Purple Rain on Non-Managing LLC Members’ Parade
Prince Rogers Nelson – better known by the mononym Prince, or for a time by a really cool symbol – was a world-famous musician, known for playing up to 27 instruments. He wrote dozens of hit songs: Purple Rain, When Doves Cry, Little Res Judicata, er, Red Corvette, the list goes on. But as discussed in McMillan v. Nelson, a recent decision from the Delaware Court of Chancery, what he did not write was a will.
Thus, upon Prince’s unfortunate and untimely passing, his estate passed through probate before ultimately being divided among six of his siblings. Those siblings’ interests were divided between two LLCs, which formed a joint venture charged with managing Prince’s estate. Two of Prince’s former business advisors were designated as managing members of the joint venture and the siblings each agreed to be passive members and not involved in the management of the estate. What could go wrong?
Apparently a lot. For the purposes of this article, what went wrong was that Prince’s sister Sharon “came to regret” her decision and began inserting herself into management decisions, including by attempting to have Prince’s former home – now run as a museum – replace its entire staff and throw lavish events. When the managing members refused these and other demands, she sought to have them replaced, and when that failed, she led an effort to amend the joint venture LLC agreement, which succeeded with a majority vote of the interests in the LLC. Litigation ensued, with the managers bringing suit to invalidate the amendment and otherwise seek relief for breach of contract.
Chancellor McCormick addressed several issues in connection with competing motions to dismiss (from defendants) and for partial summary judgment (from plaintiffs).
The Chancellor swiftly rejected a subject matter jurisdictional argument, finding that the Court clearly had subject matter jurisdiction under Delaware’s LLC Act. The Court also found that it had personal jurisdiction with respect to the first count of the complaint, which concerned the validity of the amendment to the LLC agreement, because the office of “managing member” was the res in dispute for purposes of that claim. The Court held that the defendant family members could choose whether to involve themselves in the litigation as to that office. As to the claims for breach of the LLC agreement, the Court explained that the LLC Act imposes jurisdiction over managing members of Delaware LLCs. The Court found this jurisdictional provision applied based on the fact that the family members were asserting that they were, in fact, managing members under the amended LLC agreement.
As to whether the amendment was valid, or whether it amounted to a breach of contract, the Court engaged in a detailed contractual analysis. Suffice it to say, the Court held that, even with a majority vote of LLC interests, the defendants were stuck with what they had agreed to when forming the LLC. The plaintiff managers were given responsibility for the day-to-day operation of the LLC and could only be removed for cause. The Court found the amendment to the LLC to be an improper end-run around the removal requirements. Ultimately, the Court denied the motion to dismiss and granted partial summary judgment for the plaintiff managers on the first count relating to the validity of the amendment.
Delaware law is often described as favorable to majority holders of LLC interests. This decision shows, however, that contract is still king in Delaware – even majority holders will be held to their agreed terms. Prince probably could have written a song about that.
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