Category: Freedom of Contract

LAW JOURNAL ARTICLE ABOUT LLCS

By , September 11, 2018 10:16 am

Peter Molk, a leading LLC scholar, has published an article about LLCs.  The title, citation, and introduction of are below:

51 U.C. Davis L. Rev. 2129
U.C. Davis Law Review
June, 2018
Article
Peter Molk
Copyright © 2018 by Peter Molk
PROTECTING LLC OWNERS WHILE PRESERVING LLC FLEXIBILITY

LLC statutes allow owners to restrict or completely waive standard governance protections required of other business forms. Corporate law mandatory stalwarts like fiduciary duties can be entirely eliminated in an LLC. This flexible approach has the potential to generate maximally efficient governance relationships: tailored negotiation among LLC investors can produce an optimal set of governance terms that corporate law’s mandatory protections cannot. Yet when owners lack sophistication or bargaining power, contractual freedom allows for terms that lead to mispriced capital, reduced investment, and inefficiently allocated capital across LLCs.

A series of cases has brought this problem to the fore. Recommendations for reform have focused on doing nothing, imposing mandatory protections, or relying on ad-hoc judicial interventions, but these solutions are each ultimately unsatisfying. Instead, I show how a model inspired by securities law’s accredited investor concept has the most promise to ensure LLCs‘ continued viability as a distinct organizational form, with favorable liability and tax treatment to everyday investors and the freedom to craft unique governance relationships for sophisticated ones.

IMPORTANT LAW JOURNAL ARTICLE ABOUT LLC LAW AND EQUITY

By , July 30, 2018 10:31 am

In 44 Florida State University Law Review 93 (Fall, 2016) Mohsen Manesh, a leading LLC scholar, published an important article about LLC law entitled “Equity in LLC Law.”  For some reason, the article has only just now become available in WestLaw.  The following is an abstract of the article:

To what extent does equity play a role in LLC law? To what extent do courts retain the judicial discretion “to do right and justice” in circumstances in which the LLC statute and the applicable LLC agreement do not otherwise offer an adequate remedy to an aggrieved LLC member or manager? Until recently, the answer to these questions was quite clear: Equity is subordinate to the freedom of contract and the express terms of the agreement governing an LLC. But the Delaware Chancery Court’s decision inIn re Carlisle Etcetera has upended this basic percept of LLC law and practice. Carlisle suggests that courts need not sheepishly defer to the express terms of an LLC agreement. Instead, where justice dictates a different result,Carlisle suggests that courts retain the equitable power to apply fiduciary standards or recognize other equitable rights or duties, despite the statutorily mandated freedom of contract under LLC law. Thus, this Article argues thatCarlisle represents a true paradigm shift. It inverts the long-assumed supremacy of contract over equity in LLC law. Instead, the freedom of contract must be exercised always in the shadow of equity.

NEW BLOG POST BY PETER MAHLER ABOUT NEW LAW JOURNAL ARTICLE ON LLC FREEDOM OF CONTRACT AND HOW IT IS BEING ABUSED

By , August 1, 2016 8:58 am

In the post under the link below, Peter Mahler discusses an important new law journal article by Professor Peter Molk of Willamette Law School on LLC freedom of contract and how it is being abused.  Every LLC formation lawyer should read the Mahler post and the Molk article.

Here is the link:

http://www.nybusinessdivorce.com/2016/06/articles/interviews/professor-peter-molks-groundbreaking-study-llc-owners-contract-around-default-statutory-protections/

IMPLIED COVENANT

By , February 19, 2015 10:35 am

The blog post under the link below discusses a January 28, 2015 decision by the Delaware Court of Chancery in a case called Orckit Communications Ltd. v. Networks Inc., and you can get a copy of the decision through that link.  The case is complex, but, in essence, under the relevant facts, it upholds a waiver of the implied contractual covenant of good faith and fair dealing (the “Implied Covenant”).  The Implied Covenant provides that on issues not addressed in contracts, the parties must meet one another’s reasonable expectations as in effect at the time of execution.  The Implied Covenant haunts LLC drafting, and a constitutional argument can be made that it is non-waivable.  But if your LLC formation client wants it to be waived in the governing operating agreement, read Orckit and look for common law waiver guidelines.

Here’s the link:   http://www.rlf.com/Publications/5931.

NEW ARTICLE BY CHIEF JUSTICE STRINE AND VICE CHANCELLOR LASTER

By , September 25, 2014 1:11 pm

Freedom of contract is, along with management structure flexibility and pick-your-partner and charging order protections, the major factor for most entity formation clients in choosing between LLCs and state-law business corporations as the entities they will use to conduct a new business.  The attached blog post in the “Delaware Corporate and Commercial Litigation Blog” summarizes and provides a link to a recently published law journal article by  two justices of the Delaware Court of Chancery that argues that the statutory freedom of contract available to the members of Delaware LLCs and other Delaware non-corporate entities should be restricted.

In Chapter 3 of my Wolters Kluwer LLC book, I discuss the concept of LLC freedom of contract in great detail.  On the basis of that discussion, I have to confess, with all due respect, that I think that the justice’s article is dead wrong.