Delaware LLCs are business entities established through filing their Certificate of Formation with the Delaware Secretary of State. Such an entity creates its own legal existence separate from its owners or managers and also protects from liabilities that might accrue as debts incurred by it.
Selecting an LLC act that best serves investors and investees involved in high-stakes private equity deals is one of the most critical decisions investors and investees must make. This article investigates major considerations when selecting an operating entity structure using Delaware LLC act versus other U.S. LLC acts.
What is section 18 502 of the Delaware LLC act?
Section 18 502 of the Delaware LLC act is an important statutory provision with far-reaching implications for business organization law. It stipulates that any LLC agreement which prevents members from seeking third-party review regarding matters concerning their organization or internal affairs of an LLC must explicitly allow for it, either through arbitration (in Delaware or elsewhere) or Chancery Court proceedings.
The Delaware Act includes an array of provisions designed to facilitate the resolution of member disputes, such as waiver of notice, consent without meetings and voting rules for voting either personally or by proxy. Furthermore, it allows DLLCs to indemnify their members and managers against claims and demands of any nature.
What is the purpose of section 18 502 of the Delaware LLC act?
Delaware is widely recognized as one of the world’s most progressive and flexible states when it comes to business entity formation, thanks to its ability to keep its entity statutes updated as the needs of entities and their stakeholders change over time.
Delaware goes beyond updating their business entity laws to make them more practical and beneficial through regular amendments enacted to improve them. Delaware lawmakers frequently amend the LLC act in response to issues surrounding business organization law.
Solely for this reason, section 18 502 of the Delaware LLC act allows members of limited liability companies with a mandatory right to bring derivative actions should not deter private equity investment promoters from using an LLC formed under this act to conduct their business activities. Furthermore, this rule does not conflict with its primary goal: freedom of contract.
What is the effect of section 18 502 of the Delaware LLC act?
Parties involved in high-stakes private equity deals must often make a choice between Delaware and other U.S. LLC acts for use in their deal.
Typically, when making this choice, the primary consideration should be how each competing act will impact specific business organization law issues and interests at stake in a deal – for instance, which act will best advance parties’ statutory interests by comparing default, mandatory, and permissive provisions?
Vice Chancellor Laster recently made headlines when she found in CML V, LLC vs Bax that creditors of an LLC formed under the Delaware Act don’t have standing to sue derivatively under Section 18-1002 unless those rights were explicitly provided for in its operating agreement – this decision marked as a departure from general understanding among many commentators.
What is the meaning of section 18 502 of the Delaware LLC act?
Recently, a Delaware court held that Section 18 502 of the Delaware LLC act provides creditors of LLCs formed under that statute with an explicit rule: they must contract for affirmative contractual rights and remedies when providing credit to these entities. This ruling seems to echo its main intent – to promote freedom of contract and enforceability in LLC arrangements.
Therefore, high-stakes private equity deal promoters concerned about potential business organization law challenges for their deals under other LLC acts are likely to opt for the Delaware Act instead due to its many mandatory provisions which won’t cause issues with operating agreements and numerous permissive ones that might prove more advantageous than its counterparts in other LLC acts.
Before making their choice, lawyers must conduct a careful comparison between the Delaware Act and another LLC act in terms of default, mandatory, and permissive provisions in both acts to assess their overall impact on clients as they select which act will provide maximum benefits for them.
