In yesterday's post, I discussed Tuli v. Specialty Surgical Center of Thousand Oaks, LLC, 2024 WL 4499271 (Oct. 16, 2024) and whether alleged personal animosity vitiated application of the business judgment rule to the governing board of a limited liability company. The plaintiff's beef in that case was with the defendant's decision that he was subject to a "terminating event" provision in the defendant's operating agreement. That resulted in the plaintiff's membership interest being bought out for no consideration.

The plaintiff argued that the defendant breached its operating agreement because it failed to have a formal vote of the entire governing board before declaring the terminating event. It was undisputed, however, that all the members of the governing board informally agreed to the letter. The trial court ruled this procedural failure to be substantively irrelevant and the Court of Appeal agreed. In upholding the trial court's decision, the Court of Appeal took note of the fact that the plaintiff had adduced no evidence that this failure had harmed him. On this basis, the Court of Appeal distinguished Scheenstra v. California Dairies, Inc., 213 Cal.App.4th 370 (2013):

The contractual breach in Scheenstra worked serious harm. The contractual breach here worked Tuli [the plaintiff] no harm.

Limited liability companies, unlike corporations, are not required to have boards. When an LLC does have a board of managers, the California Revised Uniform Limited Liability Company Act does not require that its managers take action at a meeting (although this may be a requirement of the operating agreement). The corporate form, in contrast, is a more formal creature with more specific structural and procedural requirements. In closely held corporations, it is not unusual for the directors to work side by side. Consequently, they may make numerous decisions that are not documented as formal board meetings (i.e., with a formal call, notice (or waiver of notice), and minutes). This informality can create numerous questions, including such basic questions as whether an action was "duly authorized" and whether directors had performed their duties in accordance with the applicable standard of care.