Obeid v. Hogan

Court of Chancery of the State of Delaware · 2016 · Corporations

CorporationsLLCsspecial litigation committeesderivative litigationoperating agreement interpretationboard removalZapataderivative suit

Facts

Two Delaware LLCs were jointly owned by Obeid, La Mack, and Massaro. One LLC, Gemini Equity Partners, adopted a corporate-style governance structure with a board of directors, while the other, Gemini Real Estate Advisors, was manager-managed with Obeid, La Mack, and Massaro as its only managers. After Obeid had asserted derivative claims in ongoing New York litigation, La Mack and Massaro attempted to have retired Judge Hogan serve as the sole member of parallel special litigation committees for both LLCs, even though he was neither a director of the Corporate LLC nor a manager of the Manager-Managed LLC. They also later voted to remove Obeid as a director of the Corporate LLC.

Issue

Whether Judge Hogan, who was neither a director nor a manager, could validly serve as the sole member of special litigation committees for the two LLCs under their governing agreements and Delaware law principles incorporated by those agreements. Also, whether Obeid could be removed from the Corporate LLC's board only by unanimous member vote rather than by a majority of the profit interests.

Rule

If an LLC agreement adopts a governance structure paralleling that of a corporation, the court will apply corporate law principles to derivative-claim control, including Zapata's requirement that a special litigation committee be a committee of directors capable of exercising the board's full authority. In a manager-managed LLC, where the operating agreement limits delegation of core governance authority to managers, a non-manager cannot be delegated authority to control derivative claims through a special litigation committee. Absent contrary agreement language, removal of a director by the members is governed by the LLC Act's default majority-in-profits-interest rule.

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Lakefront Capital Ventures, LLC is a Delaware LLC based in Chicago. Its operating agreement provides that the company's business and affairs are managed by or under the direction of a board of directors, and that any committee must consist of one or more directors. After member Dana Ruiz files derivative claims that survive the demand stage, the other two directors appoint a retired accountant from Milwaukee, who is not a director, as the sole member of a committee to decide whether the company should pursue the claims.

Is the committee validly constituted?

Explanation. The operating agreement mirrors corporate governance and committee provisions, so corporate principles govern this issue. Under the majority opinion's application of Zapata, once derivative authority has shifted to the plaintiff, the entity can reassert control only through an independent decision maker that can wield the board's full authority, and in a corporate-style structure that means a committee of directors. A non-director sole member is therefore unauthorized. (Derived from Obeid v. Hogan (n.d.).)