Morris James Partner Jason C. Jowers recently authored an article in the American Bar Association publication Business Law Today entitled "Be Careful What You Ask For: Court of Chancery Finds Corporate Law Governs LLC Based on Drafting of LLC Agreement." Below is a summary of the article.
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. 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? This article analyzes how the recent case of Obeid v. Hogan, 2016 WL 3356851 (Del. Ch. June 10, 2016) answers these questions. In Obeid, 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.