operating agreement formed for the development of a large apartment complex.

Highlights

Interested readers should review the important factual details, but for purposes of this short blog post I wanted to highlight a few noteworthy aspects of the decision.

• Section 18-110 allows for the Court of Chancery to hear and determine the validity of any “admission, election, appointment, removal or resignation of a manager of a limited liability company, and the right of any person to become or to continue to be a manager of a limited liability company.” It also provides for a summary proceeding limited to determining issues that “pertain to the validity of an action to elect or remove a manager.” Slip op. at 13.
• The court recited the truism that Delaware is contractarian, and in this context, the court observed that notice provisions and cure provision are recognized as important contract terms. Slip op. at 14.
• In my view, the most noteworthy aspect of this decision is the comparison of different provisions in the operating agreement, some of which provided that consent could not be unreasonably withheld—but other provisions did not include that “exception” to the right to consent.
• Specifically, some provisions requiring consent before an action could take place, allowed the party whose consent was necessary to: “grant or withhold consent in such member’s sole discretion, unless otherwise stated,” in one section. Likewise, another section allowed the “absolute independent right to grant, deny, withhold or condition any requested consent or approval based on its own point of view, but subject to the implied covenant of good faith and fair dealing.” Slip op. at 19-20.
• The court observed that the implied covenant of good faith and fair dealing “is omnipresent: one need not speak its name, even once, to make it appear.” Slip op. at 20.
• The court, citing other cases, observed that consistent with the implied covenant, the party whose consent is required retains the freedom not to give approval if granting consent was not in its own commercial interest. Slip op. at 20. See footnotes 94-95 and accompanying text.
• Notably, some sections of the agreement specifically provided that consent could not be “unreasonably withheld,” but the other sections at issue did not have such a restriction. Id.
• To put a sharper point on it, the court expressly rejected the argument that consent could not be withheld unreasonably—unless the agreement imposed that express condition.
• The court emphasized that: “the court should not read a reasonableness requirement into a contract entered into by two sophisticated parties nor imply an obligation inconsistent with the parties’ express agreement.” See footnotes 98-99, and accompanying text.
• This interpretation was bolstered by other consent provisions in the same agreement which did include the commonplace condition that consent not be unreasonably withheld. Slip op. at 21-22.
• Nonetheless, the court held that it was neither unreasonable nor arbitrary under the circumstances of this case for consent to be withheld. Slip op. at 22.
• Another noteworthy aspect of this decision was the court’s discussion of interim fee awards based on fee-shifting provisions in the parties’ agreement. The court discussed the circumstances in which interim fee awards may be appropriate, but that there was no exigency or other special circumstance demonstrated in this case that would warrant them. See Slip op. at 25-26.