More Corporification - Incorporating Ambiguity Into the Operating Agreement

More Corporification - Incorporating Ambiguity Into the Operating Agreement

      In a recent case decided by the North Carolina Business Court, it was called upon to interpret an operating agreement which incorporated by reference the usual authority of the president of a North Carolina corporation. In the course of its opinion, the court explained that the authority of the president of a corporation is open to interpretation. Richardson v. Kellar, 2016 NCBC 60, 2016 WL 4165887 (Sup. Ct. N.C. Aug. 2, 2016).

      This case arose out of an application by Richardson for a preliminary injunction, which relief was ultimately granted. Richardson, through a wholly owned LLC, and Kellar, through another wholly owned LLC, where the two 50% members of a North Carolina LLC named TW Devices, LLC.  Richardson and Kellar were the two directors of TW Devices, LLC.  The organic documents of that company were quite specific in detailing the purpose of the company, namely the development of a variety of cardiovascular-related medical devices. Ultimately, TW Devices would become a shareholder in a subsequently organize corporation, Cleveland Heart, Inc. (“CHI”), which was also in part owned by the Cleveland Clinic Foundation.

      Kellar would ultimately seek to marginalize Richardson, unilaterally voting the interest of TW Devices, LLC in CHI, asserting that he could do so in his alleged capacity as CEO/President of TW Devices, LLC.

      At this juncture, the question would turn ultimately on whether TW Devices LLC was merely a holding company with respect to an interest in CHI, or rather had other business purposes. The court would hold ultimately that TW Devices, LLC was not a mere holding company. On that basis, the voting of that LLCs interest in CHI was an extraordinary matter which needed to be resolved by the LLC’s two member Board of Directors. On the basis that Kellar was in effect stripping Richardson of his right to participate in those decisions, the requested temporary injunction was granted.

      But back to corporification. Initially, Kellar argued that as TW Devices LLC should be viewed as a mere holding company, he, as the president/CEO thereof, would under the operating agreement have the capacity to vote the shares. In furtherance thereof, he pointed to section 4.12(a) of the TW Devices LLC Operating Agreement, which provides:

Any officer… shall have only such authority and perform such duties as the Board may, from time to time, expressly delegate to them…. unless the Board otherwise determines, if the title assigned to an officer of the Company is one commonly used for officers of the business corporation formed under the North Carolina Business Corporation Act, then the assignment of such title shall constitute the delegation to such officer of the authority and duties that are customarily associated with such office, including the authority and duties that a President may assigned to such other officers of the Company under the North Carolina Business Corporation Act. 2016 WL 4165887, *2.

      The only problem was that even as the operating agreement sought to incorporate the authority of an officer, including the president, those are actually open questions under North Carolina law. Rather:

North Carolina law does not provide definitive guidance regarding the “customary” authority possessed by corporate presidents. The Business Corporation Act does not define the duties or powers possessed by officers. North Carolina’s leading commentator on corporate law has noted that:

The allocation of authority and duties among corporate officers is usually outlined to some extent, either specifically or generally, by the corporate bylaws, and is then further defined in more detail by the directors and by the officers themselves. To the extent that these respective functions of corporate officers and agents are not thus defined by the corporation, they may be defined by the law and custom is developed by normal practices.

Russell M. Robinson, II, Robinson on North Carolina Corporation Law § 16.01 (7^th ed. 2015) (footnotes omitted).

      A pair of observations. First, this operating agreement failed in that it did not clearly delineate the scope of authority of the president and in so doing it failed to differentiate the authority of the president versus the authority of the Board of Directors. Second, it failed in that it was not amended at the time that TW Devices LLC became an owner of CHI as to whether the authority to vote the interest in CHI would be vested in the president as an ordinary transaction or in the Board of Directors as an extraordinary transaction. Had the operating agreement addressed those points, this lawsuit could have been avoided.