IS THIS ENTITY A PARTNERSHIP?

By , August 15, 2018 3:13 pm

Some of our clients operate their business entity very informally before they come to us, and in such a way that even the federal tax regimen of the entity is unclear.  The attached excellent post about that issue by Lou Vlahos of Farrell Fritz addresses this issue under the link below.

https://www.taxlawforchb.com/2018/07/its-not-an-llc-its-not-an-lp-but-is-it-a-partnership/

LLC FIDUCIARY LAW

By , August 9, 2018 11:53 am

Published in the Marquette Law Review is a lengthy, scholarly but also practical article about LLC fiduciary law under the Wisconsin LLC Act.  It will, of course, be of particular relevance to Wisconsin lawyer, but also to LLC lawyers nationally.  Below are the title, table of contents and first paragraph of the article.

101 Marq. L. Rev. 863
Marquette Law Review
Spring, 2018
Comment
Collin D. Brunk
Copyright © 2018 by the Marquette Law Review; Collin D. Brunk
POLISHING UP WISCONSIN’S FIDUCIARY DUTIES IN LLC LAW TO ATTRACT NEW SUITORS

I. INTRODUCTION
II. EXPLORING THE HISTORY OF LLCS AND FIDUCIARY DUTIES
A. Formation and Structures of LLCs
B. Overview of Fiduciary Duties
III. APPLICABLE LLC METHODS
A. Revised Uniform Limited Liability Company Act
B. Delaware LLC Method
1. Delaware’s contractual waiver of duties
2. Delaware’s ambiguous default duties
C. Wisconsin’s Adoption of LLCs
1. Waiver of fiduciary duties
2. Default common law fiduciary duties in Wisconsin
IV. INCREASING THE ATTRACTIVENESS OF WISCONSIN LLCS
V. CONCLUSION

INTRODUCTION

Should individuals be allowed to waive fiduciary duties in a limited liability company (LLC)? Why do these fiduciary duties matter? These questions pervade scholar’s discussions when looking to improve a state’s LLC provisions. Many states permit the contractual alteration and elimination of fiduciary duties in an LLC through waiver. However, many states fail to provide clear default fiduciary duties owed by members or managers of the LLC, nor do they provide a clear upholding of waived duties. Without a clearly articulated waiver policy and list of default duties, members and potential investors may experience higher transaction costs upon LLC formation and shy away from forming an LLC in that state. Allowing such issues to persist directly contradicts the policy behind LLC formation. As one scholar stated, “[T]he overall social policy goal of business entity governance [is] to foster investor confidence while keeping transaction costs at a minimum.” Thus, a state’s LLC statute and related provisions should reflect this sentiment.

Since Wisconsin’s adoption of the LLC in 1994 little discussion has occurred regarding the default fiduciary duties members owe to the LLC and each other. Such lack of discussion leaves Wisconsin courts, attorneys, members of the LLC, and third parties to guess at the baseline fiduciary duties owed by members and managers. This topic must be tackled because the Wisconsin LLC statute ambiguously lists the default duties. The ambiguity in the current statute and lack of discussion leaves scholars debating whether common law fiduciary duties are owed if not contractually altered in the operating agreement.

Wisconsin courts waver on their implementation of the “common law” fiduciary duties to members of an LLC, creating great uncertainty for members, managers, and investors in LLCs. The only certainty that parties in Wisconsin rely on is that fiduciary duties may be altered or waived by the contractual language of the operating agreement. However, this waiver of fiduciary duties has not yet been upheld by Wisconsin courts, creating many issues as parties are uncertain if their waiver will be enforced.

Part II of this Comment examines the national rise of LLCs. Additionally, it explores the purpose of fiduciary duties as well as why they apply to certain individuals. This discussion puts into perspective the need to revise Wisconsin’s current LLC Act or enact a new LLC statute. Part III looks at the two most popular LLC regulatory methods, the Revised Uniform Limited Liability Company Act (RULLCA) and the Delaware method. Critiquing and examining these methods allows one to find the best practices to apply in Wisconsin. In addition, this part examines Wisconsin’s current LLC Act and the surrounding provisions, noting significant gaps in the current provisions. Part IV provides how Wisconsin can fill the gaps in its LLC provisions by enacting a new LLC statute that explicitly creates the default fiduciary duties of loyalty and care, but allows for the contractual waiver of these duties. The benefits derived from enacting this statute will increase investment in LLCs or promote additional LLC formations by fostering member and investor confidence.

LLCS AND VEIL-PIERCING

By , August 2, 2018 11:15 am

Below is a cite to an article about LLCs and veil piercing.

51 Creighton L. Rev. 513
Creighton Law Review
June, 2018
Article
Daniel Buchholz
Copyright © 2018 by Creighton University; Daniel Buchholz

LIMITED LIABILITY COMPANIES AND VOLUNTARY CREDITORS: REEXAMINING THE ABOLISHMENT OF VEIL PIERCING

Here is the text of the conclusion of the article:

CONCLUSION

While veil piercing may be applied incoherently and haphazardly, there may be predictable rationales courts use to pierce the veil. Nonetheless, veil piercing’s application and rationales for voluntary LLC creditors contradict both the DLLCA (and similar statutes that pattern the DLLCA) and LLC law in general. This Article demonstrates that the DLLCA grants voluntary LLC creditors numerous opportunities to protect themselves. In fact, permitting voluntary creditors to pierce the LLC veil may be inconsistent with the DLLCA and LLC common law, such as fiduciary duties. Accordingly, courts and legislatures should prevent any further LLC veil piercing by voluntary creditors.

IMPORTANT LAW JOURNAL ARTICLE ABOUT LLC LAW AND EQUITY

By , July 30, 2018 10:31 am

In 44 Florida State University Law Review 93 (Fall, 2016) Mohsen Manesh, a leading LLC scholar, published an important article about LLC law entitled “Equity in LLC Law.”  For some reason, the article has only just now become available in WestLaw.  The following is an abstract of the article:

To what extent does equity play a role in LLC law? To what extent do courts retain the judicial discretion “to do right and justice” in circumstances in which the LLC statute and the applicable LLC agreement do not otherwise offer an adequate remedy to an aggrieved LLC member or manager? Until recently, the answer to these questions was quite clear: Equity is subordinate to the freedom of contract and the express terms of the agreement governing an LLC. But the Delaware Chancery Court’s decision inIn re Carlisle Etcetera has upended this basic percept of LLC law and practice. Carlisle suggests that courts need not sheepishly defer to the express terms of an LLC agreement. Instead, where justice dictates a different result,Carlisle suggests that courts retain the equitable power to apply fiduciary standards or recognize other equitable rights or duties, despite the statutorily mandated freedom of contract under LLC law. Thus, this Article argues thatCarlisle represents a true paradigm shift. It inverts the long-assumed supremacy of contract over equity in LLC law. Instead, the freedom of contract must be exercised always in the shadow of equity.

SHAREHOLDER OPPRESSION

By , July 26, 2018 9:40 am

The excellent post by Peter Mahler under the link below about shareholder oppression applies equally to oppression of minority members of LLCs.

Here’s the link:  https://www.nybusinessdivorce.com/2018/04/articles/dissolution-procedure/shareholder-oppression-requires-denial-access-company-information/

LLCS AT THE END OF THEIR LIFE

By , July 23, 2018 12:54 pm

If you happen to be handling any LLC end-of-life matters, or if think you ever will, you may want to acquire the slides provided in the ALI seminar identified below.  I’ve downloaded them.  They’re excellent.

TSZA06 ALI-CLE 1
The American Law Institute Continuing Legal Education
ALI-CLE Course Materials
March 8, 2018
WRAPPING IT UP FOR ALTERNATIVE ENTITIES: WHAT TO DO WHEN THE END IS NEAR FOR LLCS AND LPS — SLIDES
James P. Hughes, Jr.
Young Conaway Stargatt & Taylor, LLP
Wilmington, Delaware
Elisa Erlenbach Maas
Richards, Layton & Finger PA
Wilmington, Delaware
Benyamin S. Ross
Gibson, Dunn & Crutcher LLP
Los Angeles, California

IMPLIED COVENANT

By , June 18, 2018 11:01 am

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

USE OF TRUSTS IN BUSINESS ARRANGEMENTS

By , June 14, 2018 1:45 pm

The attached post from Lou Vlahos of the FarrellFritz law firm under the link below is a brief but informative discussion about the use of trusts to structure business arrangements.  I think it will be as interesting to estate planners as to business lawyers.

Here’s the link:  https://www.taxlawforchb.com/2018/03/trusts-and-the-corporate-lawyer/

ONE 50% SHAREHOLDER WANTS TO SELL OR LIQUIDATE THE BUSINESS. THE OTHER WANTS TO KEEP IT GOING. IS THAT DEADLOCK?

By , June 12, 2018 9:57 am

Under the link below is Peter Mahler’s post, which he titles as follows:  “New Post from NY Business Divorce: One 50% Shareholder Wants to Sell or Liquidate the Business. The Other Wants to Keep It Going. Is That Deadlock?”  Needless to say, his post is highly relevant not only to state-law business corporations but also to multi-member LLCs.

Here’s the link:  https://www.nybusinessdivorce.com/2018/03/articles/deadlock/one-50-shareholder-wants-sell-liquidate-business-wants-keep-going-deadlock/

LLC MEMBER EXPULSIONS

By , June 7, 2018 8:50 am

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/