Category: LLC Cases

WHEN ARE LLCS SUBJECT TO CORPORATE LAW?

By , November 21, 2016 5:43 pm

I’ve already addressed once in this blog the Delaware case holding that an LLC may be subject to corporate law if its operating agreement so provides; but the subject is so important that I want to state below the title and the first paragraph of a new article about that case that just appeared:

2016-SEP Bus. L. Today 1
Business Law Today
September, 2016
Department
DELAWARE INSIDER: BE CAREFUL WHAT YOU ASK FOR: COURT OF CHANCERY FINDS CORPORATE LAW GOVERNS LLC BASED ON DRAFTING OF LLC AGREEMENT
Jason C. Jowers
Copyright © 2016 by the American Bar Association; Jason C. Jowers

It is the policy of the Delaware Limited Liability Company Act (LLC Act) “to give the maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements.” Indeed, cases routinely refer to LLCs as “creatures of contract,” given that the LLC Act generally cedes governance of the entity to the terms of the LLC agreement, establishing few mandatory provisions and normally only providing “gap fillers” where an LLC agreement is silent. Consequently, members of an LLC “can ‘customize’ their company, largely free of externally imposed restrictions.” Robert L. Symonds, Jr. & Matthew J. O’Toole, Delaware Limited Liability Companies § 1.03[A][1][a], at 1-13(2015). But what happens when drafters of LLC agreements use their statutorily granted freedom to adopt a governance structure that is similar to that of a corporation? Does adopting a corporate-style structure also adopt the corporate case law interpreting that structure and imposing restrictions?

In the recent case of Obeid v. Hogan, 2016 WL 3356851 (Del. Ch. June 10, 2016), the Delaware Court of Chancery confirmed that a Delaware LLC may adopt a governance structure that looks more like a corporation than a traditional LLC, but it also explained that “[t]he choices that the drafters make have consequences.” By adopting a corporate-style of governance, such as a board of directors, the Court of Chancery will to some extent turn by analogy to Delaware’s case law governing corporate boards of directors. If the LLC agreement drafters wish to adopt a board of directors structure but do not wish to import Delaware’s body of board governance case law by analogy, the drafters should specify rules in the LLC agreement to the extent they wish to deviate from the traditional corporate rules.

 

NY CASE ABOUT “PICK YOUR PARTNER” AND RELATED CONCEPTS

By , September 14, 2016 3:41 pm

The “pick-your-partner” concept and the related concepts of member vs. assignee and management rights vs. LLC interests are central to LLC law both in forming LLCs and in other LLC matters.  The recent NY court decision discussed by Peter Mahler under the link below addresses all of these concepts in deciding a case  involving all of them.  If any of your clients or if lawyers or accountants with whom you’re dealing in LLC matters raise questions about these concepts, the decision under the link below will provide them with authoritative (or at least persuasive) responses.

Here’s the link:  http://www.nybusinessdivorce.com/2016/08/articles/access-to-books-and-records/operating-agreements-two-step-consent-provision-foils-assignment-llc-member-interest/#

DECISION OF NJ SUPREME COURT IN IE TEST

By , August 10, 2016 2:29 pm

A couple of days ago, I shared a post published that day about the decision of the NJ Supreme Court in the IE Test case, but I received today a post from Peter Mahler about that case.  Peter’s analyses of LLC cases are always excellent, so I’m setting forth the link to his post below.  The case deals with a critically important LLC issue concerning statutory expulsions of LLC members.  Here’s the link:

http://www.nybusinessdivorce.com/2016/08/articles/deadlock/new-jersey-supreme-court-raises-bar-judicial-expulsion-llc-members/

BLOG POST BY TOM RUTLEDGE ABOUT NEW NJ CASE ABOUT EXPULSION OF LLC MEMBER

By , August 8, 2016 3:06 pm

Under the following link is an excellent summary by Tom Rutledge concerning a very recent NJ Supreme Court case concerning the expulsion of an LLC member under a statutory expulsion provision in the NJ LLC Act:

http://kentuckybusinessentitylaw.blogspot.com/2016/08/new-jersey-supreme-court-analyzes.html

DICTA ABOUT THE NATURE OF LLCS AND LLC MANAGEMENT STRUCTURE IN DEL. SUPREME COURT RULING IN OBEID V. HOGAN

By , July 13, 2016 2:11 pm

By statute or under their operating agreements under most or all U.S. LLC acts, multi-member LLCs can have any of three main management structures:

  • Management by the members (akin to the general partnership management structure);
  • Management by one or more managers (akin to the limited partnership management structure); and
  • Management by a board of directors and by officers (akin to the classic state-law corporate management structure).

One June 10, 2015, the Delaware Court of Chancery issued its memorandum opinion in a case called Obeid v. Hogan (C.A. No. 11900-VCL).  The facts, legal issues and rulings in the case are set forth in the post under the link below, but they not relevant to most LLC formations.  However, in dicta, the court also stated its views about two issues that are of great significance in LLC formation issues in drafting operating agreements  not only under  the Delaware Limited Liability Company Act (the “Delaware Act”) but under most or all other LLC acts.

  1. First, the court noted that when the members of an LLC choose one of the above management structures, they may also be choosing, whether they know it or not, to be subject to a broad range of statutory business organization law rules not imposed by the Delaware Act, but rather, in the case of the above three management structures, by, respectively, Delaware general partnership, limited partnership or corporate statutory law.
  2. The court noted that while contractual freedom is key under the Delaware Act, it is wrong to say that Delaware LLCs are “purely” contractual entities.  As the court explained, many key rules governing Delaware LLCs are statutory rules that result from the fact that Delaware LLCs are a product of the Delaware legislature.  Not only in Delaware but also in all other states, lawyers in drafting operating agreements must be aware of these key LLC non-contractual rules.

If you’d like to know about the facts, issues and rulings in Obeid v. Hogan, click here:  http://www.rlf.com/Publications/6517

RECENT NY LLC CASES ABOUT MANAGER REMOVALS AND OTHER ISSUES

By , March 23, 2016 2:34 pm

Here is a link to another excellent new Peter Mahler blog about recent NY LLC cases concerning manager removals and other LLC issues:  http://www.nybusinessdivorce.com/2016/02/articles/grounds-for-dissolution/winter-case-notes-llc-manager-removal-and-other-recent-decisions-of-interest/.

DELAWARE CASE RE: INSPECTION RIGHTS

By , March 15, 2016 3:09 pm

The case discussed in the link below addresses the difference between the inspection rights of managers and those of (mere) members.  This difference appears in many LLC acts besides that of Delaware.  Here’s the link:

http://www.lexology.com/library/detail.aspx?g=aa3ab17f-2c1c-4c1d-9ea3-dbf580277a9c&l=7QNDUY0

COURT OF CHANCERY EXPLAINS THE IMPLIED COVENANT RULES

By , February 20, 2015 9:45 pm
Note: This was first posted on 11/26/14 but was accidentally deleted.
The Delaware Chamber of commerce published on November 17, 2015 the case under Delaware law on the implied contractual covenant of good faith and fair dealing referred to, summarized and cited in the attached blog post.
The implied contractual covenant of good faith and fair dealing lies at the very heart of LLC contract law in every U.S. jurisdiction.  Every competent LLC lawyer needs a comprehensive understanding of the Implied Covenant, because it is often central to the negotiation of tricky issues in LLC operating agreements. 
Obviously, you need to understand the Implied Covenant under the common law of your own state.  But the opinion is likely to be persuasive in your state.

PETER MAHLER BLOG RE IMPORTANT CASES FROM SEVERAL JURISDICTIONS CONCERNING LEGAL ISSUES FOR CLOSELY-HELD BUSINESS ENTITIES

By , February 18, 2015 2:45 pm

Below is a link to the above terrific post by Peter Mahler.

http://www.nybusinessdivorce.com/2015/02/articles/grounds-for-dissolution/round-up-of-recent-business-divorce-cases-from-across-the-country/

THE HOBBY LOBBY CASE

By , January 27, 2015 2:21 pm

In an excellent recent law journal article entitled “Corporate Law after Hobby Lobby,” available here, two corporate law professors have argued persuasively for the validity of the U.S. Supreme Court’s decision in Hobby Lobby that closely held state-law business corporations as entities (i) may engage in religious conduct; (ii) may have a religious purpose; and (iiI) need not have as a purpose the maximization of profits for the benefit of their shareholders.  In my view, the reasoning in the article applies equally to LLCs.  This means that if your clients want to form an LLC for a religious purpose, they may validly do so under Hobby Lobby unless state law provides otherwise.  And in my view, this meaning applies equally to clients who want to form LLCs for purposes of promoting religious skepticism, critical thinking or other purposes that some people might view as anti-religious.