Lawyer shouldn’t draft operating agreements for multi-member LLCs unless they have a solid understanding of the implied contractual covenant of good faith and fair dealing. Below are a cite and the first paragraph of a good new article on the implied contractual covenant of good faith and fair dealing.
58 B.C. L. Rev. E-Supplement 1
Boston College Law Review E-Supplement
LEAP OF FAITH: DETERMINING THE STANDARD OF FAITH NEEDED TO VIOLATE THE IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING FOR DELAWARE LIMITED LIABILITY COMPANIES
Copyright: 2016 by Pat Andriola. All rights reserved.
Abstract: Delaware courts have long respected the right to contract in Delaware, and possibly no entity is afforded more privileges to set the boundaries of its corporate form than the Delaware Limited Liability Company. Unlike nearly every other state, Delaware permits LLCs to abolish the duties of care and loyalty in their operating agreements, but forbids companies to eliminate liability for “any act or omission that constitutes a bad faith violation of the implied contractual covenant of good faith and fair dealing.” The problem with the phrase “bad faith violation” is that, when referencing a breach of the implied covenant of good faith and fair dealing, it implies that there exists a non-bad faith violation of the covenant. In determining whether or not “neutral faith” or “non-bad faith” violations of the implied covenant are permissible under Delaware LLC law, this essay argues that Delaware courts should look to the relatively short history of the covenant, the contractarian spirit of Delaware laws and courts, and section 18-1101 of the Delaware Limited Liability Company Act to hold that the implied covenant can only be violated in bad faith.
The link below is a post about a Seventh Circuit case about a supreme example of Home Depot management negligence in hiring and supervising a manager–who ended up murdering one of the Home Depot female employees who reported to him. When you teach LLC formation clients about how to avoid veil-piercing (which you should do in every LLC formation you handle), you should tell them that their LLC may be liable for misconduct of its employees even if the misconduct has nothing to do with the LLC’s business. You might even want to tell them about the Home Depot case.
Here’s the link: http://www.employmentlawbusinessguide.com/2017/04/seventh-circuit-negligence -lawsuit-may-proceed-against-employer-regarding-supervisors-off-site-murder- of-female-subordinate/?utm_source=McLane+Middleton+-+Employment+Law+Business +Guide&utm_campaign=5e0a0f1651-RSS_EMAIL_CAMPAIGN&utm_medium=email&utm_term= 0_cb3d2edd77-5e0a0f1651-71829489
Under the link below is a brief but fairly good post summarizing the new and draconian federal statutory partnership audit rules that, for most multi-member LLCs taxable as partnerships, will become effective on 1-1-18. A few comments about the post:
- Puzzlingly, the post doesn’t mention the key fact that under the above rules, the federal tax on any partnership audit deficiency will be a terrifying 39.6 percent.
- The post doesn’t mention that even if your LLC qualifies as a “small partnership” exempt from the rules, you need to elect out of coverage by the rules in your annual federal tax return.
- The post suggests that LLCs with members that are trusts and single-member LLCs may still qualify as “small partnerships” under the rules. Based on certain recent Treasury statements, this suggestion is very probably incorrect.
- The post does not describe even briefly the types of audit provisions that the operating agreements of LLCs taxable as partnerships and other partnership entities ought to include.
- The post does not address the issue whether tax professionals whose clients are partnership entities should offer or agree to be available to serve as partnership audit “partnership representatives” for their clients. I think they should, as long as the governing operating agreement provides them with adequate contractual protection.
Chapter 50A in Drafting Limited Liability Company Operating Agreements, my Wolters Kluwer LLC formbook and practice manual, addresses all of the above issues. If anyone would like a summary of the chapter by e-mail. I will be glad to provide you with one.
Here is the link to the above post: http://www.lexology.com/library/detail.aspx?g=6fea3fe5-9c8a-4b37-a766-ab1666cefd36&l=7UML737
LLC lawyers are sometimes asked by clients about the tax issues in contributing property to multi-member LLCs taxable as partnerships. The post under the link below provides brief but very helpful advice about deferring federal income tax in these situations.
Here’s the link: http://www.taxlawforchb.com/2017/03/protecting-tax-deferral-for-a-contribution-to-a-partnership/
Many operating agreements for multi-member LLCs contain, or at least they should contain, non-competition provisions applicable to managers, members or both. The post under the link below identifies and addresses several recent legal developments that can make these provisions more difficult to enforce.
Here’s the link: http://www.corpcounsel.com/id=1202779699925/Drafting-Noncompetes-in-a-Tough-Enforcement-Climate?kw=Drafting%20Noncompetes%20in%20a%20Tough%20Enforcement%20Climate&et=editorial&bu=Corporate%20Counsel&cn=20170223&src=EMC-Email&pt=Daily%20Alert&slreturn=20170123072353
The new post under the link below provides guidelines on how you can help your clients ensure that they get stepped-up basis in asset acquisitions.
Here’s the link:
LLC operating agreements for multi-member LLCs often contain forum selection clauses, and these clauses sometimes involve carve-outs. All such clauses must be carefully drafted. The post under the link below deals with an LLC operating agreement’s forum-selection clause and carve-out, but the carve-out wasn’t explicit enough and thus was held to be ineffective. The lesson of the case is: Make your forum-selection carve-outs as explicit as possible as to what you want to carve out.
Here’s the link: http://www.lexology.com/library/detail.aspx?g=b6e73d27-dae0-4950-af37-5efba81b056f&l=7TY9XHC
If, as an estate planner or LLC lawyer, you need to deepen your expertise in asset appraisals, you’ll find the discussion in Peter Mahler’s post both interesting and valuable. Here’s the link to the post:
Whether they represent minority or majority members of an LLC, lawyers who draft LLC operating agreements for multi-member LLCs with one or more minority members must carefully address the question of how to address minority oppression issues in the agreement. The post under the link below discusses a New York appellate decision involving minority oppression under NY corporate law, but many of the lessons in the opinion apply equally to LLCs, including non-New York LLCs.
Here’s the link: http://www.nybusinessdivorce.com/2017/02/articles/dissolution-defenses/oppression-revoke-employment-profit-sharing-control/