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Paul v. Delaware Coastal Anesthesia, LLC, et. al, C.A. No. 7084-VCG (Del. Ch. May 29, 2012) (Glasscock, V.C.)

May 29, 2012

In this case, the Court, analyzing the provisions of the operating agreement (the “Operating Agreement”) of Delaware Coastal Anesthesia, LLC (the “Company”) and the statutory default provision of Section 18-302 of the Delaware Limited Liability Company Act (the “Act”), granted the defendants’ motion to dismiss the plaintiff’s breach of contract claim, finding that the Operating Agreement did not preclude the ability of the defendant members to act by written consent as provided in Section 18-302 of the Act. 

Plaintiff was a member in the Company, holding 25% of the shares in the Company.  The three individual defendants, holding the remaining 75% of the shares, agreed by written consent to terminate the plaintiff’s membership in the Company and sent her written notice of the same.  The plaintiff argued that the Company’s Operating Agreement did not permit the members to act by written consent and, therefore, the defendants’ purported termination of plaintiff was ineffective.  The plaintiff was relying on two provisions in the Operating Agreement which provided that (i) notice of meetings must be given to each member and (ii) at a meeting of the members at which a quorum is present, the members holding a majority of the shares that are entitled to vote on the matter shall be an act of the members, unless a greater number is required by the Act.  Because a meeting was not held, the plaintiff argued that the vote to terminate her membership is void.  The defendants argued that action by written consent is permitted under Section 18-302 of the Act and that, because members holding 75% of the shares in the Company (which is the amount required to terminate a member under the Operating Agreement) acted by written consent, plaintiff was properly terminated.

The Court noted that Section 18-302 of the Act is a default provision, which can be preempted by the Operating Agreement if the Operating Agreement “otherwise provides” for the manner in which votes are to be taken.  In ruling on the motion to dismiss, the Court examined the Operating Agreement to determine whether or not it “otherwise provided” for the means by which votes were to be taken, such that Section 18-302 of the Act was inapplicable.  While the plaintiff pointed to provisions in the Operating Agreement that addressed the procedure by which meetings of the members may be held, the Court questioned whether that meant that votes must be taken only at such meetings.  The Court found that it did not and specifically mentioned that the defendants had pointed to other provisions in the Operating Agreement that permitted actions by written consent without a meeting and noted that the Operating Agreement does not expressly prohibit votes by written consent.  In reviewing the applicable provisions of the Operating Agreement relating to termination of members, the Court found that such termination provision did not dictate the manner in which members may be terminated, other than requiring a vote of 75% of the membership interest.  Taking the Operating Agreement as a whole, the Court found that the defendant members could act by written consent and ruled that the vote to terminate the plaintiff was valid under the Operating Agreement.  Drawing all inferences in favor of the plaintiff, as the Court must do on a motion to dismiss, the Court found that there was no conceivable set of facts under which the plaintiff could recover and granted the motion to dismiss.

The full opinion is available here