Delaware Business Litigation Report

Court Of Chancery Explains Perils Of LLC Agreements

Zimmerman v. Crothall, C.A. 6001-VCP (January 31, 2013)

The Delaware Supreme Court has made it clear that investors in LLCs get what they bargained for in their LLC agreement, but not much more.  That seems attractive to those who manage LLCs because they feel they can limit their liabilities to investors by the terms of the LLC agreement.  Yet, management may be overstating the benefits of the LLC form, as this decision points out.

In this case, very sophisticated counsel advised on how to issue additional interests in the LLC to raise more capital. Unfortunately, and despite being the drafter of the LLC agreement, he got it wrong and failed to follow the terms of the agreement.  This points out that LLC agreements are often so complicated that compliance with their terms is tricky. Each agreement is individually crafted, unlike in a corporation where the statute generally spells out in well understood terms what are the rights and obligations of the investors and managers.  These errors have happened time after time.  Hence, use of the LLC or LLP form needs to be with great caution.

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