A contract that limits a corporate director’s vote is generally invalid, but not so for LLC managers. The guiding principle for LLCs is freedom of contract, unlike corporations, but that principle can clash with the principles undergirding an LLC manager’s fiduciary duties. For example, what’s the result if an LLC’s operating agreement requires that one of the LLC’s managers vote as directed by a designated member? Does that manager have any fiduciary duties? The Delaware Court of Chancery recently held that such a manager was not without fiduciary duties, even though he had no power to vote. Ross Holding & Mgmt. Co. v. Advance Realty Group, LLC, No. C.A. 4113-VCN, 2013 WL 764688 (Del. Ch. Feb. 28, 2013).
The plaintiffs owned units in Advance Realty Group, LLC, a Delaware LLC. Several of the plaintiffs were individuals who were executives of the LLC until their termination in 2007, and the other plaintiffs were entities owned by the individual plaintiffs. The plaintiffs raised a number of claims after their termination, but the most noteworthy was their contention that defendant Ronald Rayevich, a manager of the LLC, had breached his fiduciary duties to the LLC.
Rayevich was a member of the LLC’s managing board, which had the duty to manage the business and affairs of the LLC. He had no discretion in how to vote as a member, however, because he was required by the LLC’s Operating Agreement to follow the voting instructions of one of the LLC’s members.
The defendants moved for partial summary judgment on several of the plaintiffs’ claims, including the claim against Rayevich.
The Claim. The plaintiffs’ claim against Rayevich centered on his involvement in the managing board’s approval in 2008 of the LLC’s Conversion and Exchange Agreement (Agreement), which the plaintiffs contended negatively affected their LLC interests. The plaintiffs argued that although Rayevich had no choice in voting for the Agreement, he nonetheless violated his fiduciary duties because he failed (1) to evaluate whether the terms of the Agreement were in the best interests of the members, (2) to voice his opposition in light of the conflicts of interests involving his fellow board members, or (3) to take any steps to prevent the self-dealing of the insider defendants. Id. at *3.
Rayevich contended that he was entitled to summary judgment because (a) the plaintiffs had not overcome the presumption that he acted in good faith, and (b) even if he did breach his fiduciary duties, he was not acting willfully or in bad faith and therefore was exculpated from liability under the provisions of the LLC agreement.
The court pointed out that Rayevich is presumed to have acted on an informed basis in good faith, but said that he could not avoid liability simply by pointing out that he had no discretion to vote as a board member. Even though he could not vote, he had an obligation to consider the interests of the members and to take action to protect their interests. “[F]iduciary duties extend beyond voting. They may involve, for example, studying the proposed action, determining the appropriateness of the proposed action, setting forth a dissenting view to fellow board members, and, in the proper circumstances, informing unit holders about the potential adverse affects of a proposed action.” Id.
Procedural Posture. The court’s opinion is a ruling on the defendants’ motion for summary judgment. To prevail on a summary judgment motion the moving party must demonstrate that there is no material question of fact, and that on the undisputed facts it is entitled to judgment as a matter of law. Id. at *1. The party resisting a summary judgment motion does so either by showing that the moving party is not entitled to judgment under the law, or that the relevant facts are disputed. The parties establish the facts through affidavits submitted to the court, and there is no live testimony. A summary judgment motion can be an efficient way to resolve issues before trial.
The plaintiffs’ claim against Rayevich failed because they did not establish the facts necessary to resist his summary judgment motion. “Specific facts, as contrasted with mere allegations, are needed to resist a motion for summary judgment.” Id. at *3. The plaintiffs did not put forth facts to show Rayevich’s lack of good faith, that he was not independent and disinterested, that he was not informed about or had not considered the Agreement, or that his conduct was willful or in bad faith. Rayevich was therefore presumed to have acted in good faith and was entitled to exculpation under the LLC’s Operating Agreement, and the court ordered summary judgment in his favor on the plaintiffs’ claims.
Comment. Ross Holding points out the need for LLC managers to be proactive, and that fiduciary duties extend beyond mere voting. In the context of a multi-manager board, a manager who either has no vote or who is outvoted must be informed and give independent consideration to the proposal, and must consider expressing a dissenting view when appropriate and possibly informing the members about the potential adverse impact of a proposed action.