In the matter of Paul v. Delaware Coastal Anesthesia, C.A. No. 7084-VCG (Del. Ch. May 29, 2012), the Court of Chancery examined whether the language of an LLC agreement prescribed the sole manner by which the company’s members could vote their shares, preempting the statutory default, which favors action by written consent, as found in the Delaware Limited Liability Company Act (the “Act”).
Plaintiff Dr. Leena Paul was a shareholder and member of Delaware Coastal Anesthesia, LLC (the “LLC”) from at least June 5, 2007 to August 17, 2011. The LLC members comprised the Plaintiff and the three individual Defendants. Dr. Paul and the individual Defendants each owned 25% of the LLC.
The LLC’s operating agreement (the “Operating Agreement”) provides that a member of the LLC can be terminated without cause “at any time upon ninety (90) days written notice by . . . the Company acting by vote of seventy-five percent (75%) of the holders of the Company’s Shares.” On April 25, 2011, the three individual Defendants, representing 75% of the shares, voted or agreed by written consent to terminate Dr. Paul’s membership in the LLC. The individual Defendants then sent Dr. Paul written notice of her termination.
Dr. Paul asserted that the individual Defendants breached the Operating Agreement because that agreement does not allow the LLC members to vote by written consent. She argues that the Operating Agreement only allows members to vote their shares at a member meeting. Dr. Paul specifically points to Section 7.8, which addresses “Notice of Meetings”, and Section 7.12, which addresses “Voting of Membership Shares”.
The Defendants, on the other hand, asserted that their action by written consent is effective under § 18-302 of the Act, which provides:
Unless otherwise provided in a limited liability company agreement, on any matter that is to be voted on, consented to or approved by members, the members may take such action without a meeting, without prior notice and without a vote if consented to, in writing or by electronic transmission, by members having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all members entitled to vote thereon were present and voted.
6 Del. C. 18-302.
The issue before the Court was whether the Operating Agreement “otherwise provided” for the manner in which votes must be taken, thus preempting the statute. In making its determination, the Court noted that Delaware law provides that LLCs are contractual in nature and that an LLC’s members have wide latitude to craft the members’ rights and obligations. The Act, on the other hand, exists as a “gap filler,” supplying terms not fully explicated in an LLC agreement.
Through interpretation of the language of the Operating Agreement, the Court found that the operating agreement did not so “otherwise provide” the manner in which votes were to be taken, and thus held that the Defendants were not precluded from voting by written consent. Accordingly, the Court found in favor of the Defendants in holding that the vote by written consent of 75% of the LLC’s members to terminate Dr. Paul was valid under the Operating Agreement.
This case is important in that it reinforces the notion of contractual freedom in connection with operating agreements of limited liability companies, and further makes clear that agreements must provide that “gap filler” provisions of the LLC Act do not apply if the intent is to preclude their application to the terms of the operating agreement.