You Come at the LLC Manager, You Best Not Miss
In a popular TV series (The Wire), a well-known quote is: “You come at the king, you best not miss.” The idea is that if you’re taking the risk of attacking someone at the top, you better not miss your shot.
A corollary in The LLC Jungle world is that if you come at (attempt to remove) the LLC’s manager, you need to get it right. The removal effort must comply with the LLC’s Operating Agreement.
This concept was highlighted in a recent unpublished opinion from the Delaware Court of Chancery — Soleimani v. Hakkak. While unpublished (and therefore not binding precedent), it illustrates a basic rule that plays out repeatedly in LLC litigation.
Facts: LLC stakeholders attempt to remove manager, but miss
Plaintiff Isaac Soleimani accepted employment at White Oak Global Advisors, LLC, an investment advisor and private credit firm. Soleimani was also appointed as the Manager of both White Oak Global and an affiliated LLC, White Oak Healthcare Finance, LLC, as set forth in the LLCs’ Operating Agreements. A Term Sheet accompanying the offer letter set forth Soleimani’s duties, revenue sharing interest, and a payment that would be due upon Soleimani’s termination — the purchase of his equity stake for fair market value.
The nearly identical Operating Agreements provided Soleimani with broad managerial discretion over the LLCs subject to certain “negative control rights” vested in an Approval Committee comprised of various individual LLC members. Section 6.1 set out the process by which Soleimani could be removed as Manager by the Approval Committee. It stated that Soleimani could be removed as an employee “provided that the Company has satisfied its obligations under the Term Sheet” relating to his termination, and that after removal as an employee Soleimani could be removed as Manager.
Several years later, the Approval Committee for both LLCs purportedly terminated Soleimani’s employment and removed him as Manager. But the LLCs never paid Soleimani for the value of his equity stake, as required by the Term Sheet and Operating Agreements. Soleimani estimated the value of his interest at over $100 million.
Soleimani sued, claiming his removal was ineffective.
Court: removal failed due to noncompliance with governing agreements
The court agreed with Soleimani’s position and entered summary judgment in his favor, holding that he remained in place as an employee and Manager.
The court reviewed section 6.1 of the Operating Agreements, which stated:
Mr. Soleimani may be removed by the Company as an employee in accordance with the provisions of the Term Sheet, provided that the Company has satisfied its obligations under the Term Sheet relating to a Specified Termination Event (as defined in the Term Sheet). In the event that Mr. Soleimani is so removed as an employee of the Company, he may be removed as a Manager by the Approval Committee….
The court ruled that the phrase “provided that the Company has satisfied” created a condition precedent to Soleimani’s removal as an employee, which was the first step toward his removal as Manager. The words “has satisfied” indicated “a completed action” — not some action that could be taken after the fact. Because the LLCs had not paid Soleimani the amounts due under the Term Sheet and Operating Agreements, his purported removal was ineffective.
The court concluded:
Section 6.1 of the LLC Agreements says what is means and means what it says: Soleimani effectively remains an employee and Manager of the White Oaks LLCs until the Company satisfies its Specified Termination Event obligations. The defendants may find this outcome unpalatable. Still, it is not this court’s job to relieve sophisticated parties of the burdens of contracts they wish they had drafted differently. Parties have a right to enter into good and bad contracts, the law enforces both.
Lesson
As shown in the Soleimani case (among many others), efforts to remove an LLC’s manager must comply with the LLC’s governing documents in order to be effective.