Chancery Addresses Authority of Executives to Remove Managers of Affiliate Entities
Roccia v. Mugica, C.A. No. 2020-0641-MTZ (Del. Ch. Dec. 29, 2020)
The inherent authority of officers of Delaware companies generally extends to powers in the usual and ordinary course of the relevant company’s business. Officers otherwise gain authority through either express grants from the company’s governing body or implied grants based on past practice. In the LLC context, sources of an officer’s actual authority may include the LLC’s operating agreement and any employment agreement. In this decision, the Court of Chancery held that the plain language of a Delaware LLC’s operating agreement and the relevant employment agreement did not grant the President and CEO of a parent-entity the authority to act on the parent’s behalf to remove a member of the board of managers of a sub-entity.
The three LLCs involved in this dispute were organized in a chain with the managing member LLC owning membership interests in the parent LLC, which in turn owned membership interests in the sub LLC. The parent and sub entities were governed by corporate-like management structures with a CEO and board of managers. The parent entity’s operating agreement and the employment agreement for its President and CEO contained similar language that subjected the President and CEO’s authority to the ultimate control of the parent entity’s board of managers, while granting the President and CEO “paramount and full responsibility for the general supervision, direction and control of the business and operations of the [parent entity] … and … the general powers of management usually or typically vested in the office of president of a corporation ….” Citing these grants of authority, the President and CEO purported to remove a member of the sub-entity’s board of managers. The board member challenged his removal in the Court of Chancery.
On the parties’ cross-motions for summary judgment, the Court held that the President and CEO lacked the authority to achieve the purported removal. As the Court observed, the parent entity’s operating agreement granted plenary authority to its board of managers, while delegating limited authority to its President and CEO, analogous to that of a corporate officer in the same position. Further, according to the Court, the President and CEO’s specific grants of authority did not encompass the parent’s removal power. While the President and CEO had the inherent power typically vested in corporate presidents, such power does not extend to corporate governance matters; rather, it concerns day-to-day matters in the ordinary course of the company’s business. And, while the President and CEO had power over the parent’s “business and operations,” that too does not extend to corporate governance matters; rather, it similarly concerns the commercial enterprise and activities of the company.