Many operating agreements for multi-member LLCs impose a duty on noncompetition on members and managers both while they are members and managers and for a specified period of time after they cease to be members or managers or members because of resignation or otherwise. Before you draft such an operating agreement provision, you need to make sure that it is consistent with the applicable noncompetition law both in your own home state and in every other state where the affected members and managers will conduct the LLC’s business. For a case that illustrates this need, click here.
Category: Operating agreements
If you have a fairly standard LLC formation practice, it will only very rarely be necessary for you to include “jerk insurance” clauses in operating agreements you negotiate or draft for your clients. However, you should at least be familiar with the concept. Click here to learn about jerk insurance clauses:
Here’s another recent Ken Adams post in his blog on contract drafting that applies powerfully to the drafting of LLC operating agreements: http://www.adamsdrafting.com/why-its-important-to-police-your-defined-terms/.
Here’s another good recent post by Ken Adam in his blog on contract drafting: http://www.adamsdrafting.com/clear-drafting-doesnt-involve-dumbing-down/. The post applies as much to LLC operating agreements as to all other types of contracts.
As I’ve written previously in posts to this listserv, by far the best blog I know of on how to draft legal prose, including contract prose, is Ken Adams’ blog. Here is a link to his recent post on a “may/shall/unless” conundrum that arises from time to time in drafting LLC operating agreements (and many other types of contracts): http://www.adamsdrafting.com/shall-not-unless-versus-may-only-if/.
About 70 percent of all LLCs are single-member LLCs owned by individual. About 25 percent are two-member LLCs. Only about 5% of all LLCs have three or more members.
The biggest risk for two-member LLCs are (i) deadlock between the members and (ii) serious misconduct by one of the members. The latter risk is addressed in this terrific recent blog post by Peter Mahler.
When you form two-member LLCs for your clients, you’ve got to address the above two risks forcefully in your clients’ operating agreements. Failure to do so would be a clear violation of the duty of competence under Rule 1.1 of the ABA Model Code of Professional Conduct as in effect in most states, and could lead to a well-deserved malpractice claim.
The Delaware Limited Liability Company Act is “everybody’s second choice” for LLCs with members from two or more different states, and it is the first choice for many sophisticated businesses. The Delaware Court of Chancery’s new decision in the Seaport Village case, summarized and cited in the attached post in the Delaware Business Litigation Report blog website, simply repeats the DLLC Act statutory rule that Delaware operating agreements may be valid even if the parties don’t sign them. If you form or ever will form Delaware LLCs, you should know this rule.
In the attached post in his “Business Divorce” blog, Peter Mahler lists what he believes to be the seven hottest current issues in business divorce law. As you’ll see if you visit his blog, the first four of these issues are LLC issues. Those of us who draft LLC operating agreements should draft them so as to address these issues. If you draft LLC operating agreements (or plan to in the future), read Peter’s post!
When a member of an LLC becomes bankrupt, the other members normally don’t want the trustee in bankruptcy to become a substituted member. They can prevent this result if they can prove in bankruptcy court that the LLC’s operating agreement is an executory contract and that the bankrupt member has material duties under this agreement that are as yet unperformed. A brief but good article about this critical issue in LLC bankruptcy law may be found in the September 2014 Real Estate Law Report, published by Thomson Reuters.
The May 2014 issue of the ABA Business Lawyer contains forms, drafted by the LLCs, Partnerships and Unincorporated Entities Committee of the ABA Section of Business Law, for single-member LLCs whose members are entities and for single-member LLCs whose members are individuals, with explanatory articles about each of these forms. When my schedule permits, I intend to study all of these materials carefully, and I will share my thoughts about them in this listserv.