It is often said that Delaware limited liability companies are creatures of contract. Drafters of LLC agreements have the freedom to craft an LLC that best suits their goals. For instance, LLCs can be drafted to allow the members to manage the affairs of the LLC. LLCs can also be created so that members appoint a manager or managers to govern the LLC. Drafters can also mold an LLC to mimic a corporation by having the LLC’s affairs governed by a board of directors. What practitioners must know is that when an LLC’s governance features mimic another type of entity, a court analyzing a dispute involving that LLC will likely draw from existing precedent. So, where an LLC was created to parrot a corporation’s governance structure, a court will likely look to corporate law for guidance in resolving a dispute.
In the Delaware Court of Chancery’s recent decision, Obeid v. Hogan, C.A. No. 11900-VCL (Del. Ch. June 10, 2016), Vice Chancellor J. Travis Laster held that a board of directors of Gemini Equity Partners, (the corporate LLC), a Delaware entity governed similar to a corporation, and the managers of Gemini Real Estate Advisors, (the manager-managed LLC), a Delaware manager-managed entity, could not delegate to a nondirector/nonmanager the authority to act as a special litigation committee. The corporate LLC and the manager-managed LLC jointly managed over $1 billion in real estate assets and were comprised of the same three members, William Obeid, Christopher La Mack and Dante Massaro. Obeid, La Mack and Massaro were the directors of the corporate LLC and the managers of the manager-managed LLC, at least until La Mack and Massaro purportedly removed Obeid from management in 2014. Following Obeid’s alleged removal, a series of lawsuits were filed in various courts. Among the pending lawsuits was an action in the U.S. District Court for the Southern District of New York in which Obeid asserted derivative claims that La Mack and Massaro had wrongfully competed with the corporate LLC and manager-managed LLC.
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