Business Vantage Point Blog

The Delaware Court of Chancery recently addressed an issue in which it stated there is no meaningful precedent that involved the role of company counsel in a books and records dispute between a two-member deadlocked board of directors. In a bench ruling on October 22 in Kundrun v. AMCI Group, involving a Delaware limited liability company (LLC) with 50/50 ownership and a two-member board of directors who were in a dispute over whether one of them could access company information, the Chancery Court held that counsel selected and engaged by the executive chairman to represent the company in the dispute is not required to be disqualified from representing the company but must remain neutral in the action.

Dispute Arises Over Authority to Hire Company Counsel

Fritz Kundrun and Hans Mende each directly or indirectly own 50% of the membership interests in AMCI Group LLC, a manager-managed Delaware LLC. AMCI’s sole manager is a board of directors consisting of two directors, Kundrun and Mende. The company’s operating agreement appoints Mende as AMCI’s executive chairman, which is an officer position.

Since 2022, Kundrun has been in an ongoing dispute with Mende about getting access to company information. Kundrun sent multiple books and records demands to the company and filed an action for inspection of the books and records. After the litigation began, Mende exercised his authority as executive chairman to select and retain counsel for AMCI to represent the company in connection with the dispute.

Kundrun moved to disqualify such company counsel on the grounds that Mende did not have the authority to hire counsel unilaterally to represent AMCI. He also sought the appointment of a receiver for the limited purposes of identifying neutral counsel to represent the company in the litigation. The magistrate who initially heard the case denied the motion and Kundrun took exceptions, which were then heard by the Chancery Court.

What the Chancery Court Found

The Chancery Court noted that there does not appear to be any meaningful precedent involving an LLC books and records action where two members each own 50% of the entity and each are members of a two-person board.

Authority of Executive Chairman Under Operating Agreement

The court found that AMCI is a series LLC that establishes a manager-managed structure in which a board of directors acts as the sole manager for the LLC and its series with a delegation of authority to conduct day-to-day matters to a senior officer.

The parties disputed the proper interpretation of certain provisions of the operating agreement and the extent to which such provisions delegated authority to Mende to select counsel. In its ruling, the court focused on certain language in the operating agreement that provided authority to the executive chairman, including the following two sentences:

Subject to the authority of the board, the executive chairman will have the unqualified and complete authority and responsibility over the day-to-day operation of the business of the Company and each series. Unless later rescinded by the board, the executive chairman is, by virtue of this agreement, delegated the full powers and authority of the board with respect to the Company and each Company-managed series.

The court noted that the magistrate, in denying Kundrun’s motion, found that the operating agreement gives all power to the executive chairman other than certain actions that were specifically enumerated in the operating agreement that the executive chairman is prohibited from taking. In disagreeing with the magistrate, the court found the language in the operating agreement provides that the delegation to the officer is to handle the day-to-day operations of the business and that within the scope of authority, the officer can also exercise the board powers, but only within the day-to-day operation of the business. The court found that its interpretation gives effect to both of the above sentences and that the magistrate’s interpretation renders the day-to-day limitation a nullity and departs from the standard structure of a delegation. The court also found that it could not draw the inference that the specifically enumerated items were intended to be an exclusive list of day-to-day matters that the executive chairman was prohibited from taking, but that the list seems to be clarifications where the operating agreement provides that the executive chairman’s authority is generally limited to day-to-day matters.

The court ruled that Mende lacked the authority under the operating agreement to select company counsel for purposes of this litigation because he only had authority to exercise the power of the board in connection with the company’s day-to-day operations, noting that a books and records action brought by what is effectively a director on a two-member board who was also one of two 50/50 investors is not a day-to-day matter.

Bilateral Dispute

The court noted that engagement of counsel is often within the power of a CEO or the CEO’s delegate, such as the general counsel, but the court did not think that using that counsel to defend a dispute between one of two directors and one of two 50% stockholders over information the director can obtain is an ordinary course of business matter.

The court found that this is a bilateral dispute, where one of two directors is trying to exercise director-style, manager-level information rights and one of the reasons why he supposedly can’t get the information he wants is because the other director isn’t joining him in exercising the manager-level information rights. The court found that there is a deadlock over whether the board can act, including a deadlock over whether directors can get information because Mende supposedly won’t go along with his fellow director in exercising managerial information rights.

In viewing the matter as a bilateral dispute, the court stated that this is a setting where the company counsel needs to be representing the company; that the board is the company, not Mende; and the board is deadlocked on an array of matters, including whether Kundrun gets information in his capacity as a director.

The Chancery Court’s Order

The court’s order denied Kundrun’s request for company counsel to be disqualified but granted Kundrun’s request for an order requiring company counsel to remain neutral in the action. Among other things, the order stated that company counsel cannot take direction from the board on matters on which the board is deadlocked; company counsel must carry out any orders from the court; company counsel must comply with discovery requests and provide neutral, complete and accurate responses to those requests; and company counsel must remain neutral in the action and not take a position adverse to either Kundrun or Mende. The court’s order also noted that although the action was styled as a dispute involving Kundrun and AMCI, this dispute is actually between Kundrun and Mende, and Mende and his personal counsel may intervene in this action for purposes of defending the proceeding.

Role of Company Counsel

In an LLC that has a two-member board of directors, company counsel likely would be required to remain neutral and not take a position adverse to either board member in matters on which the board is deadlocked.