Not only in representing clients in post-formation disputes under LLC operating agreements but also in drafting these agreements, it is important to have a clear understanding of the rules that sophisticated courts are likely to apply in construing operating agreement provisions when the parties disagree about their meaning. As noted in the attached post in the Morris James Delaware Business Litigation Report blog, the April 29, 2015 decision of the Delaware Court of Chancery in Hampton v. Turner provides a good catalogue of these rules as applied to the facts in that case and, more specifically, to the relevant provisions of the governing limited liability company agreement (the term for “operating agreement” under the Delaware Limited Liability Company Act). The link to the post is:
The link below provides a good brief introduction to the above provisions. The key is: You need to ask you LLC formation clients what “B&R” rights they want (or don’t want) in the governing operating agreement, and you need to do your best to include just those rights in that agreement. Passive members will often want to have expansive rights. Some managers and investment promoters will want members to have narrow rights or none at all. (However, I doubt a Delaware court would uphold a complete elimination of these rights.)
Here’s the link:
Below is the link to a fine blog post in the Delaware Commercial Litigation Blog about a recent decision in a case called Nationwide Emerging Managers, LLC v. Northpointe Holdings, LLC, No. 441, 2014 (Del. Supr., Mar. 18, 2015). The case provides, among other things, an excellent discussion of the implied contractual covenant of good faith and fair dealing, a key doctrine in negotiating and drafting LLC agreements.
Here’s the link:
Peter Mahler has deftly summarized in his latest blog post a truly horrific and still ongoing New York family business divorce. The single most important purpose of LLC operating agreements for family businesses is, to the extent humanly possible, to anticipate and prevent family feuds like this one, or, at the very least, to provide a civil means of resolving them.
Indemnification provisions are useful in many types of agreements, including operating agreements. Indeed, prospective LLC managers often insist on indemnification provisions in the operating agreements of LLCs they will manage. Below is a link to an excellent blog post by Ken Adams on the subject of indemnification provisions, plus a very good model provision.
The very recent decision of the Delaware Court of Chancery in Pulieri v. Boardwalk Properties, LLC, C.A. No. 9886-CB (Del. Ch. Feb. 18, 2015) illustrates how important it is that LLCs with significant financial stakes have written (not oral) operating agreements. Click here for a cite of the case and for a transcript and excellent summary of it:
The implied contractual covenant of good faith and fair dealing (the “Implied Covenant”) is implicit in every type of contract, including LLC operating agreements, and it cannot be validly waived. Thus, it constantly looms as a wild card whenever disputes arise among LLC members and managers that are not clearly resolved in the provisions of the governing operating agreement, and you always have to be thinking about its possible impact when you’re planning, negotiating and drafting LLC operating agreements for your clients.
In general, under the Implied Covenant, the courts will decide a dispute of the kind described above by determining what the parties would reasonably have expected, despite their contractual silence, when they signed the agreement. With regard to the the LLC operating agreement in question in Fortis Advisors, decided on January 30, 2015, the Delaware Court of Chancery held, in effect, that a provision in the governing agreement that the parties would implement the agreement in a “commercially reasonable” manner overrode, effectively, the implied contractual covenant of good faith and fair dealing. You may find in many LLC deals that this “commercial reasonableness” standard may significantly reduce any Implied Covenant risk for your clients.
For a brief discussion of the Fortis Advisors case and a link to the text of the case, click here.
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.
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: