Category: LLC Definitions

LAW JOURNAL ARTICLE ABOUT LLCS AS CONTRACTUAL ENTITIES

By , September 19, 2018 4:22 pm

A thoughtful law journal article explores the extent to which LLCs really are the purely contractual entities they are often described as being under the Delaware Limited Liability Company Act.  The citation to the article and the abstract of it are below.

42 Del. J. Corp. L. 391
Delaware Journal of Corporate Law
2018
Article
Mohsen Manesh
Copyright © 2018 by Widener University Delaware Law School; Mohsen Manesh
CREATURES OF CONTRACT: A HALF-TRUTH ABOUT LLCS

ABSTRACT

Courts reflexively describe LLCs–the nation’s most popular form of business entity–as “creatures of contract,” the contract being, of course, the LLC agreement that governs the rights and obligations of the parties that own and manage the entity. The judicial reflex to use this maxim is especially pronounced in Delaware, where today LLCs outnumber corporations by more than two to one. And because Delaware LLC law, like its corporate law, enjoys an outsized influence in the business world, courts in other jurisdictions have now predictably embraced the “creatures of contract” maxim, too.

But to describe LLCs as “creatures of contract,” while perhaps a useful shorthand, is simply misleading. LLCs are also creatures of statute. And they are also creatures of equity. This claim is not normative; it is a legal reality.

Therefore, the singular aim of this Article is to puncture the persistent fantasy that LLCs are “creatures of contract.” More accurately, this Article shows that LLCs embody a complex interaction of contract terms, statutory rules, and judge-made doctrine. Thus, LLCs are creatures of contract, statute, and equity.

IMPLIED COVENANT

By , June 18, 2018 3:59 pm

Under the link below is an excellent discussion in a post by the Delaware law firm of Fox Rothschild concerning a recent decision of the Delaware Chancery Court defining the parameters of the implied contractual covenant of good faith and fair dealing and making clear that the doctrine applies only when one party to a contract has acted arbitrarily or unreasonably and thereby frustrated the reasonable expectations of the other party.

Here’s the link:  https://delawarechancery.foxrothschild.com/case-summaries/implied-covenant-of-good-faith-and-fair-dealing-claim-dismissed-by-chancery/?utm_source=Fox+Rothschild+-+Delaware+Chancery+Law+Blog&utm_campaign=cb9a51f367-RSS_EMAIL_CAMPAIGN&utm_medium=email&utm_term=0_86821ff155-cb9a51f367-70733165

DEADLOCK

By , December 13, 2017 3:52 pm

In the post under the link below, Peter Mahler discusses a Massachusetts Supreme Court case providing a judicial a definition for the term “deadlock” under the deadlock-dissolution provision in the Massachusetts corporate statute.   Peter’s posts are always excellent, but in my view, the post below ranks as one of his very best, and the definition in the Massachusetts case applies just as much to LLCs as to corporations.

A key question about the definition for LLC formation lawyers is this:  What are its implications in LLC formation practice—i.e., in planning, negotiating and drafting LLC operating agreements?  I’ll try my hand at addressing that question in a forthcoming post.

Here’s the link:  http://www.nybusinessdivorce.com/2017/10/articles/deadlock/court-defines-true-deadlock/

DISSOLUTION VS. LIQUIDATION

By , January 21, 2015 2:27 pm

Another basic distinction you should be aware of in forming LLCs is the distinction between an LLC dissolution and an LLC liquidation.  Click here for to read a post about this distinction in the excellent LLC blog called LLC Law Monitor.

APPARENT VS. ACTUAL AUTHORITY

By , January 21, 2015 2:20 pm

In handling LLC formations, you need to understand the difference between actual and apparent LLC member and manager authority.   For a clear explanation of the difference in the context of litigation in a New York court, click here for a recent post in an excellent LLC blog called LLC Law Monitor.

 

WHAT DOES “MATERIAL” MEAN?

By , January 19, 2015 3:44 pm

The term “material” is often a useful one to include in LLC operating agreements, even though the precise meaning of the term is usually quite unclear.  For example, many operating agreements provide that the managers must promptly disclose to the members all material information of which the managers become aware that may affect the LLC.  The following link briefly discusses this issue under Delaware law and includes a link to a very recent Delaware case on the issue:

http://www.delawarebusinesslitigation.com/2015/01/articles/case-summaries/ma/court-of-chancery-explains-what-is-a-material-disclosure/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+DelawareBusinessLitigationReport+%28Delaware+Business+Litigation+Report%29.

MEANING OF THE TERM “LLC INTEREST”

By , August 7, 2014 2:11 pm

Even experienced LLC lawyers sometimes refer to LLC members’ memberships as “LLC interests.”  However, under most LLC statutes, the term “LLC interest” means only a member’s right to allocations of LLC profits and losses and to distributions of LLC cash and other assets.  It does not mean a member’s LLC membership rights in their entirety (including, for example, management and fiduciary rights).

The above meaning of the term “LLC interest” is the basis for an interesting recent LLC charging order case.  The cite is Young v. Levy, 140 So.3d 1109 (District Court of Appeal of Florida, Fourth District, June 18, 2014).

THE MEANING OF “LIMITED LIABILITY”

By , June 23, 2014 6:28 pm

Whenever you form an LLC for your clients, you should explain to them the meaning of key LLC statutory rules and terms relevant to them.  The most relevant term of all is often the term “limited liability.”   In this blog post, Doug Batey discusses two issues concerning limited liability that often arise in LLC formations and operations.

WHAT IS AN LLC “MANAGER”?

By , March 22, 2014 3:42 pm

The term “manager” is one of the most basic terms in LLC business organization law, but I know of no LLC act that defines the term.  This post in a Morris James LLP blog entitled “Delaware Business Litigation Report” discusses a recent Delaware district court decision that defines it.  Basically, the case holds that in LLCs that are governed by a board, the board members are “managers” for purposes of the relevant Delaware personal jurisdiction statute but the officers to whom the board delegates management functions and authority are not.  The case citation is Wakley Limited v. Ensotran LLC, C.A. 12-728-GMS (March 18, 2014).

I think the Wakley decision is of questionable validity, but, unless overturned on appeal, it is likely to be influential not only in Delaware but also in many other states.