Action by Written Consent of LLC Managers is Valid to Fire Executive

Any action that the managers of a Limited Liability Company might take at a meeting can also be taken by executing a written consent.
An action by written consent may, in some circumstances, avoid the need to assemble a quorum of the managers.
The managers of an LLC many be contractually obligated to effect management changes by an operating agreement, but those obligations are not self-executing.

Limited Liability Company Lawyers A venture capital company and the independent manager of a limited liability company were permitted to correct a questionable vote and use a written consent to terminate one of the founders as manager of a group of holding companies.

The fired manager had challenged the vote as lacking a quorum, with only two of the four members present. The managers simply acted by written consent, permitted under Delaware Law, and the court held that the action had the necessary “disinterested” votes under the LLC’s operating agreement to remove the manager.

The Chancery Court of Delaware in Godden v. Franco granted summary judgement to the venture capital firm and its independent director in an action seeking to confirm their action to remove Harley Franco as president and CEO of Harley Marine Services, Inc. through a written consent executed by the limited liability company of which the HMS was a subsidiary.

HMS, a Washington entity and marine transport company with more than 800 employees, was a subsidiary of a tier of holding companies that were created when Macquarle Capital, a private equity firm, acquired just less than half of its stock. The acquisition involved a tier of limited liability companies organized under Delaware law managed by four managers, two from the Franco founders, one from the venture capital firm and an independent manager jointly appointed.

The limited liability companies were governed by an operating agreement established by one of the LLCs (“Holdco 3 LLC”) which owned majority interests in other LLCs that, at the bottom of the tier, owned 100 percent of HMS. The LLCs each adopted operating agreements that required the subsidiary LLCs to adopt operating agreements that mirrored Holdco 3.

The Holdco 3 operating agreement had a provision that permitted the removal of the manager for cause on a vote of the “non-interested” managers, in this case the representative of the venture capital firm and the independent manager. Franco was removed by such a vote at a meeting of the managers that the two Franco managers did not attend. That vote was challenged by the Franco members because only two of the four managers attending, which did not constitute a quorum.

The founders sought to enjoin Franco’s removal in an action in Washington state court, while the venture capital’s member sued in Delaware to enforce the terms of the operating agreements. In response to the challenge to the meeting, the two mangers who had voted in favor of Franco’s removal executed a written consent taking the same action.

Because the Delaware statute and the operating agreement both provided for action by written consent, the chancery judge rejected the Franco defendants attempt to set aside the effect of the written consent, relying first on Delaware’s Limited Liability Company Act authorization for action by written consent. 6 Del. C. § 1-402(d):

Unless otherwise provided in a limited liability company agreement, on any matter that is to be voted on, consented to or approved by managers, the managers may take such action without a meeting, without prior notice and without a vote if consented to or approved, in writing, . . . by managers 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 managers entitled to vote thereon were present and voted.

The action taken by written consent took advantage of the flexibility afforded by the act, and was consistent with the provisions of the LLCs operating agreement.

The Holdco 3 LLC agreement and the LLC Act recognize two paths for valid action. The first is action taken at a meeting. The second is action taken by written consent without a meeting. The two paths have different requirements. The need for a quorum before valid action can be taken at a meeting does not apply to action taken by written consent, which requires only that the consent be signed by “the number of Board Members required by Section 4.1 to approve such action at a meeting held by the Board of Managers at which a quorum was present

The Chancery Court also held that while the actions taken by written consent and effective to remove Franco, they were not self-executing provisions. Franco and the limited liability companies had a contractual obligation to implement the actions taken by the LLC at the top of the tier in the subsidiary LLCs.

[T]he provisions of the Holdco 3 LLC agreement, and any decisions that the Board of Managers or the members of Holdco 3 make in accordance with those provisions, bind the parties contractually as a matter of Delaware law just as a stockholder agreement would. If the members of Holdco 3 change the composition of the Board of Managers, then the parties to the Holdco 3 LLC agreement have a contractual obligation under the Subsidiary Board Provision to take steps to implement that decision at the subsidiaries. If the Board of Managers of Holdco 3 decides that an individual should be an officer of a particular subsidiary, then the parties to the Holdco 3 LLC agreement have a contractual obligation under the Subsidiary Officer Provision to take steps to implement that decision at the pertinent subsidiary. And if the Board of Managers of Holdco 3 makes an Interested Party Decision, then the parties to the Holdco 3 LLC agreement have a contractual obligation to carry it out. In my view, the Personal Commitment Provision fits in with and supports this structure. By binding Franco to the Holdco 3 LLC agreement personally through the “Personal Commitment Provision, the parties ensured that Franco would have a personal obligation to abide by the provisions of the Holdco 3 LLC agreement and decisions made by the Board of Managers of Holdco 3 in accordance with those provisions.

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This declaration should not be construed too broadly. Just as a decision by the Board of Managers of Holdco 3 to terminate Franco would not implement itself automatically at the level of HMS Inc., so too the obligations created by the Subsidiary Board Provision are not self-executing. In other words, if the composition of the Board of Managers of Holdco 3 changed, it would not be possible to declare based on that fact and the existence of the Subsidiary Board Provision that the composition of the board of directors of HMS Inc. automatically changed. The parties to the Holdco 3 LLC agreement would have contractual obligations to seek to effectuate that change, and a recalcitrant party could face contractual remedies for failing to comply with its obligations, but effecting the change would require valid corporate action at HMS Inc. The Subsidiary Board Provision is not self-executing, and the declaration provided by this decision does not imply that it is.

Ultimately, whether the termination of Franco would be implemented at the level of HMS, the court noted, was a matter for the Washington state court.

Any action that the managers of a Limited Liability Company might take at a meeting can also be taken by executing a written consent.

An action by written consent may, in some circumstances, avoid the need to assemble a quorum of the managers.

The managers of an LLC many be contractually obligated to effect management changes by an operating agreement, but those obligations are not self-executing.