On August 30, 2024, the Delaware Court of Chancery in Campus Eye Management Holdings, LLC v. E. Bruce DiDonato, OD, C.A. 2024-0121-LWW (Del. Ch. August 30, 2024), affirmed an amendment to a limited liability company agreement (an "LLC Agreement") that was adopted by merger, notwithstanding a different vote was required to adopt the amendment in accordance with the amendment provision of the LLC Agreement. The Court's ruling highlights the importance to minority members of expressly providing that an LLC Agreement's amendment provision applies to amendments by merger.
Background
In December 2021, Dr. E. Bruce DiDonato, OD ("DiDonato") sold approximately 65% of Campus Eye Management Holdings, LLC ("MSO Parent") to an affiliate of The Beekman Group ("Beekman"), a private equity firm. DiDonato and Beekman negotiated an LLC Agreement for MSO Parent as part of the sale, which LLC Agreement provided DiDonato with the right to appoint only a minority of the managers of MSO Parent. At the time of the sale, MSO Parent was the sole member of a management services organization called Campus Eye Management, LLC ("MSO"), and DiDonato was the named "initial Manager" of MSO in its LLC Agreement (the "MSO LLC Agreement").
A few months after the closing of the sale transaction, the managers of MSO Parent appointed by Beekman (the "Beekman Managers") purported to cause MSO Parent to unilaterally amend the MSO LLC Agreement to remove DiDonato as the manager of MSO. In an earlier decision of the Court (E. Bruce DiDonato, OD v. Campus Eye Management, LLC, C.A. No. 2023-0671-LWW (Del. Ch. Jan. 31, 2024)) (the "Prior Decision"), the Court analyzed the amendment provision of the MSO LLC Agreement. The amendment provision stated: "The [MSO LLC] Agreement may be amended, modified, waived or supplemented by the Manager with the written consent of all Members." The Court determined that the MSO LLC Agreement could not be amended in accordance with its amendment provision without DiDonato's involvement, as manager, and invalidated an amendment unilaterally adopted by MSO Parent, as member, purporting to remove DiDonato as manager.
On the day the Court issued the Prior Decision, the Beekman Managers caused MSO Parent to form a new Delaware limited liability company that was wholly owned by MSO Parent ("Newco") and caused Newco to merge with MSO, with MSO surviving the merger (the "Merger"). As part of the Merger, the MSO LLC Agreement was amended to provide that MSO was managed by its sole member, MSO Parent (the "Merger Amendment"), which effectively removed DiDonato as manager of MSO without his consent to such amendment. In so doing, MSO Parent utilized Section 18-209(f) of the Delaware Limited Liability Company Act (the "LLC Act").
Section 18-209(f) provides that a merger agreement approved in accordance with the LLC Act may amend an LLC Agreement of a surviving company notwithstanding the amendment provision of the surviving company's LLC Agreement, except for a provision that by its terms applies to an amendment in connection with a merger.
DiDonato advanced an argument that the implied covenant of good faith and fair dealing should "block" the merger absent his consent. The Court, however, dismissed DiDonato's assertion, given that the application of the implied covenant of good faith and fair dealing is limited to filling contractual gaps that neither party could have anticipated. Despite DiDonato's claim that it was unforeseeable when the parties signed the original MSO LLC Agreement that MSO Parent might use a merger to effect an amendment, the Court noted, Section 18-209(f) of the LLC Act contemplates this very situation.
Key Takeaways
- Drafters of limited liability company agreements that want a restriction to apply to mergers should add the phrase, "whether by merger, consolidation or otherwise" to the relevant restriction.
- The ability to effect an amendment to a governing agreement by merger is also baked into the Delaware Revised Uniform Limited Partnership Act, 6 Del. C. 17-101, et seq., in Section 17-211(g).
- The Court's opinion in Campus Eye Management Holdings is a reminder that the default provisions of the LLC Act apply in the absence of a term of an LLC Agreement and of the importance of understanding the default rules when drafting LLC Agreements.
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