Business Associations, Pages 973–978

VGS, Inc. v. Castiel

Court of Chancery of Delaware, 2000

Facts:

Castiel formed Virtual Geosatellite LLC to pursue an FCC license to build a satellite system. Its sole member was Virtual Geosatellite Holdings, Inc., but Ellipso, controlled by Castiel, and Sahagen Satellite, controlled by Sahagen, soon joined as members. Castiel's companies owned 75% equity in the LLC and Sahagen Satellite owned 25%. Castiel had the power to control two of the board seats and accordingly appointed himself and Quinn to the board of managers, while Sahagen appointed himself.

The two partners soon had a falling out however, and Sahagen convinced Quinn to consent with him to a merge the LLC into VGS, Inc. without telling Castiel. This corporation included Sahagen and Quinn on its board of directors, but not Castiel. Castiel's corporations received a combined 37.5% interest in VGS, while Sahagen ended up owning 62.5% of it.

Issues:

  • Did the merger require a majority or a unanimous vote?

  • Did Sahagen and Quinn breach their duty of loyalty to Castiel by not disclosing the merger?

Reasoning:

  • The LLC Agreement allowed members to appoint representatives based on its percentage interest. The number would not matter if it was required to be unanimous. It also refers to the minority's veto power. It furthermore allows members with two-thirds percentage interest to dissolve the LLC, which would be unlikely to be allowed when the managers could not do so without a unanimous vote. Finally, putting every issue that failed to pass unanimously among the managers to a vote with the members would make Sahagen's and Quinn's positions superfluous, as Castiel would have the majority vote on any issue alone. This would not be intended unless clearly spelled out in the agreement. The board of managers had the authority to act by majority vote.

  • The LLC act, read literally, would not require Sahagen and Quinn to give Castiel notice, and the LLC Agreement does not modify this. However, this situation was not intended by the legislature in drafting the statute. It would have not enabled two managers to clandestinely deprive a third representing a majority interest of the ability to take action. This intent then limits the permitted action to occur without notice by a constant or fixed majority. When Sahagen and Quinn acted in secret to avoid Quinn from being removed from the board, they they failed to discharge their duty of loyalty to him in good faith. They had to give him notice first. This issue should have been decided by all three managers with their interests fully represented.

Holding:

  • The board of managers had the authority to act by majority vote.

  • Sahagen and Quinn failed to discharge their duty of loyalty to Castiel in good faith.

Judgment:

Merger invalidated and rescinded.

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