When I am assisting clients in forming multi-member LLCs, I usually begin the process by asking them to review the attached memo and to send me their mark-ups of it. The memo seeks to identify for them all of the principal legal and tax issues that, in my view, they should address before we begin discussing the operating agreement as such. I’m attaching this memo in the hope that it may also be useful to you.
As you may know, I write two or three posts every week. These posts provide current information about, among other things (i) significant new LLC cases; (ii) significant new LLC statutory developments; (iii) recent writings on topics of LLC law, tax and practice in blogs, law journals and other secondary sources; and (iv) LLC practice techniques.
I’m delighted that so many of you have sent me e-mails expressing gratitude for these posts. I love writing the posts because they keep me on my toes; but it’s nice that other people also find them useful.
My associate prepares an updated list of my posts monthly. In case the updated list is of interest to you, here’s a link to it: http://www.cunninghamonoperatingagreements.com/wp-content/uploads/Table-of-JMC-posts-to-WC-listservs-as-of-7-12.docx.
I chair a committee that is revising the New Hampshire Revised Limited Liability Company Act (the “Revised Act”). I’m presently drafting a set of provisions to provide in the Revised Act for LLC domestications. The Delaware and Florida acts contain these provisions. In case you’re not sure what a domestication is: it’s a statutory procedure by which an LLC formed under one LLC act changes the act that governs it to another act. Thus, for example, the domestication of a foreign LLC means the change of the LLC act that governs it from the foreign act to the act of another jurisdiction. If you domesticate an LLC, you can change the LLC act that governs it without having to use a merger, and the domestication eliminates any possibility of transfer taxes, since the domesticated entity will be the same after the domestication as before.
In Xcell Energy and Coal Company LLC v. Energy Investment Group LLC, C.A. No. 8652-VCN (June 30, 2014), the Delaware Court of Chancery answered the above questions as follows:
- Members of member-managed LLCs and managers of manager-managed LLCs owe fiduciary duties to their LLCs unless the operating agreement provides otherwise, but they owe them to members as such only if the operating agreement so provides.
- Members of manager-managed LLCs do not owe fiduciary duties to the LLC unless the operating agreement so provides.
There are many LLC acts besides the Delaware Limited Liability Company Act in which the answers to the questions in the subject line of this post are unclear. Under these acts, the Xcell case obviously will not be dispositive, but, given the prestige of the Court of Chancery, it may well be persuasive.
A link to the Xcell case is http://www.delawarebusinesslitigation.com/files/2014/07/Xcell-Energy.pdf.
The May 2014 issue of the ABA Business Lawyer contains forms, drafted by the LLCs, Partnerships and Unincorporated Entities Committee of the ABA Section of Business Law, for single-member LLCs whose members are entities and for single-member LLCs whose members are individuals, with explanatory articles about each of these forms. When my schedule permits, I intend to study all of these materials carefully, and I will share my thoughts about them in this listserv.
The Utah RULLCA case discussed in this recent post by Doug Batey illustrates the great importance of drafting LLC operating agreements to make crystal-clear when a manager’s actions will bind the LLC and when they will not.
Whenever you form an LLC for your clients, you have to be aware of the issue whether the memberships issued by the LLC will be, at least for one or more members, securities subject to regulation under federal and state securities laws.
There are many LLC cases on this issue, but the short answer to the above issue is provided in Williamson v. Tucker, 645 F.2d 404, Fed. Sec. L. Rep. (CCH) ¶98003, 32 Fed. R. Serv. 2d 361, 58 A.L.R. Fed. 371 (5th Cir. 1981). As applicable to LLCs, this case can be said to hold that any LLC memberships granted to passive members—i.e., members who have little or no right to participate in LLC management—are securities. If LLCs you form will have passive members and if you yourself are not a securities lawyer, you should consult with a securities lawyer before the LLC is formed.
In Hibbs v. Berger, 2014 WL 1796755 (Mo. App. May 6, 2014), the Missouri Court of Appeals held that a 5% minority member of a Missouri LLC may pierce the LLC’s veil to make claims against the LLC’s majority members. The case illustrates the very broad equitable powers that courts may exercise in veil-piercing cases. A key function of lawyers forming LLCs is to instruct their clients about veil-piercing. The Hibbs case would be good grist in any LLC veil-piercing tutorial.
FAMILY DYNAMICS AND THE ESTATE PLANNING FACTOR IN DRAFTING SHAREHOLDER AGREEMENTS (AND BY IMPLICATION, LLC OPERATING AGREEMENTS)
Peter Mahler’s latest blog post addresses the above issues superbly.
Yesterday, a Florida district court of appeals issued its opinion yesterday in a case called Young v. Levy, 2014 WL 2741060. The case holds that because of the “exclusive remedy” language in the charging order provisions of the Florida LLC Act, plaintiffs can only obtain charging orders on distributions by the LLC in question to one of its members, and cannot obtain garnishments of these distributions. The LLC acts of roughly 15 other states have exclusivity provisions similar to Florida’s.