In Kuramo Capital Management, LLC v. Seruma, C.A. No. 2021-0323-KSJM (Del. Ch. Apr. 30, 2024) (Kuramo), the Delaware Court of Chancery held that an investment manager breached his fiduciary duties to a limited liability company in a post-trial opinion with a dizzyingly complex set of facts.
The core issue before the Court was determining who were the beneficial owners of Plantations et Huileries de Congo SA (PHC), a Congolese palm oil production company based in the Democratic Republic of the Congo (DRC). In 2009, Feronia Inc., a Canadian holding company, acquired 76.16 percent of PHC’s shares (the PHC shares). The DRC has since owned the remaining shares of PHC.
In December 2015, PHC entered into a term facility agreement with certain lenders for up to $49 million. In connection with the term facility agreement, Feronia pledged all of its PHC shares as collateral. In 2017, CDC Group PLC, an affiliate of the British government, acquired a majority of Feronia’s stock. That same year, Kuramo Capital Management, LLC (Kuramo), a manager of private equity funds, indirectly invested in PHC through Feronia.
In 2017, Wale Adeosun (Adeosun), the chief executive officer of Kuramo, became reacquainted with an old connection, Larry Seruma (Seruma), the chief investment officer of Nile Capital Management, LLC (Nile). In 2017, Kuramo committed to allocate at least $25 million to Nile, and Seruma agreed to manage Kuramo’s allocated funds. This was effected by amending Nile’s LLC agreement (the amended Nile agreement) and changing the name to Kuramo Nile Capital Management, LLC.
By 2018, Feronia was nearly insolvent. The near insolvency prompted a series of capital infusions from investors. This ultimately led to a 2020 restructuring of Feronia whereby Seruma ultimately became Feronia’s chief executive officer.
In 2021, Seruma sought to be on the board of PHC. Adeosun informed Seruma that he would not support Seruma as PHC’s director general or in a role as permanent chief executive officer. Seruma did not succeed in his election to the PHC board. Instead, he engaged in self-help and, among other actions, interfered with the restructuring such that the lenders later refused to deal with him. After his failed attempt to gain control of PHC’s board, Kuramo sent Seruma notice of termination of the amended Nile agreement and demanded its assets be redeemed immediately. Seruma refused, arguing a five-year lock-up provision barred Kuramo from redeeming its assets.
After an investigation, Kuramo discovered that it went from beneficially owning 97 percent of the PHC shares to an unknown minority percentage. Furthermore, Seruma claimed to be the majority owner, though he had previously only owned a 1 percent stake. Seruma achieved this by making a series of transactions unknown to Kuramo (the “challenged transactions”). After Kuramo discovered the challenged transactions, it and Seruma had a falling out. The lenders then offered Kuramo the opportunity to helm the acquisition of PHC debt, which Kuramo accepted.
Kuramo filed suit in 2021, claiming that Seruma breached his fiduciary duties to Kuramo, among other claims, by misappropriating Kuramo’s beneficial interest in PHC through the challenged transactions. Kuramo argued default fiduciary duties applied since they were not disclaimed in the amended Nile agreement. The Chancery Court agreed and reiterated the well-worn principle that under Delaware law, “managers or managing members of LLCs owe the full panoply of fiduciary obligations unless the LLC agreement eliminates or modifies them” in a way that is “clear and unambiguous.” Having determined that Seruma owed Kuramo fiduciary duties, the Court then determined whether there was a breach.
Kuramo argued that the challenged transactions should be reviewed under the court’s entire fairness standard, the strictest form of review, since Seruma controlled the challenged transactions and “served to convey to Seruma and his wife a majority of beneficial ownership interest in the principal investment that he was managing.” Seruma denied there was a conflict and argued the business judgment rule should apply. The Court determined that the challenged transactions should be reviewed under the entire fairness standard, which includes two basic aspects: fair dealing and fair price. Applying these factors, the Court determined that the challenged transactions were not entirely fair and that Seruma breached his fiduciary duties to Kuramo.
While the Court concluded that the entire fairness review applied given Seruma owed default fiduciary duties, it acknowledged in a footnote that the result would nevertheless be the same under a contractual standard. The amended Nile agreement provided that the manager was required to resolve conflicts “in a manner that is, or provides terms that are, fair and reasonable to the Company or any Member.” The Court observed that this phrase was similar to language that the Court of Chancery had previously interpreted to invoke a standard similar to entire fairness, and it quoted an earlier Court of Chancery decision for the proposition that the “fair and reasonable standard is something, if not equivalent to, entire fairness review.”
The Court also determined that Seruma was not entitled to indemnification under an affiliate LLC agreement, which required an indemnified party to act in “good faith.” Because Seruma breached his fiduciary duties, the Court determined he did not act in good faith and was not entitled to indemnification. Kuramo also had alleged fraud, but that claim was dismissed since it was largely duplicative of the breach of fiduciary duty claim.
While the facts of the Kuramo case are long, winding, and confusing, the case does provide a clear recitation of the standards that apply to a limited liability company manager when that company has not clearly and unambiguously modified or eliminated fiduciary duties in its operating agreement.