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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Showing 69 posts in LLC Agreements.
Alternative entity agreements may eliminate common law fiduciary duties and often do, supplanting them with contractual fiduciary duties. These frequently include an obligation to act “in good faith” or “in the best interests of the company,” broadly or in certain circumstances. Thus, even with fiduciary duty exculpation clauses in LLC agreements, managers may still find themselves exposed to a member’s allegations that they failed to satisfy their standard of conduct, as this decision illustrates. This decision also is interesting for its discussion of the potential impact of bankruptcy court sale orders on the Court of Chancery’s ability to enter equitable relief.
Under the LLC Act, as with the DGCL, an entity planning to dissolve and distribute its assets is required to set aside some reserve of assets to pay all known claims. Failure to set aside sufficient assets may result in revocation of the entity’s certificate of cancellation, thereby reviving the entity, as happened in this case. This decision explains when claims are “known” by the entity (i.e., the entity has actual knowledge of the claims) and how the entity may value those claims for purposes of retaining sufficient assets to potentially satisfy them. Importantly, the reserve need not match all potential damages dollar-for-dollar. The value of claims may be discounted based on their lack of merit, for example.
This may be the definitive decision on when and how to apply the covenant in every LLC agreement to act in good faith and deal fairly. Here the “gap” the parties did not address in their LLC agreement concerns the rights of newly admitted LLC members to block a forced sale of the entity. While that right was addressed in the initial LLC agreement, the terms on which new members were admitted years later were not addressed at that time. The decision is also noteworthy in how it decides to fill the gap the parties left, by deciding what they would have done had they thought about it.
This decision resolves the tricky issue of when the provisions of an LLC agreement do not allow “gap filling” so as to permit a claim for violation of the covenant to act in good faith and fairly. Briefly, when the LLC agreement permits the governing body of an LLC to act in its “sole” discretion and otherwise has an effective limit on the exercise of that discretion [such as permitting deals only with outsiders] then there is no reason to limit the discretion by imposing a duty to act in good faith. Of course, that may also require a waiver of fiduciary duties in the LLC agreement.
This books and records decision addresses inspection rights granted under an LLC agreement. It also is useful as a reminder that a mere decline in an entity’s performance is not a sufficient proper purpose supporting inspection. While the “credible basis” standard for suspecting mismanagement is low, it is not that low.
This decision holds that a creditor lacks standing to bring breach of fiduciary duty claims arising out of the management of an LLC. Of course, creditors are better served by drafting the loan documents to protect their rights.
This decision explains how a provision in an LLC agreement waiving fiduciary duties is to be applied in the context of conflicted transactions. It is a good summary of Delaware law on that issue.
It also has an instructive summary of the law governing contract interpretation, albeit under New York law.
Under the famous Zapata decision, a board of directors may take control of a derivative case, provided it meets the test set out in that opinion. But may such a board, or the managers in an LLC, delegate that authority to a non-member? This decision says that delegation is not appropriate for an LLC with a management structure similar to a corporation or in an LLC that limits the delegation authority of it member-managers.
This is an interesting decision because it explains what direct claims are available to investors in an LLC. More ›
This decision may answer the question of whether an LLC Agreement’s bar of dissolution without a member’s consent trumps the statutory remedy of court-ordered dissolution when the entity’s purpose cannot be achieved any longer. It concludes that dissolution is proper under the facts presented where the objecting member really had no good reason to object.
In this precedent-setting decision, the Court upholds the right of an assignee of an LLC interest to petition for its dissolution. The LLC Act itself limits a dissolution petition to managers or members, but drawing on precedent upholding the broad powers of a court of equity, the Court holds that an equitable remedy exists that permits an assignee to also seek dissolution.
A repeat issue with using the LLC form of entity is trying to figure out what the LLC agreement means. This decision is another example of the Court sorting through conflicting interpretations that must have surprised at least one of the parties. As such it is a useful, if limited by its facts, primer on proper interpretation.
This decision explains the Amendment-By-Merger Exception that is found in alternative entity agreements. The purpose of the Exception is to be sure that a merger agreement that has the affect of amending the operating agreement gets the same vote, including class votes, that an equivalent amendment to the operating agreement would require under the terms of the operating agreement. Such clauses try to prevent a merger agreement from being used, as is done for corporations, to amend the basic deal set out in the parties' agreement.
The decision also has an interesting discussion of what constitutes an amendment to an operating agreement, a point that is not always clear.