## Facts

- Two Delaware LLCs shared the same three members: William T. Obeid, Christopher S. La Mack, and Dante A. Massaro.
- One LLC used a corporate-style governance structure with a board of directors (the “Corporate LLC”); the other was manager-managed with a distinction between managers and passive members (the “Manager-Managed LLC”).
- After internal disputes, La Mack and Massaro removed Obeid from leadership roles in the Manager-Managed LLC and later removed him as a director of the Corporate LLC.
- Obeid filed direct and derivative claims against La Mack and Massaro in federal court in New York, alleging misuse of company assets and usurpation of opportunities.
- La Mack and Massaro sought to establish special litigation committees (SLCs) and executed an engagement letter appointing retired federal judge Michael R. Hogan to act as the sole SLC member for both entities.
- Hogan was neither a director of the Corporate LLC nor a manager (or member-manager) of the Manager-Managed LLC.
- Obeid filed an action in the Delaware Court of Chancery seeking declarations that (i) Hogan could not serve as the SLC for either LLC and (ii) his removal as a director of the Corporate LLC was invalid.
- The case proceeded on cross-motions for summary judgment on an undisputed factual record.

## Issues

1. Whether a board-managed, corporate-style Delaware LLC may appoint a non-director as the sole member of an SLC controlling derivative claims.
2. Whether managers of a manager-managed Delaware LLC may delegate to a non-manager the authority to control litigation through an SLC.
3. Whether the Corporate LLC’s operating agreement required unanimous member consent to remove a director, or permitted removal by majority vote.

## Decision

- Summary judgment was granted for Obeid on the SLC-authority issues.
- The court held Hogan could not serve as the sole SLC member for the Corporate LLC because he was not a director.
- The court held Hogan could not serve as the sole SLC member for the Manager-Managed LLC because he was not a manager and the operating agreement restricted delegation of core governance functions.
- Summary judgment was denied on Obeid’s challenge to his removal as a director of the Corporate LLC; the operating agreement permitted removal by majority vote.

## Legal Principles

- Delaware LLCs are governed primarily by contract; the operating agreement can define governance structures and limit delegation of authority.
- When an LLC adopts a corporate-style board structure, corporate-law doctrines governing board authority and SLCs may be applied by analogy; an SLC exercising board-delegated control over derivative claims must be composed of directors.
- Although 6 Del. C. § 18-407 permits delegation of rights and powers, the scope of delegation is constrained by the operating agreement.
- Control of litigation, including derivative litigation, may be treated as a core governance function that cannot be transferred outside the class designated by the agreement (e.g., only directors for a board-governed entity, only managers for a manager-managed entity) absent clear authorization.
- Contractual provisions allocating member voting power may permit removal of directors by majority vote where unanimity is not required by the operating agreement.

## Conclusion

The Court of Chancery invalidated an attempt to vest SLC authority in a non-director and non-manager, holding that derivative-claim control must remain with the governing body specified by each LLC’s operating agreement, while also enforcing contractual terms that allowed a majority of members to remove a director of the corporate-style LLC.


Obeid v. Hogan, 2016 WL 3356851 (Del. Ch. June 10, 2016)