Another basic distinction you should be aware of in forming LLCs is the distinction between an LLC dissolution and an LLC liquidation. Click here for to read a post about this distinction in the excellent LLC blog called LLC Law Monitor.
In handling LLC formations, you need to understand the difference between actual and apparent LLC member and manager authority. For a clear explanation of the difference in the context of litigation in a New York court, click here for a recent post in an excellent LLC blog called LLC Law Monitor.
If you have a fairly standard LLC formation practice, it will only very rarely be necessary for you to include “jerk insurance” clauses in operating agreements you negotiate or draft for your clients. However, you should at least be familiar with the concept. Click here to learn about jerk insurance clauses:
The term “material” is often a useful one to include in LLC operating agreements, even though the precise meaning of the term is usually quite unclear. For example, many operating agreements provide that the managers must promptly disclose to the members all material information of which the managers become aware that may affect the LLC. The following link briefly discusses this issue under Delaware law and includes a link to a very recent Delaware case on the issue:
The case under this link–http://courts.delaware.gov/opinions/download.aspx?ID=216530—discusses manager dismissals under Delaware LLC law. The link is to the blog post discussing the case is http://www.delawarelitigation.com/2014/12/articles/uncategorized/chancery-denies-motion-to-dismiss-claim-seeking-ouster-of-llc-manager/.
How would you draft an LLC operating agreement to avoid the problems outlined in the above case?
On December 30, 2014, the Delaware Chamber of Commerce issued its decision in a case called Prokupek v. Consumer Capital Partners LLC, C.A. 9918-VCN (December 30, 2014). In an excellent blog called the Delaware Business Litigation Reports (every LLC lawyer should subscribe to it), a blog post about the case summarizes it as follows:
This decision applies settled law in the corporate context to hold that a former member of an LLC may not obtain inspection rights because those are limited to current members. The opinion is also interesting in that it holds that even if the member interests were redeemed at too low a price, the right to inspect ended and the former member should pursue a breach of contract claim.
Another good post by Ken Adams—this time, on the question of what it takes to become a good contract drafter: http://www.adamsdrafting.com/what-it-takes-to-be-a-great-contract-drafter.
It is sometimes tempting to include one or more “best efforts” clauses—e.g., “The manager shall use her best efforts to complete X task by Y date.” In his excellent blog about contract drafting, Ken Adams has recently published a post that states, in essence, that you should never use such a clause. You can read his blog here: http://www.adamsdrafting.com/does-it-make-sense-to-require-someone-to-use-efforts-to-complete-something-in-a-reasonable-time/.
In his final post for 2014 in his excellent “Business Divorce” blog, Peter Mahler has listed and briefly summarized the top ten close-corporation and LLC cases he’s discussed in his blog during 2014. The link to this post is http://www.nybusinessdivorce.com/2014/12/articles/llcs/top-ten-business-divorce-cases-of-2014/. Many of these cases are LLC cases. Most were decided in the New York courts. However, the principles underlying many of these New York cases are equally important in most or all other states.
Here is a link to an excellent CCH current update about the adoption of the Revised Limited Liability Company Act (“RULLCA”): http://www.cunninghamonoperatingagreements.com/wp-content/uploads/RULLCA-CCH-ARTICLE-12-22-14.docx.
According to the update, the following 12 U.S. jurisdictions, in alphabetical order, have adopted RULLCA: Alabama, California, District of Columbia, Florida, Idaho, Iowa, Minnesota, Nebraska, New Jersey, South Carolina, Utah, and Wyoming. At least one state—Arkansas—has considered adopting RULLCA but has decided not to do so, at least for now.
The members of the RULLCA drafting committee have, collectively, vast expertise about LLC statutory and case law, they worked very hard on RULLCA, and there are many excellent provisions in RULLCA. However, I deeply dislike RULLCA for, among others, the following reasons:
- The RULLCA comments provide no overarching drafting philosophy. Clearly, that philosophy should be (i) to provide a maximally user-friendly LLC statute for small businesses in the relevant jurisdiction and for lawyers who know little or nothing about LLC law, but who nevertheless form LLCs for their clients from time to time; and (ii) to provide maximum flexibility for both small and large LLCs in tailoring their LLCs to meet member needs and interests.
- Unlike the Delaware Limited Liability Company Act and many other LLC acts, RULLCA does not make use of the phrase “unless the operating agreement provides otherwise” to denote default provisions. Instead, it has a single, very dense provision stating which provisions in it may be altered in an operating agreement. Lawyers who lack LLC expertise may be unaware of this provision or may misconstrue it and, as a result, may screw up operating agreements and other LLC matters beyond belief.
- Unlike most or all non-RULLCA LLC acts, RULLCA, for no good reason, and astoundingly, lacks a default allocation rule. This lack will someday lead to enormous disputes among members of RULLCA LLCs and how LLC profits should be allocated among them.
- Unlike the Delaware Limited Liability Company Act and the LLC acts of roughly 18 other states, RULLCA does not contain the freedom of contract provision set forth in DLLC Act § 18-1101(b). This provisions provides as follows: “It is the policy of this [act] to give maximum effect to the principle of freedom of contract and to the enforceability of LLC agreements.” It is a marvelous and indeed an indispensable charter for creative LLC lawyers and accountants and their clients.
All of the above major flaws in RULLCA, and a number of other major flaws in it, can and should be fixed in the above 12 jurisdictions, and they can be fixed by very simple amendments to RULLCA.