Document: Obeid v. Hogan, C.A. No. 11900-VCL (Del. Ch. Apr. 27, 2016)
The Court of Chancery examined the operating agreements of two Delaware limited liability companies (“LLCs”) to determine whether a third party could serve as the sole member of a special litigation committee in each LLC.
One of the two LLCs adopted a governance structure mimicking that of a corporation and using language drawn directly from the corporate domain. It established a manager-managed governance structure that empowered a “Corporate Board” to act as the sole manager. The “Corporate Board” was authorized to designate committees of “one or more of the Directors of the Company.” The Court ruled that such language required the Court to apply corporate precedents, including the prohibition against non-directors acting on a special litigation committee.
The second LLC established a similar management structure. Its LLC Agreement provided that “the powers of the Company shall be exercised by or under the authority, and the business and affairs of the Company shall be managed by, one or more Managers.” The Court determined that provisions of the LLC, taken as a whole, addressed the issue by expressly limiting the power of the managers to delegate their core governance functions. As a result, only managers could serve on a special litigation committee.
Bottom Line: If the parties to an LLC wish to avoid the consequences of corporate precedents, do not include language typically associated with a corporation in an LLC Agreement. In addition, the LLC Agreement should include provisions that address if and how delegation is permitted.