L. Londell McMillan v. Sharon Nelson
Unreported Memorandum Opinion (Del. Ch. July 5, 2024) (2024)
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Rule of Law:
Under Delaware law, an LLC agreement that explicitly vests broad management authority in managing members and restricts non-managing members to specific veto rights will be interpreted according to its plain language, thereby prohibiting non-managing members from unilaterally amending the agreement to assume management control or remove managing members outside of contractually defined procedures.
Facts:
- Prince Rogers Nelson died unexpectedly on April 21, 2016, and his six siblings inherited equal interests in his estate.
- Three siblings (Tyka, Omarr, and Alfred) sold their combined 50% interest in the estate to a music publishing company, Primary Wave Music, LLC, which later assigned its interests to Prince OAT Holdings LLC.
- The other three siblings (Sharon Nelson, Norrine Nelson, and John R. Nelson) assigned 20% of their collective interests to L. Londell McMillan and Charles Spicer, Jr. for their assistance during the probate process.
- John R. Nelson passed away, and his interests passed to the John R. Nelson Revocable Trust, with Breanna Nelson, Allen Nelson, and Johnny Nicholas Nelson Torres as co-trustees.
- Sharon Nelson, Norrine Nelson, the Trust, McMillan, and Spicer formed Prince Legacy, LLC, a Delaware limited liability company, to hold their collective 50% interest in Prince's estate assets.
- The Prince Legacy LLC Operating Agreement vested management of the company in McMillan and Spicer as 'Managing Members' and designated the other members as 'Non-Managing Members', explicitly limiting their participation in company affairs.
- Sharon Nelson later came to regret this decision and attempted to insert herself into management decisions, making demands such as replacing the entire staff of the Paisley Park Museum, which McMillan and Spicer rejected.
- Sharon Nelson, Norrine Nelson, Breanna Nelson, and Allen Nelson (Defendants) then collectively attempted to amend the LLC Agreement via written consent to remove McMillan and Spicer as Managing Members and replace them with Sharon, Norrine, and the Trust, and to relax member interest transfer restrictions.
Procedural Posture:
- Plaintiffs L. Londell McMillan, Charles Spicer, Jr., and Johnny Nicholas Nelson Torres filed an action in the Court of Chancery of the State of Delaware.
- The Complaint contained three counts: a declaration concerning the invalidity of the Amended LLC Agreement and Written Consent (Count I), a claim that Defendants breached the LLC Agreement (Count II), and a claim that Defendants breached the covenant of good faith and fair dealing (Count III).
- The court expedited resolution of the question of whether Defendants validly amended the LLC Agreement and removed McMillan and Spicer as Managing Members.
- The court granted Plaintiffs’ motion for a status quo order, keeping McMillan and Spicer as the Managing Members during the action.
- Defendants Sharon Nelson, Norrine Nelson, Breanna M. Nelson, and Allen D. Nelson moved to dismiss the Complaint under Rule 12(b)(1), 12(b)(2), 12(b)(3), and 12(b)(6).
- Plaintiffs moved for summary judgment on Count I of their Complaint.
- The court heard argument on both motions.
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Issue:
Does an LLC agreement that explicitly grants managing members broad authority, restricts non-managing members from controlling company affairs, and provides non-managing members only with veto rights over certain actions, permit non-managing members to unilaterally amend the agreement and remove managing members?
Opinions:
Majority - McCormick, C.
No, an LLC agreement structured to explicitly grant managing members broad authority and restrict non-managing members to veto rights does not permit non-managing members to unilaterally amend the agreement and remove managing members. The court applied the objective theory of contracts, prioritizing the plain meaning within the four corners of the LLC Agreement. Section 6.5 of the LLC Agreement explicitly prohibits Non-Managing Members from "participat[ing] in the control of the Company’s affairs" or "act[ing] for or to bind the Company." The defendants' collective attempt to restructure governance by amending the agreement constituted participation in control, violating Section 6.5. Section 6.2 grants Managing Members broad authority over the Company's business and affairs. While Section 6.3 identifies 28 actions requiring Non-Managing Member consent, this provision grants them veto rights (the power to approve or disapprove actions proposed by Managing Members), not an affirmative right to unilaterally initiate or compel those actions. This interpretation aligns with the court's reasoning in 2009 Caiola Family Trust v. PWA, LLC, which found similar language to convey a limited veto power rather than unilateral authority. The court further noted that Section 5.3, defining "Member Meetings," only grants members a right to "meaningful input and consultation," not "direction" or "control." Defendants' interpretation would render Sections 6.2 and 6.5 mere surplusage and allow Non-Managing Members to unilaterally discard the established management structure. Additionally, Section 13.3, a formalities clause for amendments, does not confer power on Non-Managing Members to unilaterally propose and adopt amendments; it outlines the mechanics for amendments initiated by the Managing Members with requisite consent. Allowing unilateral removal of Managing Members would undermine Section 6.2's specific removal provisions, which require a managing member's failure to perform and the remaining managing member's consent. Therefore, the attempted amendment was invalid, and McMillan and Spicer remain the Managing Members. The court denied the defendants' motion to dismiss Counts I and II, but granted dismissal of Count III (breach of implied covenant of good faith and fair dealing) as the agreement was not silent on the issue.
Analysis:
This case significantly reinforces the principle that Delaware courts strictly interpret LLC agreements based on their plain language. It clarifies the critical distinction between a 'veto right' (the power to consent or disapprove an action) and an 'affirmative right to act' (the power to initiate or compel an action). The decision emphasizes that even a majority of ownership interests cannot unilaterally alter the governance structure or bypass designated management authority if the agreement explicitly divests them of such control. This ruling provides crucial guidance for drafters of LLC agreements to ensure precise allocation of power and avoid unintended governance disputes, particularly when distinguishing between management roles and mere oversight or approval functions.
