Category: Contract Drafting

PURPOSE CLAUSES IN LLC OPERATING AGREEMENTS

By , August 28, 2018 7:44 pm

The post by Peter Mahler under the link below shows the potential complexity and the land mines lurking in operating agreement purpose clauses approving “any lawful purpose.”  Maybe in some cases the solution is to provide that the members by majority or supermajority vote may specify or limit their LLC’s purpose from time to time.  In any event, thanks to Peter, I find I’m looking at “standard” purpose clauses with a new level of caution.

Here’s the link:  https://www.nybusinessdivorce.com/2018/02/articles/llcs/purposeless-purpose-clause-makes-comeback/

LLC MEMBER EXPULSIONS

By , June 7, 2018 1:47 pm

When things go bad among LLC members, the expulsion provision in their operating agreement can be the most important provision in the agreement—and it better be well drafted.  In the excellent post under the link below, Peter Mahler of the FarrellFritz law firm provides an excellent general discussion of LLC operating agreement expulsion provisions and of a recent New York expulsion case.

Here’s the link:  https://www.nybusinessdivorce.com/2018/02/articles/expulsion-and-removal/llc-member-expulsion-hath-shapiro-wrought/

TRANSFERRING MEMBERSHIPS IN FAMILY BUSINESS ENTITIES

By , October 25, 2017 4:06 pm

The post under the link below is a brief but useful discussion concerning the importance of properly drafting business ownership transfer provisions in the partnership agreements of family business entities.

Here’s the link:  http://www.fiduciarylawblog.com/2017/08/who-are-the-partners-now.html

EXCULPATORY PROVISIONS

By , July 28, 2017 1:09 pm

It is often appropriate to include exculpatory provisions in the operating agreements of multi-member LLCs.  The post under the link below discusses a Delaware case concerning an exculpatory provision under the Delaware Limited Liability Company Act, but the post is also relevant to the drafting of these provisions under LLC acts other than the Delaware Act.

Here is the link:

https://www.natlawreview.com/article/exculpatory-provisions-under-delaware-law-say-what-you-mean-and-mean-what-you-say

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