SUBSCRIPTION AGREEMENTS IN LLC FORMATIONS

By , December 16, 2014 2:51 pm

If you’re forming an LLC that will have even just one passive investor, you’ll have to address federal and state security laws protecting these investors.   This new post by Peter Mahler in his great blog entitled “Business Divorce” addresses significant LLC formation issues arising in the securities law “subscription agreement” included as a key exhibit to the operating agreement of the LLC in question in Peter’s post.

POLICING DEFINED TERMS

By , December 12, 2014 3:09 pm

Here’s another recent Ken Adams post in his blog on contract drafting that applies powerfully to the drafting of LLC operating agreements:  http://www.adamsdrafting.com/why-its-important-to-police-your-defined-terms/.

KEN ADAMS’ BLOG ON DUMBING DOWN

By , December 11, 2014 2:39 pm

Here’s another good recent post by Ken Adam in his blog on contract drafting: http://www.adamsdrafting.com/clear-drafting-doesnt-involve-dumbing-down/.  The post applies as much to LLC operating agreements as to all other types of contracts.

KEN ADAMS’ BLOG ON “MAY/SHALL/UNLESS” CONUNDRUM

By , December 11, 2014 2:34 pm

As I’ve written previously in posts to this listserv, by far the best blog I know of on how to draft legal prose, including contract prose, is Ken Adams’ blog.  Here is a link to his recent post on a “may/shall/unless” conundrum that arises from time to time in drafting LLC operating agreements (and many other types of contracts):  http://www.adamsdrafting.com/shall-not-unless-versus-may-only-if/.

MINORITY SHAREHOLDER’S INVESTIGATION OF MANAGEMENT MISCONDUCT IS PROPER PURPOSE FOR BOOKS & RECORDS DEMAND

By , December 11, 2014 2:17 pm

If you represent non-manager members in an LLC formation, you have to take every reasonable step in the operating agreement to protect them from manager misconduct.  The first step is usually to ensure that they can obtain detailed information from the LLC as to whether that misconduct has occurred, is occurring, or may occur.  You should draft the member information provisions in operating agreements for the above clients to maximize the opportunity of clients under the governing statute and the operating agreement to obtain the relevant LLC information.  One way is to expressly provide in the agreement that a “proper purpose” of a client information demand is to explore any significant current or future possibility of manager misconduct.  This “proper purpose” issue  is discussed in the recent Delaware case here.

REMINDER! SEMINAR ON PICK YOUR PARTNER AND CHARGING ORDER PROVISIONS

By , December 9, 2014 3:22 pm

I will be teaching a 1.5-hour seminar on the above subjects on December 11.  If these subjects interest you and you want more information about my seminar, click on this link:  http://www.nbi-sems.com/Details.aspx/R-68133ER%7C?ctname=SPKEM.

COURT OF CHANCERY AFFIRMS ARBITRATION AWARD

By , December 4, 2014 4:17 pm

Many operating agreements of multi-member LLCs do and should contain arbitration provisions.   Comprehensive arbitration provisions are contained in the model operating agreements (“forms”) in my book.  The attached Delaware case illustrates how difficult it is to persuade courts to set aside arbitration rulings.  You should make your LLC formation clients aware of this fact about arbitration.

Personally, I think that a strong arbitration provision in an operating agreement, plus some coaching by lawyers about arbitration, can be a powerful incentive for LLC members to resolve internal LLC disputes voluntarily.

SEMINAR ON CHARGING ORDER AND PICK-YOUR-PARTNER PROVISIONS

By , November 17, 2014 3:19 pm

I will be teaching a 1.5-hour seminar on the above subjects on December 11.  If these subjects interest you and you want more information about my seminar, click on this link:  http://www.nbi-sems.com/Details.aspx/R-68133ER%7C?ctname=SPKEM.

KEN ADAM’S BLOG ABOUT CONTRACT DRAFTING

By , November 11, 2014 2:47 pm

Obviously, LLC operating agreements should be well drafted in plain English that clients can readily understand.  The best website I know of on contract drafting is written by a lawyer named Ken Adams.  The URL is www.adamsdrafting.com.  (If you know of other good websites on contract drafting, please so indicate in a response to this post.)  Ken is the author of the ABA handbook on contract drafting, and he teaches contract drafting seminars to law firms worldwide.  If contract drafting is a subject that interests you, I suggest you click on the link to his website and then on the navigation button marked blog.  This will enable you to subscribe to his website blog posts.

DISPUTES BETWEEN MEMBERS OF TWO-MEMBER LLCS

By , November 10, 2014 6:05 pm

About 70 percent of all LLCs are single-member LLCs owned by individual.  About 25 percent  are two-member LLCs.  Only about 5% of all LLCs have three or more members.

The biggest risk for two-member LLCs are (i)  deadlock between the members and (ii) serious misconduct by one of the members.  The latter risk is addressed in this terrific recent blog post by Peter Mahler.

When you form two-member LLCs for your clients, you’ve got to address the above two risks forcefully in your clients’ operating agreements.   Failure to do so would be a clear violation of the duty of competence under Rule 1.1 of the ABA Model Code of Professional Conduct as in effect in most states, and could lead to a well-deserved malpractice claim.