Delaware LLCs are business entities that give owners considerable freedom. You can assign voting or consent rights and obligations to different Members, Managers, Classes or even individuals within your corporation.
These flexibility rights give owners the power to structure their business relationships however they see fit, while giving Delaware courts the authority to resolve disputes by applying principles of contract interpretation. Furthermore, if an issue is not specifically addressed in a foundational LLC agreement, then default rules under applicable business entity statutes will take precedence.
Default Provisions
Delaware LLC acts contain several key default provisions that provide assurance to parties involved in high-stakes private equity deals.
First, these provisions safeguard members’ rights to obtain third-party review of matters pertaining to the organization and internal affairs of an LLC in both Chancery Court and arbitration (unless expressly prohibited by express language in the governing agreement).
Second, these default rules provide a wider statutory basis than other LLC acts for creative operating agreement arrangements that do not conflict with public policy objectives.
Third, these provisions provide legal opinions confirming that the contractual standards which follow Delaware’s common law fiduciary duties are valid and enforceable.
Chief Justice Steele’s interpretation of these statutory rules may prove detrimental to less sophisticated “mom and pop” businesses in Delaware, but even if it did, this would only impact a fraction of the alternative entity universe within Delaware.
Mandatory Provisions
Working on high-stakes private equity deals involving LLC formation, I have come to appreciate the significance of mandatory provisions under Delaware LLC act dissociation. These clauses can give one party an advantage or disadvantage relative to all others in a deal.
First and foremost, operating agreements provide parties to a deal with certainty about their arrangements before they are created and signed. Furthermore, these documents offer legal support for firms to customize their arrangements according to particular business needs.
For instance, the Delaware DLLC act explicitly states that members and managers of a DLLC cannot be held personally liable for any acts or omissions of the company or its directors/officers. This limitation of personal liability is an important legal and practical advantage to promoters of DLLCs. Furthermore, this provision permits a DLLC to indemnify its members and managers against any claims or demands they might incur.
Permissive Provisions
Delaware LLC Act dissociation is a common procedure to end the relationship among members of a limited liability company. It’s regulated by state laws and usually involves some claim of bad behavior which has had an adverse effect on the company, violated an operating agreement multiple times or made it unfeasible to keep that member as part of the LLC.
Involuntary dissociation may also take place if the LLC becomes subject to bankruptcy or other actions seeking protection from creditors, a transfer of all members’ interests (other than as security or under court orders), death, merger, or dissolution of a trust that holds their membership interest.
Status-based criteria are far less controversial than conduct-based grounds for involuntary dissociation, yet parties to an operating agreement should always take into account these statutory standards and ensure the appropriate language is included in their agreement.
Dissolution
Dissolution of an LLC can be a powerful remedy in the hands of courts when it becomes impossible for it to operate in accordance with its operating agreement. Delaware and New York law both permit courts to order limited liability companies to dissolve when it’s no longer “reasonably practicable” to carry on business as expected under their operating agreement.
Dissociation often begins with status-based criteria, such as bankruptcy or receivership and the transfer of all a member’s interests to another entity (other than as security or under court ordering). These circumstances tend to cause less controversy than other scenarios.
Dissociation based on conduct is more contentious. These grounds for dissociation can range from a breach of duty to obstruction of normal operations and often lead to conflict between family members, disrupting an established business relationship. Furthermore, such actions make it more difficult for members to continue receiving distributions from the LLC or sell their interest in it.
