Limited liability company agreements often include procedures for member voting on significant company actions. But sometimes it is convenient to instead ask the members to sign a written consent document and thus avoid the need for an in-person meeting. The Delaware Court of Chancery last month had to decide whether an LLC agreement that allowed member voting, but said almost nothing about members taking action by written consent, precluded the use of member written consents. Paul v. Delaware Coastal Anesthesia, LLC, No. 7084-VCG, 2012 WL 1934469 (Del. Ch. May 29, 2012).
Background. Dr. Leena Paul was one of four 25% members of the LLC. The LLC’s operating agreement allowed a member of the LLC to be terminated without cause on 90 days’ notice by “the Company acting by vote” of members holding 75% of the interests in the LLC. The three members other than Dr. Paul agreed by written consent to terminate Dr. Paul’s membership in the LLC and gave her written notice of her termination.
Dr. Paul sued the LLC and the three members to set aside her termination, contending that the LLC’s operating agreement did not allow the LLC members to take action by written consent. Paul, at *1. The three members then filed a motion to dismiss the complaint.
Analysis. Dr. Paul’s complaint pointed to Section 7.8 of the operating agreement, which required that notice of any member meeting must state the place, date, and time of the meeting. It also stated: “At a meeting of Members at which a quorum is present, the affirmative vote of Members holding a majority of the Membership Shares and entitled to vote on the matter shall be the act of the Members, unless a greater number is required by the Act.” Id. at *2. Dr. Paul contended that the members’ consent was void because no membership meeting was held and proper notice of the action was not given to members.
Dr. Paul also contended that as an LLC member she had a fundamental right to vote her interests in the LLC. But the court disposed of that argument in a footnote by pointing out that Section 18-302 of the Delaware LLC Act allows LLC members to take action by written consent rather than voting at a meeting, unless otherwise provided by the LLC agreement. Id. at *2 n.10.
The other members asserted that their member action by written consent was valid under Section 18-302 of the Delaware LLC Act:
Unless otherwise provided in a limited liability company agreement, on any matter that is to be voted on, consented to or approved by members, the members may take such action without a meeting, without prior notice and without a vote if consented to, in writing or by electronic transmission, by members having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all members entitled to vote thereon were present and voted.
This section allows LLC members to take action by written consent, without a meeting, “unless otherwise provided in a limited liability company agreement.” The question for the court, therefore, was whether the operating agreement “otherwise provided,” i.e., preempted the statute’s authorization of written consents.
The court first noted that LLCs are contractual in nature, that the members have wide latitude to craft their rights and obligations, and that the LLC Act exists as a “gap filler” to supply terms not covered in the agreement. The court then turned to the language of the operating agreement.
The LLC agreement provided procedures for meetings of the members and defined the requisite vote to take action, but did not expressly bar the use of member consents. Further, the agreement’s sections on record dates and proxies allowed members to “express consent to Company action in writing without a meeting.” Id. at *2. The court concluded that, reading the operating agreement as a whole, it did not “‘otherwise provide,’ so as to preempt, actions by written consent to terminate a member,” and dismissed the complaint. Id. at *3.
Comment. This is a short and straightforward opinion, but I think it noteworthy for two reasons. One is that this issue, i.e., using written consents in lieu of member voting in person at a meeting, comes up frequently. On multiple occasions clients involved in an LLC have asked me, “Do we need to have a meeting or can we just sign a written consent?” The question is asked because scheduling or other issues may make a written consent convenient, or the written consent may be important to avoid delays.
The other point is for lawyers who draft LLC agreements. If an LLC agreement is intended to allow members the option either to vote or to take action by written consent, both should be explicitly authorized. If only one of these two approval methods is authorized, it leaves an inference that the lack of explicit authorization is intended to bar use of the other method.