Any operating agreement for a relatively sophisticated or substantial business should contain a provision providing for the advancement of litigation expenses to managers who are sued because of their activities or omissions as managers. The post under the link below discusses a recent Delaware case about contested advancement provisions in the operating agreement of a Delaware LLC.
Category: Operating agreements
GOOD FAITH VS. BOARD DISCRETION IN OPERATING AGREEMENTS; DEADLINE PROVISIONS IN OPERATING AGREEMENTS
Operating agreements and related membership repurchase agreements often contain both (i) management discretion provisions and (ii) provisions requiring management to act in good faith. And of course the contractual law of most or all jurisdictions imposes on LLC members and managers an implied contractual covenant of good faith and fair dealing. These agreements also often contain provisions imposing deadlines for LLC member and manager procedures.
In the blog post under the link below, Peter Mahler provides a sobering discussion of a recent New York LLC case in which (i) a good faith provision trumps a management discretion provision; and (ii) poor drafting of a deadline provision leads to disaster.
LLC operating agreements often need to include non-competition provision applicable to managers or members, and LLC lawyers need to have at least a basic understanding of non-competition law in order to ensure that when persons become managers or members of LLCs these lawyers are forming, this won’t create problems under non-compete agreements of these persons with third parties. A good primer on non-compete and related law may be found in the blog post under the link set forth above. The post is entitled “Navigating Non-Compete and Other Key Talent Issues: A Primer for Employers.”
The post under the link below discusses the Obeid v. Hogan decision by the Delaware Court of Chancery, which I’ve already briefly summarized in a post to this listserv a couple of weeks ago. However, the post below discusses in substantial detail the specific issue of manager delegations of their duties to non-managers as addressed in that decision—an important LLC operating agreement drafting issue that I did not address in my post. I urge you to read the post below if either (i) you draft LLC agreements under the Delaware Limited Liability Company Act or (ii) you do or may at some point draft management delegation provisions under non-Delaware LLC acts.
Here is the link:
The post under the link below is yet a further post by Peter emphasizing (i) the value of clearly drafted LLC operating agreements and (ii) the disasters that can arise if an LLC has no operating agreement. The first of the three cases addressed in Peter’s post also provides a good summary of Delaware rules of contract interpretation applicable to operating agreements. These rules may well be influential in non-Delaware jurisdictions for this purpose.
The excellent new blawg post under the link below demonstrates (i) the absolute need that a two-member LLC, even when the members are brothers, have a comprehensive written operating agreement; (ii) that under that agreement, the less active brother in the LLC have the right to monitor all that happens in the LLC; and (iii) that he exercise that right on a regular basis.
Here’s the link:
The following link is to an excellent new post by Peter Mahler of Farrell Fritz about the operating agreement clauses noted above:
Some of you may find interest in this forthcoming NBI seminar.
Here are five basic guidelines for drafting definitional provisions in LLC operating agreements:
- In your operating agreements, draft a definitional provision for every term in the agreement that any client or other reader may not otherwise readily understand. This includes, for example, the terms “contribution,” “allocation,” “distribution,” “cross-purchase,” and “fiduciary.”
- If a definition you draft in an operating agreement, even if it is well drafted, is insufficient to explain the meaning of the defined term to non-lawyer readers, illustrate the meaning of the term in an exhibit to the agreement.
- Many lawyers put all of the definitions of terms in their operating agreements in an initial comprehensive section of definitions at the beginning of the agreement. These comprehensive definitional sections often include numerous inscrutable tax definitions based on esoteric citations of federal tax regulations. DON’T EVER DO THIS! If you do, you will demonstrate your grave insensitivity to the needs of clients of yours who want to read and understand the agreement, and your insensitivity and obtuseness will make your clients angry and will deter them from studying the rest of the agreement.
- Instead, place each definitional provision immediately before or after the term in the agreement that it defines. This way, readers will have a concrete context for understanding the term and its definition.
- However, in a lengthy agreement that contains numerous definitions, consider repeating all of these definitions in a single, comprehensive exhibit attached to the agreement.
The new (and excellent) blog post by Peter Mahler of the Ferrell Fritz law firm under the link below addresses the issue of whether an LLC operating agreement can be enforced against a member who didn’t sign it. This is an issue that arises all too often in LLC practice.