Simon Says, “Freeze!”: Court of Chancery Confirms that Company Counsel Must Play Neutral When Equal Ownership Board Is Deadlocked
Recently, in Kundrun v. AMCI Group, LLC, the Delaware Court of Chancery resolved a dispute at the intersection of corporate governance and litigation control by closely examining the intended allocations of authority within a company’s LLC agreement. The Court focused on the agreement’s division of authority among the company’s (i) two equal-equity owners, who comprised the company’s two-member board vested with management authority, and (ii) an executive chairman—one of the two board members—with authority to manage the day-to-day operations of the business. Reading the agreement as a whole, the Court concluded that it did not authorize one member of a deadlocked, evenly split board to direct the actions of company counsel when the matter at issue falls outside the business’s day-to-day operations. In resolving the issue, the Court reaffirmed the long-standing principle that, when a company board is evenly deadlocked in a dispute that effectively is bilateral, company counsel must stay neutral and may not side with one board member or faction over another.
Background
Fritz R. Kundrun (“Plaintiff”) and Hans J. Mende co-own and run AMCI Group, LLC (“AMCI” or “the Company”), a Delaware-organized investment company. Kundrun and Mende each hold a 50% equity stake in AMCI and serve as members of its two-member board of directors. Pursuant to the Company’s LLC Agreement, AMCI’s board exercises authority over the business and affairs of the Company as its sole manager, and Mende serves as AMCI’s “executive chairman”—the Company’s only officer position—with “complete authority over the day-to-day operation of the business of the company,” subject to the authority of the board.
In May 2025, Kundrun commenced a summary proceeding against the Company in the Delaware Court of Chancery, seeking to inspect certain of the Company’s books and records. Mende did not support his fellow director’s attempt to exercise managerial information rights and opposed the request. Following Kundrun’s book-and-records complaint, Kundrun commenced several plenary actions against both the Company and Mende, alleging fraud and breaches of fiduciary duty in relation to the purported mismanagement and mishandling of Company assets. Mende, purportedly exercising his authority as executive chairman of AMCI to operate its day-to-day operations, then retained outside counsel for the Company to defend against Kundrun’s litigations. Kundrun objected to such retention, and moved (i) to disqualify Company counsel on the grounds that Mende did not have authority to hire them unilaterally and (ii) for the appointment of a receiver to identify neutral counsel to represent the Company in its defense against Kundrun’s books-and-records proceeding. Magistrate Mitchell issued a report denying Kundrun’s motion. Thereafter, Kundrun filed objections to the report, thus invoking de novo review of the Magistrate’s conclusions.
The Decision
Vice Chancellor Laster granted in part and denied in part Kundrun’s motion. The Court declined to disqualify Company counsel or appoint a receiver but granted the motion insofar as it sought to require Company counsel to (i) remain neutral in Kundrun’s books-and-records proceeding and (ii) not take direction from either director acting unilaterally. Instead, Mende was permitted to intervene, with his own counsel, to defend the action, with Company counsel limited to a neutral, institutional role.
The Court began its analysis by emphasizing that this was not a typical books-and-records dispute involving a minority stockholder or a dissenting director on a multi-member board. Rather, the dispute arose in the context of a two-member board with equal ownership and governance power, rendering the controversy effectively bilateral. The Court noted that Delaware law has long recognized that companies with such ownership and governance characteristics can present unique governance challenges, and that applying doctrines developed for larger, multi-owner entities risks producing distorted outcomes. Indeed, the Court acknowledged the dearth of “meaningful precedent involving an LLC books and records action where the members each own 50 percent of the entity and are each members of a two-person board.”
Turning to AMCI’s LLC Agreement, the Court of Chancery rejected the Company’s argument that Mende, as executive chairman, possessed unilateral authority to retain Company counsel for this dispute. Although the LLC Agreement delegated “unqualified and complete authority and responsibility” to Mende “over the day-to-day operation of the business” (which the Court referred to as the agreement’s “scope provision”), the Court concluded such delegation did not extend to defending a books-and-records action brought by one of two directors who also owned half of the Company, despite the fact that, immediately following such language, AMCI’s LLC Agreement stated that Mende had been “delegated the full powers and authority of the board with respect to the company” (referred to by the Court as the “powers provision”). The Court construed the “scope” and “powers” provisions as following a familiar corporate law structure: a grant of authority limited by scope, followed by a description of the powers available within that scope. Per the Court’s reading, Mende could exercise board-level powers only when acting within the confines of ordinary-course, day-to-day operations; if construed more broadly, the “powers” provision would usurp the “scope” provision and render it a nullity. Accordingly, the Court concluded that a director-level information dispute among a deadlocked equal-ownership board fell outside the day-to-day operations of the business that the Company’s executive chairman had authority to manage.
Although the Court of Chancery concluded that Mende lacked authority to appoint Company counsel for this litigation, it declined to order disqualification. Relying on Engstrum v. Paul Engstrom Associates, Inc., 124 A.2d 722 (Del. Ch. 1956) and similar precedent, the Court explained that when an entity is effectively paralyzed by a governance deadlock, company counsel may continue to represent the company so long as counsel remains neutral and does not align with one side of the dispute. In that posture, company counsel’s role is limited to identifying responsive information, implementing court directives, and carrying out joint instructions or final orders. Advocacy for or against one director’s interests, however, must be undertaken by personal counsel, rather than counsel purporting to speak for the company.
Finally, the Court of Chancery rejected Kundrun’s request for a limited receiver, concluding that neutrality obligations imposed on Company counsel adequately addressed the governance impasse without inviting unnecessary judicial intrusion into the Company’s affairs. The Court emphasized that receivership is an extraordinary remedy and was unwarranted where a narrower, functional solution could preserve the Company’s institutional interests while respecting the parties’ contractual framework.
Key Takeaways
Kundrun offers several important lessons that companies, transaction planners, and corporate litigation practitioners ought to remember when crafting governance structures and anticipating future disputes. First, when a company’s operative agreement or charter establishes a board with an even number of directors (even if equity ownership stakes vary), corporate governance disputes like those in Kundrun become more likely. Second, when a company board is deadlocked in a bilateral dispute, the company cannot act and thus company counsel may not act at the direction of one faction over another. Rather, as Kundrun acknowledges, company counsel must remain neutral and observe a limited role to implement court directives, identify information, and facilitate compliance—not advocacy. And third, Kundrun underscores the practical importance of careful drafting: parties who fail to eliminate ambiguity in their governance agreements, particularly with respect to delegations of authority, deadlock resolution, or control over litigation decisions, risk having those agreements interpreted in unintended ways when cooperation breaks down.
Law clerk Katie Lutz also contributed to this blog post.
This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.
