Parties to high-stakes private equity deals should consider forming their operating entity in Delaware for several reasons. One major benefit is the flexibility provided by Delaware’s LLC Act.
Contrary to corporate law, which holds directors and officers accountable to liability frameworks developed through case law judicial decisions, the Delaware LLC Act grants members almost unfettered freedom in structuring their governing agreement for business needs – this is known as “freedom of contract.”
Freedom of Contract
Three primary reasons why sophisticated investors and their legal counsel prefer the Delaware LLC act for high-stakes private equity deals are:
First, Section 18-1101(b) ensures that any contractual arrangement made under the Delaware Act will be upholdable in court if challenged in Delaware’s courts. Furthermore, this provision has both a permissive and mandatory effect.
Second, Section 18-109(d) provides that no provision in an operating agreement of a Delaware LLC that restricts members’ ability to seek third-party review of matters pertaining to the organization and internal affairs of an LLC is valid unless it also expressly permits such review through arbitration (whether conducted within Delaware or elsewhere).
Finally, the Delaware legislature closely follows statutory and case law developments nationwide, proposing amendments designed to enhance the utility of the Delaware LLC act. This demonstrates a steadfast dedication to upholding and improving this preeminent U.S. LLC act for implementing high-stakes private equity deals involving limited liability companies.
Liability Protection
The Delaware LLC act, commonly referred to as “Removing Manager,” empowers members and managers with the power to eliminate or restrict fiduciary duties traditionally placed upon those in control of an entity. This flexibility stems from Delaware’s longstanding policy in favor of freedom of contract.
Though this flexibility offers several important advantages, it also has the potential for unintended consequences. If parties opt not to include contractual standards that reflect common law duties of loyalty, they could still be vulnerable to claims alleging breach.
In one case, the Court held that a provision in an LLC agreement purporting to limit claims against a manager except for certain specified actions was actually an exculpation clause that limited liability for specific acts taken by the manager. But they also noted this solution wasn’t particularly inventive or creative; rather they said “the most novel and clever remedy to this problem lies outside standard contractual language used to eliminate default fiduciary duties in LLC Agreements,” holding that Genitrix LLC Agreement SS 9.1 provided an inventive alternative to standard provisions.
Tax Benefits
Many entrepreneurs find it beneficial to form an LLC under the Delaware Limited Liability Company Act in order to conduct private equity investing. Doing so offers several advantages such as freedom of contract, liability protection and flexibility.
Delaware has long been known as a haven for corporations, but more recently it has also become an innovator in providing cutting-edge alternative business entities. One example is the Delaware limited liability company (DLLC), which offers tax advantages not available through corporations but which business owners, advisors and investors are increasingly turning towards.
The Delaware Domestic Limited Liability Company Act offers members and managers of their DLLC flexibility when creating, domesticating or setting up series LLCs. This ability stems from Delaware’s longstanding policy in favor of freedom of contract.
Flexibility
Delaware LLCs have the unique advantage of being able to remove their manager without a majority vote from members, unlike in some other states. This flexibility stems from Delaware’s longstanding policy supporting freedom of contract, making this aspect one of the most attractive features for business entities in this state.
A Delaware Limited Liability Company (DLLC) can structure their business to suit specific needs (for instance, selling assets or merging into another venture). They may even change legal status from LLC to corporation without needing extra paperwork.
Furthermore, the Delaware LLC act contains a range of provisions which can be utilized to craft innovative operating agreement arrangements and secure legal endorsement. There are approximately 88 default provisions identified as “default,” 65 of which are mandatory and 49 permissive.
