The Delaware Court of Chancery recently interpreted the Delaware Limited Liability Company Act’s (“LLC Act”) provision for service on any “person” who “participates materially in the management” of a Delaware LLC as sufficient to support implied consent to Delaware jurisdiction by a Delaware LLC’s general counsel. In past cases, the Delaware Court of Chancery found that this material-participation standard applies to LLC officers who hold the title of president and perform functions customarily associated with that role. But in In re P3 Health Group Holdings, LLC, No. 2021-0518-JTL, Vice Chancellor Laster considered the plain meaning of “participates materially” and those words’ “natural habitat” in other statutes like the federal tax code and Delaware General Corporation Law’s (“DGCL”) consent-to-jurisdiction statute for corporate officers, and held that the LLC Act’s consent-to-jurisdiction statute extends to any person who holds a “C-suite” position in a Delaware LLC, including an LLC’s general counsel. C-suite executives of Delaware LLCs should thus anticipate that they may be subject to jurisdiction in Delaware for claims involving their actions as senior officers of a Delaware entity going forward.
P3 Health Group Holdings, LLC (“P3”) was a population health management company that provided long-term care for patient-members. P3 had operations in Nevada, Arizona, Florida, and Oregon, and was organized under Delaware law.
One of P3’s officers was Jessica Puathasnanon. Ms. Puathasnanon served as P3’s general counsel and chief legal officer. In that role, she worked with P3’s outside counsel to advise the company, its officers, and the managers on the board.
In August 2020, P3 began exploring ways to take the company public. One of P3’s members, Hudson Vegas Investment SPV, LLC (“Hudson”), did not like the economics of the proposed transaction and vetoed it. So P3’s officers decided to pursue an alternative transaction that would not require Hudson’s consent. According to Hudson, P3’s officers and controlling member then proceeded to jam the new go-public transaction through the board approval process without giving Hudson and the other members sufficient time to consider it.
Hudson sued various defendants in the Delaware Court of Chancery, including Ms. Puathasnanon, and attempted to enjoin the transaction. As relevant here, Hudson alleged that Ms. Puathasnanon breached her fiduciary duties to P3 and its members in her capacity as an officer of the company. Ms. Puathasnanon moved to dismiss based on lack of personal jurisdiction. Hudson countered that Ms. Puathasnanon impliedly consented to Delaware jurisdiction under the LLC Act’s consent-to-jurisdiction statute, 6 Del. C. § 18-109(a). The statute provides that a “manager . . . may be served with process” through the LLC’s registered agent “in all civil actions or proceedings brought in the State of Delaware involving or relating to the business of the [LLC] or a violation by the manager . . . of a duty to the [LLC] of a member of the [LLC].” The statute defines “manager” as either (1) a person formally named or designated as a manager pursuant to the LLC agreement or (2) a person who “participates materially in the management of the [LLC].” Hudson and Ms. Puathasnanon disputed whether she was considered a “manager” under the latter definition. The Delaware Court of Chancery decided she was.
Vice Chancellor Laster’s Decision
Vice Chancellor Laster first considered dictionary definitions of the words “participates materially,” and concluded that the statute’s plain language confers manager status on any individual who plays a significant role in either managing an LLC or an activity or event related to the management of an LLC. The court acknowledged that prior Delaware Court of Chancery decisions held that the title of “president” satisfied the requirements for manager status under the consent-to-jurisdiction statute. Per Vice Chancellor Laster, these precedents indicated that it was sufficient for a plaintiff to plead facts showing that a defendant held a senior role in an LLC and performed functions consistent with that role. And under that standard, Hudson met its burden to plead jurisdiction over Ms. Puathasnanon.
The court also looked to how the concept of “material participation” was used in other legal contexts. Citing the federal tax code’s 500-hours test for determining whether a taxpayer is an active participant in a trade or business, Vice Chancellor Laster analogized the tax code standard to the “participates materially” standard under the LLC Act’s consent-to-jurisdiction statute. The court found that since Ms. Puathasnanon participated in a senior management position of the LLC for more than 500 hours per year, that fact supported an inference that Ms. Puathasnanon qualified as a manager for purposes of the statute.
The court also analogized the LLC Act’s consent-to-jurisdiction provision to the equivalent provision under the DGCL. And because the DGCL’s consent-to-jurisdiction statute expressly extended to C-suite officers, including the general counsel, the court determined that equivalent or comparable officers of an LLC could also impliedly consent to Delaware jurisdiction under the LLC Act. Ms. Puathasnanon argued that the DGCL analogy was inapt because the LLC Act does not expressly mention the general counsel as being subject to jurisdiction in Delaware, while the DGCL does. But the court dismissed that distinction as “not convincing,” reasoning that the drafters of the LLC Act did not include a list of specific officer positions so as to maintain flexibility for LLCs — which are inherently flexible and primarily contractual entities — and allow them to create bespoke governance structures and officer positions that suit their individual needs.
The court thus held that Ms. Puathasnanon impliedly consented to Delaware jurisdiction for claims relating to her role as an officer of a Delaware LLC.
Absent an appeal and reversal of this decision by the Delaware Supreme Court, general counsel and senior executives of LLCs organized under Delaware law should anticipate that they will be found to have impliedly consented to jurisdiction in Delaware for any claims related to their role as an officer. If a senior executive or LLC wishes to avoid Delaware jurisdiction, they should consider using a mandatory forum-selection clause designating another venue in their relevant contracts.
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