The limited liability company (LLC) is formed by filing a “certificate of formation” with the Secretary of State. Each state is somewhat unique in what information must be included on this certificate, but generally, the name of the company, address, and the name and address of the registered agent is required.
Once again, each LLC is governed by the law where the company was formed. However, most states have adopted the Revised Uniform Limited Liability Company Act (RULLCA). Delaware has not adopted the RULLCA but has the Delaware Limited Liability Company Act (DLLCA). Most LLCs (80%) are formed in Delaware and are thus governed by the DLLCA.
The operating agreement is similar to a partnership agreement for partnerships. That is, the operating agreement tailors the state’s statute to fit the needs of the LLC. There are still some parts of the statute that can’t be worked around in the contract, so attorneys should remain familiar with the default and mandatory rules of the statute.
A LLC can be either member-managed (like a decentralized partnership) or manager-managed (like a centralized corporation). The default rule under the DLLCA is that LLCs are member-managed. However, this can be altered in the operating agreement to be manager-managed. Under RULLCA, there are new default rules that form if the LLC elects to be manager-managed.
LLCs may have the duties of loyalty and care imposed upon all members/managers/the LLC. RULLCA § 409 has fiduciary duties on members and managers (depending on the format). Delaware does not have any provisions, leaving that up to the operating agreement and the courts.
William Penn Partnership v. Saliba
12 A.3d 749 (Del. 2011).
Saliba won at trial and the Lingos appealed.
Was there a breach of fiduciary duty?
For the sale to be valid without breaching a fiduciary duty, the sale needed to engage in fair dealing and fair price. Fair price does not equal fair dealing. Fair price is determined by a proper evaluation of the company. To establish fair dealing, courts consider the structure, timing, disclosures, and approvals of the sale.
There was a breach of fiduciary duty, affirmed.
Del Bay LLC was a hotel that was built and several members had an interest in the hotel. Because of a falling out between some of the members, the LLC stopped holding regular meetings. Eventually, discussions arose between some of the members about selling Del Bay. When certain members learned of these discussions, they expressed their interest in making the purchase themselves, so the hotel would not be sold to a third-party. Their offer was considered, but the timing did not work out. Del Bay was sold to a third-party without the approval or participation of the other members.
Consequently, the members that were excluded in the discussion sued saying that the sale was a breach of a fiduciary duty.
The operating agreement did not disavow any duties and so the fiduciary duty of loyalty and care apply. To meet this standard, the parties had to show that the transaction had fair dealing and fair price. Although there was a fair price, there were several misrepresentations made by the Lingos in their self-interest that caused a breach of duty. These included:
- Imposing an articifical deadline for the sale
- Failing to inform Saliba of the sale terms
- Failing to inform Saliba that they had committed selling the property to a third-party (owned by the Lingos)
- Holding a vote that did not include Saliba.
- Representing that the vote was unanimous when it was not.
The case notes that the operating agreement did not expressly disavow fiduciary duties. According to DLLCA, the LLC can expressly say that members do not owe a fiduciary duty of loyalty or care. Under RULLCA, an operating agreement can modify, but not eliminate these duties.
Feeley v. NHAOCG, LLC
62 A.3d 649 (Del. Ch. 2012).
Feely and Akel started a business together (called AK-Feel) and obtained start up finances from Akel’s father (NHAOCG). The two groups combined together to start Oculus with AK-Feel as the managing partner. However, the relationship between the parties turned south over a bad business deal. NHAOCG attempted to obtain control of the company and AK-Feel sued. NHAOCG then filed counterclaims saying that Feely had breached fiduciary duties while managing the deal that went bad.
In Delaware, there are default fiduciary duties unless the operating agreement expressly eliminates, restricts, or displaces those duties. The Operating agreement present does not discount those duties and so they could be found in this case. The motion to dismiss is thus denied.
Obligation of Good Faith and Fair Dealing
Even in Delaware, the operating agreement cannot eliminate good faith and fair dealings. § 18-1101(c). Likewise, the provision remains in full force within the RULLCA. § 409(d).
The liability shield rules can be found in RULLCA § 304(a) and DLLCA § 18-303(a).
Estate of Countryman v. Farmers Co-op. Ass’n
679 N.W.2d 598 (Iowa 2004).
A group was gathered together when a propane tank exploded and caused extensive injuries to those present. They sued everyone they could think of including Keota, who helped with getting the propane product on the market. Keota claimed that the limited liability shield protected them from liability.
A liability shield will protect individuals and entities from the liability of others. However, if the individual or even entity engaged in tortious conduct, they can be found liable for that conduct.
Transfer of LLC Interests
The default rule under the DLLCA (18-702(a)) allows a member to transfer economic rights but not the management rights. Same applies for RULLCA § 501.
Achaian, Inc. v. Leemon Family LLC
25 A.3d 800 (Del. Ch. 2011).
Omniglow sold their business to three members: Leeman (50% member), Holland (30% Member), Achaian (20% member). After a dispute was not resolved between the parties, and an attempt to stop Leeman from having 100% control all the time, Holland sold its percentage to Achain, resulting in a 50/50 deadlock.
By default, one does not transfer member rights unless the operating agreement says so. Here, the operating agreements stated that the entire rights could be transferred. As such, the next issue to resolve would be whether the company should be dissolved (a deadlock = dissolution).
Allocating Profits, Losses and Distributions
DLLCA §§ 18-503 and 504.
RULLCA § 404(a) – distributions are made equally among members.
DLLCA § 18-603 – Default rule is that a member cannot withdraw before dissolution or winding up. But this rule can be altered in the operating agreement.
RULLCA § 601(a) – Members can withdraw at any time.
Touch of Italy Salumeria & Pasticceria, LLC v. Bascio
2014 WL 108895 (Del. Ch. 2014).
A member of Touch of Italy withdrew in accordance with the operating agreement. Shortly thereafter, he opened a competing store called Bascio in the same area. The reason why this caused so much dispute is because he said that he would not open such a store when he left. It turns out that he planned on doing so all along. As such, the plaintiffs claim there is a breach of contract, and a breach of fiduciary duties and the obligation of good faith.
There was no breach of contract because the provision specifically allowed the withdrawal of members. Thus there was no breach. Additionally, there was no breach of the obligation of good faith because there was no noncompete clause included (so there was nothing to violate). Finally, there is no evidence of a breach of fiduciary duties because the plaintiffs failed to bring any support to the claim that the “planning” actually occurred. In other words, Bascio was formed after the party left Touch of Italy.
DCLLA § 18-801 – The LLC is dissolved at the time specified in the operating agreement once a trigger (also specified occurs). Dissolution can also occur with a two-thirds vote of the ownership interests.
Haley v. Talcott
864 A.2d 86 (Del. Ch. 2004).
Haley and Talcott opened a restaurant together. Talcott provided the financing and Haley provided the work. At the outset of the business, Haley was given the option to purchase the real estate. The proceedings began, but conflicts between the parties brought them to a halt. As a result of the conflict, Haley was left on the outside, looking in. He was unable to receive profit from the LLC and had no say in any managerial capacity. The LLC agreement had an exit path, but would be costly and disadvantageous to the individual to elected it.
In summary, both Haley and Talcott were willing to buy the other out, but neither were willing to sell to the other. As such, the court was asked to dissolve the LLC.
Here, we have two LLC members with 50% ownership each and at complete odds. Because of the situation, it makes sense that the LLC should be dissolved to overcome the impasse. This is true, even with the exit mechanism contained in the operating agreement. The exit mechanism is impractical because neither party is willing to buy, but also because both parties are guarantors of the mortgage. Should one be bought out, then the business fail, they would still be liable for the mortgage despite having no control over the property. As such, the LLC should be dissolved, auctioned, and the market value distributed to the owners.
A series LLC is where an LLC can categorize their assets into series. The idea is that if an accident arises within one series, then the amount recovered would be taken from that same series, leaving the other assets untouched. This is primarily used in Delaware and a few other states. Mostly investment companies utilize this form and there are uncertainties on whether the form will be accepted in federal aspects, such as federal bankruptcy law.
The content contained in this article may contain inaccuracies and is not intended to reflect the opinions, views, beliefs, or practices of any academic professor or publication. Instead, this content is a reflection on the author’s understanding of the law and legal practices.