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March 1, 2013Robert Arthur

Limited Liability Company Law – Whether a Manager of a Manager-Managed Limited Liability Company Breached Fiduciary Duties Under Delaware Law to the Limited Liability Company and Its Members

Gatz Props., LLC v. Auriga Capital Corp., 59 A.3d 1206 (Del. 2012)

Dealing with Drafting Deadlocks

Two of your law school classmates decide to form a company, and it sounds great. Bill and Paul have the same business idea – making custom pet bandanas and selling them at the farmers market every Saturday. They both put the same amount of money into the business, and launched their little pet accessory business as an LLC. You hear bits and pieces through the school newsletter, but it seems they are doing really well selling at the Redmond farmer’s market. Next thing you know, Bill wants to start selling at the Seattle Sunday farmers market, just a little way away. However, you hear that Paul doesn’t want to drive that far and has blocked Bill’s decision. It is a 50/50 company, and Bill and Paul agreed to make decisions about the business together even though they never wrote out a formal agreement. Without Paul’s consent, the business can’t expand to Seattle, and stylish pets in the urban oasis may need to go without the latest in Kraken accessories.For Bill and Paul, foregoing an LLC Operating Agreement sounded like a good idea at formation – they couldn’t imagine ever disagreeing about how to run the business! - but now that Paul vetoed Bill’s business decision, bandanas have piled up because Bill can’t sell at the Sunday market. Bill could make a lot more money from selling at the other market, and the workers he hired to make the extra bandanas and collars (he expanded production to collars without Paul’s consent) need to be paid. This is a problem.It's a good thing you also went to law school with Bill and Paul, and even better that you did pretty well in your Business Entities class and went to work in Delaware after graduation.