On August 30, 2024, the Delaware Court of Chancery issued an opinion in Campus Eye Management Holdings, LLC v. E. Bruce DiDonato, OD, et al., upholding an amendment to a limited liability company agreement (LLC agreement) adopted through a merger, despite recently finding that an attempt to make that same amendment was invalid under the LLC agreement. The court held that the LLC agreement did not contain an explicit provision forbidding an amendment through a merger; thus, the Delaware Limited Liability Company Act, 6 Del. C. sections 18–101, et seq (the LLC Act), applies the default rule. Because the LLC Act permitted the amendment via the merger, the court held that the amendment was valid and enforceable.
The issue stemmed from Dr. E. Bruce DiDonato’s (DiDonato) December 2021 sale of a 65 percent majority stake in his optometry practice to The Beekman Group (Beekman), a private equity firm. As part of the transaction, DiDonato restructured his practice into a management services operation, Campus Eye Management, LLC (MSO), and its parent company, Campus Eye Management Holdings, LLC (MSO Parent). Two LLC agreements were formed: one for the MSO (Original MSO LLC Agreement), which named DiDonato as the initial manager, and one for the MSO Parent (MSO Parent LLC Agreement), which provided for a three-member board composed of two Beekman appointees and one DiDonato appointee. DiDonato appointed himself.
A few months after closing the transaction, the two MSO Parent managers appointed by Beekman purported to amend the Original MSO LLC Agreement to remove DiDonato as the manager of MSO. DiDonato filed suit in the Court of Chancery, seeking to have the amendment invalidated. The court determined that the MSO Parent lacked the contractual right to amend the Original MSO LLC Agreement without DiDonato’s involvement and so held the amendment invalid. Accordingly, DiDonato remained manager of MSO at that point.
The two Beekman-appointed MSO Parent managers, however, were not to be deterred. On the same day that the court invalidated the amendment to the MSO LLC Agreement for the lack of DiDonato’s involvement in the amendment process, they executed two written consents. One of the consents formed a second wholly owned subsidiary, Campus MSO Newco, LLC (Newco), and the other caused Newco to be merged into MSO. MSO survived the merger and adopted a new amended LLC agreement (Amended MSO LLC Agreement), which provided that the MSO would be managed by its members (which was only MSO Parent)—not a manager. The merger effectively removed DiDonato as manager of MSO without his consent.
MSO Parent then filed an action in the Court of Chancery against DiDonato seeking, inter alia, a declaratory judgment validating the merger and the Amended MSO LLC Agreement and a finding that DiDonato was no longer manager of MSO. After DiDonato answered and asserted counterclaims, MSO Parent moved for partial judgment on the pleadings on the declaratory judgment claims, claiming that it complied with all the relevant agreements and the LLC Act.
The court ultimately found in favor of MSO Parent. It considered three primary issues in doing so: the validity of the written consents, the validity of the merger, and the validity of the Amended MSO LLC Agreement through the merger.
The court first found that the written consents executed by the Beekman-appointed MSO Parent managers were valid. The court noted that Section 18-404(d) provides that “[u]nless otherwise provided in a limited liability company agreement,” written consent by managers may be done by a majority, “without a meeting,” and “without prior notice.” The court noted that Section 6.4 of the MSO Parent LLC Agreement authorizes the MSO Parent Board to act by majority written consent. However, the MSO Parent LLC Agreement lacked any provision requiring advance notice of written consents approved under Section 6.4, and there is no default requirement of notice in the LLC Act. Accordingly, the court determined that the Beekman-appointed MSO Parent managers were permitted to act by written consent without providing any notice to DiDonato. Thus, the written consents were valid.
The court turned next to the merger. Again, the court first noted the language of the LLC Act. It pointed out that under Section 18-209(b), a majority of an LLC’s members can approve a merger unless “otherwise provided” in an LLC agreement. The court noted that the Original MSO LLC Agreement was operative at the time of the merger and was silent on whether a merger can be brought about by a majority of the members, as was the Amended MSO LLC Agreement. Accordingly, where LLC agreements are silent, the LLC Act steps in to fill the gap with a default rule. Because Section 18-209(b) expressly authorizes “members who own more than 50 percent” of the membership interests to approve a merger, with MSO Parent being the only member of the MSO and the only member of Newco, it had statutory authority to approve the merger.
Lastly, the court addressed the adoption of the Amended MSO LLC Agreement. Once more, the court turned to the LLC Act, explaining that it permits members of an LLC to amend the entity’s LLC agreement in connection with a merger, notwithstanding any amendment provision in the agreement, unless the provision expressly applies to an amendment in connection with a merger. Noting that the Original MSO LLC Agreement contained no provision addressing amendments in connection with a merger, it held that the Amended MSO LLC Agreement was valid under Section 18-209(f).
This opinion is a reminder that contracts should be carefully drafted, particularly in the LLC context, because regardless of whether a specific course of action is foreclosed by the terms of a contract, there may be other valid methods to accomplish the same result. Contract disputes in Delaware typically turn on the plain language of the contract at issue, but when the contracts are in the LLC context, there is also an interplay between the contract in question and the LLC Act, as the LLC Act works to fill in any gaps left in the contract’s provisions. This opinion therefore indicates how important it is to address all concepts considered by the LLC Act with explicit language that reflects the parties’ agreed-upon intentions to ensure that no gaps are left to be filled by the default terms of the LLC Act.