VGS, Inc. v. Castiel - No. 17995, 2000 Del. Ch. LEXIS 122 (Del. Ch. Aug. 31, 2000)

Rule:

The purpose of permitting action by written consent without notice is to enable limited liability company (LLC) managers to take quick, efficient action in situations where a minority of managers could not block or adversely affect the course set by the majority even if they were notified of the proposed action and objected to it. The General Assembly never intended to enable two managers to deprive, clandestinely and surreptitiously, a third manager representing the majority interest in the LLC of an opportunity to protect that interest by taking an action that the third manager's member would surely have opposed if he had knowledge of it.

Facts:

A limited liability company (LLC) was composed of three member corporations and controlled by defendant manager, who owned substantial controlling interests in two of the members, and acted as the LLC's chief executive officer. The LLC, however, had three managers, the remaining two managers owning a combined minority interest in the LLC. In a clandestine strategic move, the two minority managers voted to merge the LLC into plaintiff corporation, thus relegating defendant manager to a minority interest holder. Thereafter, plaintiff sought to validate the merger. 

Issue:

Was the merger valid?

Answer:

No.

Conclusion:

The merger was rescinded, because the minority managers breached their duty of loyalty to the defendant manager in seeking to wrest control from the latter through the said merger. Had defendant manager knew of the proposed merger, he would have taken steps to protect his majority interest. Since the minority managers were aware of this, they breached their duty of loyalty to defendant manager by failing to act in good faith. The purported merger was therefore declared invalid.