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:
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.
Here’s the link: http://www.nybusinessdivorce.com/2015/09/articles/llcs/can-llc-agreement-be-enforced-against-member-who-doesnt-sign-it/#more-14624.
The implied contractual covenant of good faith and fair dealing is a rule of contract interpretation that underlies and governs every LLC operating agreement. The link below is to a recent post in the Morris James LLP Delaware litigation blog about an LLC case called Charlotte Broadcasting LLC. This post should make it clear to drafters of operating agreements in Delaware (and perhaps in many other states) that giving an LLC member or manager “absolute discretion” in handling LLC matters specified in an operating agreement won’t override the implied covenant.
Here’s the link:
Here is a cite, which I received from a WestLaw Alert, to a new law journal article on some key issues in structuring the federal tax provisions in the operating agreements of multi-member LLCs taxable as partnerships:
Polyatskiy, STRUCTURING LLC WITH CAPITAL INTEREST, PROFITS INTEREST, NCO, COMPENSATORY OPTION, AND CONVERTIBLE DEBT AND EQUITY, 27 DCBA Brief 32 (July, 2015).
I haven’t been able to find a link to the article, but if I do, I’ll post it.