In Skye Mineral Investors LLC v. DXS Capital (U.S.) Limited, et al., the Delaware Court of Chancery (the "Court") denied defendants' motion to dismiss, finding that plaintiffs had sufficiently pled a breach by the members holding a minority equity interest (the "Minority Members") in Skye Mineral Partners, LLC ("SMP") and the manager who the Minority Members appointed to SMP's board of managers (the "Minority Manager") of their fiduciary duty of loyalty to SMP and its members.  Plaintiff's key allegations were that SMP's LLC Agreement required the vote of at least 75% of the interests in order for SMP or CSM to incur debt or grant liens, and the Minority Members used their interests in SMP to vote to block debt and equity financing opportunities for SMP and its sole subsidiary, CS Mining, LLC ("CSM"), with the intent of causing (and actually causing) CSM's bankruptcy so that the Minority Members' affiliate could purchase CSM's assets out of the bankruptcy at a steep discount.

Factual Background

In Skye, CSM held valuable mineral interests and was working to obtain financing to expand its processing capacity to take advantage of those minerals in what it called "Phase II." The Minority Manager discovered that CSM's mineral deposits were valued at over $600 million. He shared that information with only SMP's Minority Members and worked with them to implement the above plan to block CSM's attempts to obtain financing, thereby causing it to file for bankruptcy so that an affiliate of the Minority Members could purchase its assets cheaply.

Noble Americas Corp. ("Noble") loaned $30 million to CSM to finance Phase II. CSM fell behind on its loan payments, and Noble declared an event of default.  The Minority Members used their blocking rights in SMP's LLC Agreement to prevent CSM from obtaining further equity and debt investments that it had lined up, including by suing to enforce those rights.  The Minority Manager then emailed the Minority Members that "... we can sit back and hold our position and when this [CSM] collapses we have the first lien and can buy it out of bankruptcy very cheap."  The Minority Members then purchased the Noble loan through an affiliate for $23 million, which was a $7 million discount, and purchased CSM's assets out of bankruptcy for $40 million.

Breach of the Fiduciary Duty of Loyalty by the Minority Manager

SMP's LLC Agreement imposed fiduciary duties on managers, except with respect to corporate opportunities, leaving some aspects of the duty of loyalty intact. The Court noted that Delaware law permits members to expand or restrict the duties of members and managers in a limited liability company's ("LLC") LLC agreement, but for a waiver to be effective, it must be clear and unambiguous. Here, contrary to waiving fiduciary duties, the LLC Agreement provided that "[e]xcept as otherwise set forth in this Agreement, a Manager has a fiduciary duty to the Company and the Members that is the same as the duty that a director of a Delaware corporation owes to a corporation and its stockholders." Based on the foregoing, the Court found that the Minority Member owed a fiduciary duty of loyalty to SMP and its members and that the plaintiffs had adequately stated claims that his actions in conspiring to drive CSM into bankruptcy through the acquisition of the Noble loan breached that duty.

Breach of the Fiduciary Duty of Loyalty by the Minority Members

The Court recited that under Delaware law, a stockholder may owe fiduciary duties if he is a "controlling stockholder", meaning the stockholder (1) "owns more than 50% of the company's voting power" or (2) "owns less than 50% of the voting power of the corporation but exercises control over the business affairs of the corporation." The Court found that even though here the Minority Members held less than 50% of SMP's voting power, there was a reasonable inference that they exercised actual control over SMP through use of their blocking rights in bad faith to prevent SMP and thus CSM from consummating any financing and channel it into bankruptcy.

As "controlling members," the Court found that the Minority Members owed traditional fiduciary duties to SMP and its members, and those fiduciary duties were not waived by unambiguous, clear language in the LLC Agreement as required by Delaware law.  Instead, the LLC Agreement merely waived the doctrine of corporate opportunity, but no other fiduciary obligations.  The language in the LLC Agreement provided: "No Member or its Affiliates shall have any fiduciary obligations with respect to the Company or to the other Members insofar as making other investment opportunities available to the Company or to the other Members."  It also provided that SMP's members could give or withhold, condition or delay their "votes, approvals, or consents" in their "sole and absolute discretion."  The Court found that the foregoing permission to act in their sole discretion did not mean that the Minority Members were allowed to act in bad faith.  Based on the foregoing, the Court rejected the defendants' motion to dismiss the breach of fiduciary duty of loyalty claim.

Key Takeaway

Skye serves as a reminder that in Delaware, LLC managers and their controlling members are likely to be found to have fiduciary duties to the LLC and its members if the LLC Agreement does not clearly and unambiguously waive those duties.  Skye also is instructive in demonstrating that minority members of a LLC with significant veto rights over the LLC's activities such as incurring debt or granting liens may be deemed to be controlling members that owe fiduciary duties to the limited liability company and its members.

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