Category: LLC Cases

“PROPER PURPOSE”

By , June 19, 2017 8:41 am

When non-manager members have disputes with managers, the access of the non-managers to LLC records is often a key issue.  The issue is whether the non-member members have a “proper purpose” for obtaining those records.  The post under the link below discusses a Delaware Court of Chancery case about that issue.

Here’s the link:  https://delawarechancery.foxrothschild.com/books-and-records-demand-2/chancery-finds-that-mismanagement-exists-warranting-section-220-books-and-records-demand/?utm_source=Fox+Rothschild+-+Delaware+Chancery+Law+Blog&utm_campaign=c83185548b-RSS_EMAIL_CAMPAIGN&utm_medium=email&utm_term=0_86821ff155-c83185548b-70733165

DELAWARE SUPREME COURT DECISION ON IMPLIED COVENANT

By , March 9, 2017 9:40 am

The judicial doctrine called the implied contractual covenant of good faith and fair dealing looms over every multi-member LLC operating agreement.  Delaware has a far more extensive body of case law on the Implied Covenant than any other state, and this case law is likely to be persuasive in many other states. The link below discusses an important Delaware Supreme Court Implied Covenant case.

Here’s the link: https://delawarechancery.foxrothschild.com/mergers-and-acquisitions/delaware-supreme-court-addresses-the-implied-covenant-of-good-faith-and-fair-dealing/?utm_source=Fox+Rothschild+-+Delaware+Chancery+Law+Blog&utm_campaign=580be6649c-RSS_EMAIL_CAMPAIGN&utm_medium=email&utm_term=0_86821ff155-580be6649c-70733165

TOP 10 2016 BUSINESS DIVORCE CASES

By , January 11, 2017 1:40 pm

If, like me, you’re a fan of Peter Mahler’s remarkable weekly bog posts on business divorce cases, you’ll find his most recent post, under the link below, a useful review of his past year of posts.  It’s about his choice of the top ten 2016 business divorce cases.

Here’s the link:

http://www.nybusinessdivorce.com/2016/12/articles/annual-top-10-cases/top-10-business-divorce-cases-2016/

NY CASE ABOUT RIGHT OF SHAREHOLDERS TO INSPECT RECORDS OF CORPORATE SUBSIDIARY–SIGNIFICANCE FOR LLCS

By , January 6, 2017 11:06 am

Under the link below is a post by Peter Mahler about a recent decision by a New York appellate court holding that the shareholders of a NY corporation had a common law right to inspect the books and records of a wholly owned subsidiary of that corporation.  Not just in NY but also in other states, this case is likely to be useful to LLC lawyers whose clients want to inspect the books and records of single-member LLCs and other subsidiaries of multi-member LLCs of which these clients are members.

Here is the link:

http://www.nybusinessdivorce.com/2016/10/articles/access-to-books-and-records/ruling-upholds-shareholders-right-inspect-subsidiarys-books-records/

LLC-RELATED DEALS INVOLVING MULTIPLE LEGAL DOCUMENTS

By , December 9, 2016 12:00 pm

LLC formations often involve multiple documents, especially if these formations involve passive investments that require federal securities compliance documents or if they involve holding company/operating company structures.  The November 14, 2016 decision of the Delaware Supreme Court  under the link below addresses, among other issues, how to determine the relative rank of multiple interrelated LLC documents in a single, complex deal extending over a significant period of time.

Here’s the link:

https://gallery.mailchimp.com/27d7d107b7ca58cf04799f740/files/Finger_Lakes_Capital_Partners_LLC_v._Honeoye_Lake_Acquisition_LLC.pdf

WHEN ARE LLCS SUBJECT TO CORPORATE LAW?

By , November 21, 2016 12:45 pm

I’ve already addressed once in this blog the Delaware case holding that an LLC may be subject to corporate law if its operating agreement so provides; but the subject is so important that I want to state below the title and the first paragraph of a new article about that case that just appeared:

2016-SEP Bus. L. Today 1
Business Law Today
September, 2016
Department
DELAWARE INSIDER: BE CAREFUL WHAT YOU ASK FOR: COURT OF CHANCERY FINDS CORPORATE LAW GOVERNS LLC BASED ON DRAFTING OF LLC AGREEMENT
Jason C. Jowers
Copyright © 2016 by the American Bar Association; Jason C. Jowers

It is the policy of the Delaware Limited Liability Company Act (LLC Act) “to give the maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements.” Indeed, cases routinely refer to LLCs as “creatures of contract,” given that the LLC Act generally cedes governance of the entity to the terms of the LLC agreement, establishing few mandatory provisions and normally only providing “gap fillers” where an LLC agreement is silent. Consequently, members of an LLC “can ‘customize’ their company, largely free of externally imposed restrictions.” Robert L. Symonds, Jr. & Matthew J. O’Toole, Delaware Limited Liability Companies § 1.03[A][1][a], at 1-13(2015). But what happens when drafters of LLC agreements use their statutorily granted freedom to adopt a governance structure that is similar to that of a corporation? Does adopting a corporate-style structure also adopt the corporate case law interpreting that structure and imposing restrictions?

In the recent case of Obeid v. Hogan, 2016 WL 3356851 (Del. Ch. June 10, 2016), the Delaware Court of Chancery confirmed that a Delaware LLC may adopt a governance structure that looks more like a corporation than a traditional LLC, but it also explained that “[t]he choices that the drafters make have consequences.” By adopting a corporate-style of governance, such as a board of directors, the Court of Chancery will to some extent turn by analogy to Delaware’s case law governing corporate boards of directors. If the LLC agreement drafters wish to adopt a board of directors structure but do not wish to import Delaware’s body of board governance case law by analogy, the drafters should specify rules in the LLC agreement to the extent they wish to deviate from the traditional corporate rules.

NY CASE ABOUT “PICK YOUR PARTNER” AND RELATED CONCEPTS

By , September 14, 2016 10:46 am

The “pick-your-partner” concept and the related concepts of member vs. assignee and management rights vs. LLC interests are central to LLC law both in forming LLCs and in other LLC matters.  The recent NY court decision discussed by Peter Mahler under the link below addresses all of these concepts in deciding a case  involving all of them.  If any of your clients or if lawyers or accountants with whom you’re dealing in LLC matters raise questions about these concepts, the decision under the link below will provide them with authoritative (or at least persuasive) responses.

Here’s the link:  http://www.nybusinessdivorce.com/2016/08/articles/access-to-books-and-records/operating-agreements-two-step-consent-provision-foils-assignment-llc-member-interest/#

DECISION OF NJ SUPREME COURT IN IE TEST

By , August 10, 2016 9:32 am

A couple of days ago, I shared a post published that day about the decision of the NJ Supreme Court in the IE Test case, but I received today a post from Peter Mahler about that case.  Peter’s analyses of LLC cases are always excellent, so I’m setting forth the link to his post below.  The case deals with a critically important LLC issue concerning statutory expulsions of LLC members.  Here’s the link:

http://www.nybusinessdivorce.com/2016/08/articles/deadlock/new-jersey-supreme-court-raises-bar-judicial-expulsion-llc-members/

BLOG POST BY TOM RUTLEDGE ABOUT NEW NJ CASE ABOUT EXPULSION OF LLC MEMBER

By , August 8, 2016 10:09 am

Under the following link is an excellent summary by Tom Rutledge concerning a very recent NJ Supreme Court case concerning the expulsion of an LLC member under a statutory expulsion provision in the NJ LLC Act:

http://kentuckybusinessentitylaw.blogspot.com/2016/08/new-jersey-supreme-court-analyzes.html

DICTA ABOUT THE NATURE OF LLCS AND LLC MANAGEMENT STRUCTURES IN DEL. SUPREME COURT RULING IN OBEID V. HOGAN

By , July 13, 2016 9:14 am

By statute or under their operating agreements under most or all U.S. LLC acts, multi-member LLCs can have any of three main management structures:

  • Management by the members (akin to the general partnership management structure);
  • Management by one or more managers (akin to the limited partnership management structure); and
  • Management by a board of directors and by officers (akin to the classic state-law corporate management structure).

One June 10, 2015, the Delaware Court of Chancery issued its memorandum opinion in a case called Obeid v. Hogan (C.A. No. 11900-VCL).  The facts, legal issues and rulings in the case are set forth in the post under the link below, but they not relevant to most LLC formations.  However, in dicta, the court also stated its views about two issues that are of great significance in LLC formation issues in drafting operating agreements  not only under  the Delaware Limited Liability Company Act (the “Delaware Act”) but under most or all other LLC acts.

  1. First, the court noted that when the members of an LLC choose one of the above management structures, they may also be choosing, whether they know it or not, to be subject to a broad range of statutory business organization law rules not imposed by the Delaware Act, but rather, in the case of the above three management structures, by, respectively, Delaware general partnership, limited partnership or corporate statutory law.
  2. The court noted that while contractual freedom is key under the Delaware Act, it is wrong to say that Delaware LLCs are “purely” contractual entities.  As the court explained, many key rules governing Delaware LLCs are statutory rules that result from the fact that Delaware LLCs are a product of the Delaware legislature.  Not only in Delaware but also in all other states, lawyers in drafting operating agreements must be aware of these key LLC non-contractual rules.

If you’d like to know about the facts, issues and rulings in Obeid v. Hogan, click here:  http://www.rlf.com/Publications/6517