Category: Contract Drafting

LAW JOURNAL ARTICLE ABOUT CONTRACTING AROUND LLC STATUTE DEFAULT RULES

By , June 6, 2017 5:27 pm

A key task in drafting any LLC operating agreement is to draft provisions in it that validly override default provisions in the governing LLC act that are contrary to your clients’ best interests.  Below are the citation and first paragraph of a law journal article about this process.

42 J. Corp. L. 503
Journal of Corporation Law
Spring, 2017
Article
Peter Molk
Copyright © 2016 by the University of Iowa (The Journal of Corporation Law); Peter Molk
HOW DO LLC OWNERS CONTRACT AROUND DEFAULT STATUTORY PROTECTIONS?

Limited liability companies are built on the idea of contractual freedom. Unlike with other business organization forms, most owner protections apply only by default to LLCs, which are free to waive or modify them as desired. This freedom promises economic efficiency if parties are sophisticated but raises the potential for opportunism by relatively more sophisticated managers and majority owners. While companies ranging from small landscape firms to Chrysler and Fidelity organize as LLCs, remarkably little is known about whether or how LLCs use this contractual flexibility.

I analyze the operating agreements of 283 privately owned LLCs organized under Delaware and New York law to determine when and how parties alter default provisions. I find widespread use of LLC statutes’ flexibility to decrease default owner protections, as well as widespread adoption of owner protections that do not apply by default. There is little evidence, however, that the contractual freedom is used to craft systematically more efficient contractual owner protections. Instead, using a proxy for owner vulnerability, I find that LLCs with more vulnerable owners adopt significantly fewer owner safeguards, suggesting that contractual freedom may be used more often for opportunism and not for efficiency.

NON-COMPETES

By , April 14, 2017 6:18 pm

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

AGREEMENTS TO AGREE

By , April 3, 2017 2:42 pm

It sometimes happens in an LLC formation process that the parties have agreed to enter into a comprehensive operating agreement but for some reason are not yet read able or willing to draft the agreement. The law journal article cited below discusses this situation in general (i.e., not LLC-specific) terms, but it is readily applicable to the above “agreement to agree” among LLC members. Here is the cite:

35 Corp. Couns. Rev. 123
Corporate Counsel Review
May, 2016
Casenote
ENFORCEABILITY OF AN AGREEMENT TO AGREE IN A COMMERCIAL CONTEXT
Fischer v. CTMI, L.L.C., No. 13-0977, 2016 Tex. LEXIS 2 (Tex. Jan. 8, 2016)
Rhiannon Jajoo
Copyright: 2016 by Corporate Counsel Review; Rhiannon Jajoo

Here is the key paragraph in the article:

“The result found in this case indicates that language in a contract requiring parties to come to some mutual agreement in the future will not render the contract unenforceable as long as the contract contains enough material terms to allow the Court to enforce it. If parties truly do not intend to be bound by an agreement to agree at a later date, the parties must make that clear in the contract language, either by omitting material terms or by specific indication.”

CONTRACT PROSE

By , March 13, 2017 2:59 pm

Under the link below is one of the best short pieces on writing legal prose that I’ve ever encountered. I’d only add the following: Every contract that contains four or more pages of provisions should begin with a title page and a one-level table of contents, and every contract that contains ten or more pages of provisions should begin with a title page, a one-level summary of contents and a two-level table of contents.

Here’s the link:

http://www.lexology.com/library/detail.aspx?g=5a6ebd27-3e27-4d16-9a26-be9f0c569fc7&l=7TW42C2

PRACTICE TIP CONCERNING THE USE OF “EXCEPT AS OTHERWISE PROVIDED IN THIS AGREEMENT”

By , February 24, 2017 3:41 pm

I’m often asked by clients to review operating agreements drafted by other lawyers for LLCs that my clients may want to join.  A phrase I often see in one or more of the provisions of many of these agreements is the phrase “except as otherwise provided in this Agreement.”

I beg you to never use the above phrase in operating agreements that you draft.  The phrase forces readers, in the case of each such provision, to comb through the entire agreement to find “other provisions.”  Instead, just cite those other provisions.

DRAFTING INSPECTION PROVISIONS FOR DELAWARE LLCS WHOSE MEMBERS AREN’T DELAWARE CITIZENS AND WHO OPERATE THE LLC’S BUSINESS OUTSIDE OF DELAWARE

By , February 8, 2017 2:30 pm

The post under the link below discusses a North Carolina case addressing the issue of whether the Delaware Limited Liability Company Act can prevent North Carolina residents from obtaining a North Carolina court order permitting them to inspect the books and records of a Delaware LLC.  Believe it or not, the North Carolina court says they can’t.  The case addresses an issue on which every lawyer drafting LLC agreements for Delaware LLCs with non-Delaware members needs to be an expert.

Here is the link:  http://www.lexology.com/library/detail.aspx?g=3bcf043e-1963-45cb-8c19-97ad8c188986&l=7SX6EVN

BE CAREFUL WHAT YOU EMAIL!

By , February 3, 2017 3:01 pm

Here is the first sentence of the new post under the link below:

“In Gomes v. Karnell, No. 11814-VCMR (Del. Ch. Nov. 30, 2016), the Delaware Court of Chancery granted the defendants’ motion to compel arbitration and held that an email exchange between the parties’ attorneys formed a valid arbitration agreement.”

The lesson of the case is one that applies to all e-mails that all lawyers, including LLC lawyers, should apply to all of their e-mails to anyone if they could be read to impose obligations on their clients.

Here is the link:  http://www.lexology.com/library/detail.aspx?g=2c8a71ac-c718-454a-93a9-056bd5381d6f&l=7T95Y3G

ARTICLE ABOUT KEY CONTRACT TERMS IN THE INTER-OWNER AGREEMENTS OF PRIVATELY HELD COMPANIES

By , January 24, 2017 5:47 pm

The article cited below provides an excellent discussion of buy-sell provisions, tag-along and drag-along provisions and many other key provisions in the inter-owner agreements of privately held companies, including LLCs.

53 Am. Bus. L.J. 677
American Business Law Journal
Winter 2016
PRIVATE ORDERING OF EXIT IN LIMITED LIABILITY COMPANIES: THEORY AND EVIDENCE FROM BUSINESS ORGANIZATION CONTRACTS
Suren Gomtsian
Copyright © 2016 by Academy of Legal Studies in Business; Suren Gomtsian

NON-COMPETES AND TRADE SECRETS

By , December 23, 2016 11:36 am

Under the link below is a good new post on non-competes and trade secrets—the basics of which every LLC lawyer should know well.  And the post is in the form of a Christmas poem!

Here’s the link:  http://www.lexology.com/library/detail.aspx?g=74ed3e8b-58a6-4bb8-968b-a125012843c0&l=7T95Y3R

Merry Christmas!

CONTRACT THEORY

By , November 18, 2016 5:29 pm

Although LLCs are statutory entities, they are profoundly contractual.  The Nobel Prize in Economics was won this year by two contractual theorists.  For a summary of their thoughts, click here:

https://app.box.com/s/fw17k5uuvs580i9vvdj12h8ugpj43x1p