Category: Operating agreements

WHAT IS AN OPERATING AGREEMENT?

By , July 28, 2015 8:29 am

The attached recent post by a leading Kentucky law firm in an excellent legal blog called Lexology seeks to answer the above question.  The link is:

http://www.lexology.com/library/detail.aspx?g=40cd7098-38d7-4938-8136-4a1bd4e78200&utm_source=Lexology+Daily+Newsfeed&utm_medium=HTML+email+-+Body+-+General+section&utm_campaign=Lexology+subscriber+daily+feed&utm_content=Lexology+Daily+Newsfeed+2015-07-24&utm_term=

IMPLIED COVENANT

By , July 21, 2015 8:16 am

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:

http://www.lexology.com/library/detail.aspx?g=3bfdb20b-b849-430d-8ed1-2e86cec46c05&utm_source=Lexology+Daily+Newsfeed&utm_medium=HTML+email+-+Body+-+General+section&utm_campaign=Lexology+subscriber+daily+feed&utm_content=Lexology+Daily+Newsfeed+2015-07-14&utm_term=

ARTICLE RE PROFITS INTERESTS

By , July 16, 2015 9:56 am

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.

GIVING LLC OPERATING AGREEMENTS THE RIGHT TITLE

By , July 15, 2015 2:53 pm

The core document in any LLC formation practice is, of course, the LLC’s operating agreement.  The first thing clients and other readers will see in the agreement will be its title.

You form an LLC under your state’s LLC act for individuals X, Y and Z under the Delaware Limited Liability Company Act.   XYZ will be member-managed and it will be taxable as a partnership.  What guidelines should you apply in fashioning a title for its operating agreement?

  1. Most LLC lawyers will entitle XYZ’s operating agreement “Operating Agreement of XYZ, LLC.”   Period.  This isn’t a good title.
  2. The five most important things about any LLC are its name, the LLC act under which it has been formed, its ownership structure, its management structure and its federal tax structure.  If your clients and other readers of XYZ’s operating agreement know those five things upfront, this will give them a powerful basis for understanding the terms and conditions in the body of the agreement.  A good operating agreement title will tell them all five things in one fell swoop.
  3. Thus, the title of XYZ’s operating agreement should read as follows:

OPERATING AGREEMENT OF XYZ, LLC

A MEMBER-MANAGED THREE-MEMBER
DELAWARE LIMITED LIABILITY COMPANY
TAXABLE AS A PARTNERSHIP 

THE UFTA

By , July 7, 2015 12:47 pm

Whenever you’re forming an LLC to which one or more members will be contributing property, you have to give at least quick consideration to the issue whether the contribution may involve any Uniform Fraudulent Transfer Act risk; and the contribution provisions in many of my LLC model operating agreements include UFTA representations. The latest edition of the ABA Business Lawyer contains an important new article about the UFTA.  It’s by Kenneth C. Kettering.  The title is “The Uniform Voidable Transactions Act [the new name for the UFTA]; or, the 2014 Amendments to the Uniform Fraudulent Transfer Act.”  (I’d include a link to the article, but, as you’d expect, it’s copyrighted.)

Every LLC lawyer should read this article.

LEGALZOOM

By , June 17, 2015 8:09 am

Under the link below is an excellent post by Peter Mahler on LegalZoom LLC operating agreements. If your clients are debating whether to use your services in drafting their operating agreements or, instead, to use a LegalZoom agreement, Peter’s post will give you some good ideas about how to discuss this issue with your clients.

Here’s the link:

http://www.nybusinessdivorce.com/2015/06/articles/llcs/legalzoom-llc-agreement-bargain-or-blunder/

WHAT IS THE PURPOSE OF AN LLC?

By , June 12, 2015 9:12 am

Among the more important provisions in any operating agreement is the one that defines the LLC’s purpose.  There is very little in LLC literature about the issue of defining an LLC’s purpose in operating agreements.  A new blog post from Peter Mahler discusses what happens when the courts address this issue.  Here’s the link:

http://www.nybusinessdivorce.com/2015/06/articles/grounds-for-dissolution/finding-purpose-outside-the-llc-agreement/

JUDICIAL RULES FOR INTERPRETING LLC OPERATING AGREEMENTS

By , May 4, 2015 9:58 am

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:

http://www.delawarebusinesslitigation.com/2015/04/articles/case-summaries/llc-agreements/court-of-chancery-explains-llc-agreement/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+DelawareBusinessLitigationReport+%28Delaware+Business+Litigation+Report%29

PROVISIONS IN LLC OPERATING AGREEMENTS EXPANDING OR RESTRICTING THE RIGHT OF MEMBERS TO INSPECT LLC BOOKS AND RECORDS (“B & R” PROVISIONS)

By , March 27, 2015 10:13 am

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:

http://delawarechancery.foxrothschild.com/books-and-records-demand-2/the-importance-of-a-books-and-records-inspection-clause-in-an-llc-operating-agreement/?utm_source=Fox+Rothschild+-+Delaware+Court+of+Chancery+Practice+Blog&utm_campaign=c07387329c-RSS_EMAIL_CAMPAIGN&utm_medium=email&utm_term=0_86821ff155-c07387329c-70733165

NEW DECISION BY DEL. S. CT. ON IMPLIED COVENANT AND OTHER CONTRACT INTERPRETATION ISSUES

By , March 24, 2015 9:13 am

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:

http://www.delawarelitigation.com/2015/03/articles/delaware-supreme-court-updates/delaware-supreme-courts-latest-iteration-of-implied-covenant-of-good-faith-and-fair-dealing/