Date Submitted: July 31, 2014.
Kevin G. Abrams, Esquire and J. Peter Shindel, Jr., Esquire of Abrams & Bayliss LLP, Wilmington, Delaware, and Jonathan M. Hoff, Esquire and Joshua R. Weiss, Esquire of Cadwalader, Wickersham & Taft LLP, New York, New York, Attorneys for Plaintiff.
Stephen P. Lamb, Esquire and Meghan M. Dougherty, Esquire of Paul, Weiss, Rifkind, Wharton & Garrison LLP, Wilmington, Delaware, and Robert A. Atkins, Esquire and Steven C. Herzog, Esquire of Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, New York, Attorneys for Defendants.
Joel Friedlander, Esquire and Benjamin P. Chapple, Esquire of Friedlander & Gorris, P.A., Wilmington, Delaware, Attorneys for Nominal Defendant.
NOBLE, Vice Chancellor.
Plaintiff, a member of a limited liability company (an "LLC"), filed this action directly and derivatively against the company's managing member and its controllers. Plaintiff seeks equitable relief and damages, asserting nine claims arising from Defendants' alleged actions to expropriate money to which Plaintiff is entitled, cause prohibited distributions, cause improper loans, and withhold information about such actions. Defendants have moved to dismiss the breach of contract and declaratory judgment claims in part and Plaintiff's remaining seven claims in full.
Plaintiff The Renco Group, Inc. ("Renco"), a holding company incorporated under New York law, was the sole owner of AM General LLC ("AM General"), "a Delaware limited liability company that manufactures, among other things, the military vehicle known as the 'Humvee.'" Defendants are MacAndrews AMG Holdings LLC ("MacAndrews AMG"), a Delaware LLC; MacAndrews AMG's sole owner, MacAndrews & Forbes Holdings, Inc. ("M&F"), a Delaware corporation; and M&F's sole shareholder, Ronald O. Perelman ("Perelman").
As part of a sophisticated business arrangement, Renco and M&F formed nominal defendant AM General Holdings LLC ("Holdco"), and Holdco and ILR Capital LLC ("ILR Capital"), an affiliate of Renco, formed Ilshar Capital LLC ("Ilshar Capital"). In exchange for its interest in Holdco, Renco contributed its membership interests in AM General to Holdco. This contribution included General Engine Products LLC ("GEP"), AM General's wholly-owned subsidiary that "principally manufactures a 6.5-liter diesel engine (the '6.5L Diesel Engine')" for use in Humvees. MacAndrews AMG contributed cash and became managing member of Holdco.
Renco and MacAndrews AMG (the "Holdco Members") memorialized their relationship in the Limited Liability Company Agreement of AM General Holdings LLC, dated August 10, 2004 (the "Holdco Agreement"). Under the Holdco Agreement, Renco is entitled (roughly speaking) to $15 million annually if AM General's EBITDA exceeds a certain threshold, 100% of the profits and losses from activities related to the 6.5L Diesel Engine (the "GEP Business"), and 30% of the profits generated by AM General after deducting the above. MacAndrews AMG is entitled to the remaining 70% of AM General's profits.
Because MacAndrews AMG generally has "'full, exclusive and complete discretion to manage and control the business and affairs of [Holdco]'" as the managing member,  Renco negotiated for various protections of its interest in profits from AM General and GEP. One such protection is to require that "all transactions between 'AM General or any of its Subsidiaries, on one hand, and a Member or any Affiliates thereof, on the other hand, shall be no less favorable . . . than would be the case in an arms-length transaction.'" Another is to require Renco's approval for certain actions, including "any sale, transfer, distribution or other disposition of any of the assets or Capital stock of GEP, other than . . . in the Ordinary Course of Business" (one type of "AM General Major Decision").Section 6.4(s) of the Holdco Agreement specifically requires mutual consent for "'the payment of a management fee or similar fee . . . by [Holdco], AM General or any of its Subsidiaries, '" to "'an affiliate'" of MacAndrews AMG or M&F.This provision had origins in Renco's rejection of M&F's request, during negotiations for the overall business arrangement, to charge GEP a royalty for its alleged use of AM General's intellectual property.
The Holdco Agreement addresses yet other financial and monitoring concerns. Section 9.4(c) bars distributions to MacAndrews AMG if MacAndrews AMG's Revalued Capital Account would, as a result, become "'equal to or less than 20% of the aggregated Revalued Capital Account of all Members, '" and Section 8.3(b) allows Renco to "cause MacAndrews AMG to distribute cash to Renco" if MacAndrews AMG's Revalued Capital Account falls (or will fall) below that level. Loans from Holdco to the Holdco Members ("Company Loans") are allowed, but under limited circumstances as set forth in Section 9.7. To the extent that company funds are not used to pay expenses or distributed, they are to be held as Company Loans or certain types of investments. Section 10.1 invokes Section 18-305 of the Delaware LLC Act to guarantee that books and records for Holdco's business and the AM General Business "'shall at all times be open to inspection and examination at reasonable times by each Member.'"
Fiduciary duties offer another layer of security. Relevant provisions include Section 12.3(a), which allegedly preserves "'the duties and liabilities of a Covered Person otherwise existing at law or in equity'" unless the Holdco Agreement restricts those duties and liabilities; Section 12.3(b), which allows a Covered Person to resolve its own conflict of interest without breaching the Holdco Agreement or any other duty absent "'fraud, willful misconduct, bad faith or gross negligence'"; and Section 12.2, which exculpates a Covered Person for acts and omissions reasonably believed to be within its powers under the Holdco Agreement except for those deemed "'to constitute fraud, willful misconduct, bad faith or gross negligence.'"
Despite the above provisions, Defendants found ways to benefit from GEP's business activities. Through an agreement effective as of the closing date of the Holdco Agreement, MacAndrews AMG caused AM General to charge GEP a royalty amounting to 2.5% of GEP's annual gross sales (and later increasing to 8%). In that same agreement, MacAndrews AMG also raised the annual management fee AM General charges GEP from $240, 000 to $1.2 million plus an amount based on GEP's performance. And while the profits and losses of the GEP Business relate to the 6.5L Diesel Engine, MacAndrews AMG included in its calculations ...