## Facts

- David Castiel formed Virtual Geosatellite LLC to pursue an FCC satellite license; initially, his entity Virtual Geosatellite Holdings, Inc. was the sole member.
- Two additional members joined: Ellipso, Inc. (also controlled by Castiel) and Sahagen Satellite Technology Group, LLC (controlled by Peter D. Sahagen).
- Ownership units in the LLC were: Holdings 660 (63%), Sahagen Satellite 260 (25%), and Ellipso 120 (12%), giving Castiel-controlled entities a combined 75% interest.
- The LLC was governed by a three-member Board of Managers; Castiel (through Holdings) could appoint and remove two managers, and Sahagen Satellite appointed one.
- Castiel appointed himself and Tom Quinn as managers; Sahagen appointed himself as the third manager.
- After disputes about management and control, Sahagen convinced Quinn to support a merger of the LLC into a newly formed corporation, VGS, Inc.
- Sahagen and Quinn approved the merger as two of three managers without notifying Castiel.
- The merger eliminated the LLC and materially shifted control: Castiel’s combined interest dropped from 75% to 37.5%, while Sahagen’s increased from 25% to 62.5%.
- The court found notice was withheld so Castiel could not exercise his contractual power to remove Quinn, which would have blocked the transaction.
- Castiel, through Holdings, Ellipso, and the LLC, challenged the merger and sought equitable relief, including rescission.

## Issues

1. Whether the LLC agreement required unanimous manager approval for a merger or permitted approval by majority vote.
2. Whether managers who approved a merger without notice to a co-manager breached fiduciary duties of loyalty and good faith when secrecy was used to defeat the co-manager’s contractual rights.
3. Whether the merger should be declared invalid and rescinded as an equitable remedy.

## Decision

- The Court of Chancery held the board could approve a merger by majority vote; the LLC agreement did not impose a unanimity requirement.
- The court held Sahagen and Quinn breached fiduciary duties of loyalty and good faith by acting covertly to prevent Castiel from exercising his bargained-for right to remove Quinn.
- The court declared the merger invalid and ordered rescission, restoring the pre-merger status quo.

## Legal Principles

- Absent a clear contractual requirement of unanimity, a multi-member LLC board with delegated management authority may act by majority vote on fundamental transactions.
- Even where statutory or contractual formalities arguably permit action without notice, fiduciary duties limit how managers may use procedural authority.
- Managers breach the duty of loyalty and act in bad faith when they use their office to secretly frustrate another manager’s contractual governance rights, especially in a control-shifting transaction.
- Equity evaluates substance over form and may unwind a transaction, including through rescission, when disloyal conduct taints approval of a fundamental change in ownership or control.

## Conclusion

The court upheld majority-rule board authority under the LLC agreement but rescinded the LLC’s merger into VGS because two managers acted in bad faith by withholding notice to prevent a co-manager from exercising contractual removal rights, thereby effecting an inequitable shift in control.


VGS, Inc. v. Castiel, 2000 WL 1277372 (Del. Ch. Aug. 31, 2000)