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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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When Is a Manager Not Really a Manager?
Under the Delaware Limited Liability Company Act, a non-Delaware resident may be deemed to have consented to being sued in Delaware if she is a “manager” of the LLC. But who, exactly, is such a manager? That question is answered by the recent decision in In re Dissolution of Arctic Ease, C.A. No. 8932-VCMR (Del. Ch. Dec. 9, 2016). As that decision points out, all who manage are not “managers” under the Delaware LLC Act.
The analysis starts with Section 18-109(a) of the Delaware LLC Act that provides for implied consent to Delaware jurisdiction. A person designated as a manager in an LLC agreement is deemed to have consented to the jurisdiction of a Delaware court. But, the section goes on to also hold that someone who "participates materially in the management" of a Delaware LLC is also a manager who is deemed to consent to Delaware jurisdiction. Does that mean even the manager of a Delaware LLC's employee cafeteria consents to Delaware jurisdiction? Clearly some line needs to be drawn.
To begin with, it is helpful to remember that the Delaware LLC Act implied consent statute was designed to follow the implied consent statute in the Delaware General Corporation Law. That corporate statute applies to the members of the corporation's board of directors. By law, those directors manage the corporation's business under Section 141 of the DGCL. Hence, it is logical to interpret the implied consent statute for Delaware LLCs as also limited to the same type of managers referred to in the Delaware corporate law—the ultimate authority over the entity. Under that view, intermediaries below the actual listed managers in the LLC agreement would not be managers who consented to jurisdiction.
While that analogy is helpful, it does not necessarily answer the question of who are managers for jurisdictional purposes under 18-109(a)(ii). That is largely because how a Delaware LLC business is controlled is not clearly dictated by the terms of the LLC Act. Instead, the specific LLC agreement between the members will dictate who controls it. For example, there are Delaware LLCs that have specific functions controlled by persons not usually thought of as managers, such as the power to borrow money that is reserved to members. If no one else can control that decision, are those persons then managers of the LLC?
Arctic Ease addressed that question. The test is whether the initial decisions of the alleged managers are subject to the control of someone else. If those decisions are subject to others' review, then those initial decision-makers are not managers under the LLC Act. But even that test does not fully answer the question. Suppose, for example, that certain actions of the LLC required member approval. Are the members then deemed to be also managers for purposes of the implied consent statute? That seems unlikely.
After all, stockholders in a Delaware corporation retain the right to make certain decisions for that entity. Stockholders must consent, for example, to the sale of substantially all the assets of the entity. Yet notwithstanding that ultimate authority, no one would consider stockholders subject to the corporate law's director consent statute. However, that result follows from the corporate law's provisions for vesting management generally in a group labeled "directors." What if a corporation had no directors, but acted by stockholder votes? Who then is subject to the implied consent statute?
The answer to this question is not as simple as it may seem. After all, the director consent statute applies not just to those who serve as "directors," but also to a "member of the governing body" of a Delaware corporation. Nonetheless, no Delaware decision has yet held that stockholders may be members just because they have a vote on an issue.
What Arctic Ease ultimately teaches us is that form does matter. Arctic Ease involved an LLC whose LLC agreement named a single person, Carol Forden, as its "managing member." The plaintiffs alleged that Forden was basically a figurehead with the real decisions being made by others they contended were the real managers. That argument was rejected, however. Arctic Ease instead held that the manager title Forden had coupled with the power conferred upon her by the terms of the LLC agreement made her the sole manager, regardless of who really managed the entity.
This result makes sense. If a nonresident is to be subject to a state's jurisdiction by an implied consent statute, that should be clear. The investors in a Delaware LLC have a choice on who they want held responsible in the Delaware courts for management of their entity. If they choose a mere figurehead, that is their choice and they may bear the consequences.