In the recent decision of McMillan, et al. v. Nelson, et al., C.A. No. 2024-0016-KSJM (Del. Ch.), the Delaware Court of Chancery reaffirmed the primacy of contractual language in LLC governance disputes. McMillan centered on a dispute over the management of Prince Legacy, LLC, an entity formed to manage assets from the estate of the late musician Prince. The Court’s ruling underscores the importance of clear and unambiguous drafting in LLC agreements, particularly regarding management structures and amendment procedures. This decision provides valuable guidance on the interpretation of LLC agreements under Delaware law and the limits of non-managing members’ authority.

Background

Prince Legacy, LLC was formed by L. Londell McMillan and Charles Spicer, Jr., along with some of Prince’s heirs. McMillan and Spicer were appointed as Managing Members with broad authority. Later, some of Prince’s heirs, led by Sharon Nelson, attempted to remove McMillan and Spicer as Managing Members by amending the LLC agreement. McMillan, Spicer, and one of the heirs filed suit seeking a declaration that the LLC agreement prohibited the defendants’ attempts to amend it.

Analysis

The Delaware Court of Chancery focused on interpreting the LLC agreement’s provisions regarding management authority and amendment procedures. The Court analyzed several key sections of the agreement. Section 6.2 granted broad authority to the Managing Members for day-to-day management. Section 6.5 explicitly prohibited Non-Managing Members from participating in company control or binding the company. Section 6.3 required Member consent for certain actions but did not grant Non-Managing Members unilateral authority to take those actions.

Chancellor McCormick rejected the defendants’ interpretation that Section 6.3 allowed them to unilaterally amend the LLC agreement. Instead, the Court found that the agreement’s structure and plain language only gave Non-Managing Members veto rights over certain actions, not the power to initiate them.

The Court interpreted Section 5.3 of the LLC agreement as limiting Non-Managing Members to providing “meaningful input and consultation” rather than direction or control. This interpretation further supported the Court’s view that the LLC agreement did not grant Non-Managing Members the authority to unilaterally amend the agreement or remove Managing Members. The Court also found that the defendants’ interpretation would lead to absurd results, rendering key provisions of the agreement mere surplusage.

Conclusion

The Court granted summary judgment in favor of the plaintiffs on their declaratory judgment claim, finding that the LLC agreement unambiguously prohibited the defendants from unilaterally amending it or removing the Managing Members. The Court upheld the management structure established by the agreement, emphasizing the importance of clear contractual language in LLC governance disputes.

This decision reinforces Delaware’s approach to interpreting LLC agreements, emphasizing the primacy of contractual language and the Court’s reluctance to rewrite clearly drafted agreements, even when they result in outcomes unfavorable to some parties.