ABA Section of Business Law

By JAMES G. LEYDEN JR.

A lot of companies choose to incorporate in Delaware. But what about LLCs? Is the state good for them also?

Delaware continues to be on the leading edge in offering the business community flexible legal entities to conduct business. Already a forum of choice when it comes to organizing corporations, limited partnerships and business trusts, the state intends to achieve a comparable position for Delaware limited liability companies (DLLCs). This should be possible since DLLCs have many of the same features currently available to Delaware corporations, limited partnerships and business trusts.

The Delaware Limited Liability Company Act, 6 Del. C. Section 18-101, et seq. (the DLLC Act), which became effective on Oct.1, 1992, is modeled on the state’s well-accepted limited partnership statute, the Delaware Revised Uniform Limited Partnership Act, 6 Del. C. Section 17-101, et seq. In addition, several provisions from the Delaware General Corporation Law have been incorporated into the DLLC Act. Delaware’s commitment to updating its laws relating to limited liability companies is shown by the fact that the act has been amended in 1994, 1995, 1996, 1997, 1998 and 1999. It is expected that the act will be amended again this August.

More than 100,000 DLLCs have been formed. This compares with approximately 290,000 Delaware corporations. The formation of 100,000 DLLCs in less than a decade is remarkable. A substantial majority of them have been formed over the last four years.

A DLLC, like a Delaware corporation, is a separate legal entity that is permitted to carry on any lawful business, purpose or activity except certain insurance or banking activities. As a separate legal entity, a DLLC is distinct from its owners, who are known as "members." Thus, a DLLC may acquire and dispose of real or personal property in its own name, make contracts in its own name, participate with others in business opportunities and sue and be sued in its own name.

If properly formed, a DLLC is similar to a corporation with respect to the liability of its members. For federal income tax purposes, as a general rule, a DLLC may be treated as a partnership or a division of the member. Therefore, no general liability exists for members or managers of a DLLC and pass-through taxation may be achieved.

Another key feature of the DLLC, in addition to protecting members and managers from personal liability to third parties, is the freedom of contract principles that pervade the DLLC Act. Section 18-1101(b) of the act expressly provides that "It is the policy of [the DLLC Act] to give maximum effect to the principle of freedom of contract and to the enforceability of [Delaware] limited liability company agreements."

In order to form and organize a DLLC, there should be a DLLC agreement. The agreement sets forth the rules relating to the internal affairs of a DLLC in much the same way that a limited partnership agreement governs the internal affairs of a limited partnership, the certificate of incorporation and bylaws govern the internal affairs of a Delaware corporation, and a trust agreement governs the internal affairs of a Delaware business trust. A DLLC agreement is not filed with the Delaware secretary of state.

While a DLLC agreement is the governing document of a DLLC, the organization is not complete until one or more authorized persons executes and files a certificate of formation with the Delaware secretary of state. A certificate of formation must only set forth: (1) the name of the DLLC, which must contain the words "limited liability company"or the abbreviation "L.L.C." or the designation "LLC," and (2) the address of the registered office, and the name and address of the registered agent for service of process on the DLLC in the state of Delaware. Information such as the identity of the members and managers, the amount of their investment, the nature of the business and the capital structure need not be disclosed in the certificate of formation. A DLLC is formed at the time of the filing of the certificate of formation with the Delaware secretary of state, and will continue as a separate legal entity until the cancellation of the certificate of formation.

A practical advantage of the DLLC Act is the ability to file documents (including filing by fax) with the Delaware secretary of state and receive certified copies of such filed documents on an expedited basis. Certified copies of filed documents and good standing certificates for DLLCs may also be obtained on an expedited basis from the office of the Delaware secretary of state. Most filings may be made with the office of the secretary of state of Delaware on a priority-one basis (within two hours), same-day basis or 24-hour basis.

A member or owner of a DLLC may be a natural person, partnership, limited liability company, trust, estate, association, corporation, custodian, nominee or any other individual or entity in its own or any representative capacity. Thus, virtually any natural person, legal entity or representative may be a member of a DLLC.

A DLLC agreement may also provide for conditional obligations to make a contribution. A conditional obligation may not be enforced unless the conditions of the obligation have been satisfied or waived by the members. Conditional obligations include contributions payable on a discretionary call of a DLLC prior to the time the call occurs. This feature is ideal for equity and debt-investment funds conducted through a DLLC.

A person may also be admitted as a member (including as the sole member) of a DLLC and may receive a limited liability company interest without making a contribution to the DLLC or being obligated to make a contribution to the DLLC. In addition, unless otherwise provided in a DLLC agreement, a person may be admitted to a DLLC as a member (including as the sole member) of the DLLC without acquiring a limited liability company interest in the DLLC. Thus, it is possible to be a member of a DLLC without making a contribution to the DLLC or without acquiring an interest in the DLLC.

A DLLC, as a separate legal entity, may engage in any type of lawful business, purpose or activity with the exception of certain insurance and banking activities. The purposes and powers of a DLLC may be restricted by provisions in a DLLC agreement if desired. For example, it is permissible to structure a special-purpose DLLC or bankruptcy-remote DLLC if desired that may only engage in specified purposes.

Some advantageous uses of DLLCs include:

• corporate joint venture transactions and strategic alliances;

• the holding of investment securities, including, without limitation, debt and equity securities;

• real estate-based activity — (holding real property, holding mortgages, holding foreclosed property, holding commercial and residential properties such as office buildings, shopping centers, apartment complexes, warehouses and manufacturing facilities);

• bankruptcy-remote entities;

• manufacturing businesses;

• use of DLLCs in lieu of corporate subsidiaries;

• special-purpose finance subsidiaries (such as, "preferred securities" transactions);

• technology and research businesses;

• the holding of intellectual property and intangible assets;

• the mining and exploration of natural resources, including oil and gas transactions;

• structured finance transactions;

• leveraged buyout transactions;

• serving as a general partner of a general partnership or a limited partnership (including as a general partner of investment limited partnership funds); and

• estate tax purposes.

The advantageous use of DLLCs in private business transactions is virtually unlimited.

Notwithstanding the ability of a DLLC to engage in virtually any lawful business, there are a few special characteristics of limited liability companies that make it more appropriate to use an entity other than an LLC in certain types of transactions. An LLC, for instance, is generally not the best form of business entity to use when it is desirable to have publicly traded equity interests. Under existing federal tax laws, except in limited circumstances such as certain real estate ventures, oil and gas ventures and registered investment companies, DLLCs with publicly traded limited liability company interests are likely subject to the publicly traded partnership federal tax rules. These federal tax rules tax such publicly traded partnerships in the same manner as corporations for federal income tax purposes.

When forming a DLLC, business lawyers need to consider the jurisdictions in which the DLLC will be conducting its business. For example, consideration needs to be given as to whether the DLLC can qualify as a limited liability company in the jurisdictions where it proposes to conduct its business if that is in a jurisdiction other than Delaware. Currently, all 50 states and the District of Columbia have enacted limited liability company statutes that permit the qualification of foreign limited liability companies. Nevertheless, it is important to check the jurisdiction where the DLLC will conduct business to determine the classification and treatment of the DLLC under such laws. It is also prudent to check the classification of a limited liability company for state tax purposes.

As previously noted, a fundamental policy of the DLLC Act is the limitation of liability of members and managers for the debts, obligations and liabilities of a DLLC. Section 18-303(a) of the DLLC Act provides that,

Except as otherwise provided by this chapter, the debts, obligations and liabilities of a [DLLC], whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the [DLLC], and no member or manager shall be obligated personally for any such debt, obligation or liability of the [DLLC] solely by reason of being a member or acting as a manager of the [DLLC].

Thus, the general rule is that members and managers are not liable for the debts, obligations or liabilities of a DLLC.

This limitation on liability is an advantage that a DLLC has over a general partnership or a limited partnership. As a general rule, partners of general partnerships (other than in some circumstances general partners of limited liability partnerships) and general partners of limited partnerships (other than in some circumstances general partners of limited liability limited partnerships) are liable for the debts and liabilities of a partnership to the extent that partnership assets are insufficient to satisfy such debts and liabilities.

Notwithstanding the limitation on liability afforded members and managers for the debts and obligations of a DLLC that is provided in the DLLC Act, a member or manager of a DLLC under certain circumstances may be obligated for the member’s or manager’s own tortious or wrongful conduct or acts under general principles of law. In addition, a member is liable to make its contributions to the DLLC and other payment obligations that are provided in a DLLC agreement, and, under certain limited circumstances, a member of a DLLC may be required to return distributions wrongfully distributed to it.

A fundamental policy of the DLLC Act is to give maximum effect to the principle of freedom of contract. The act’s basic approach is to permit members of a DLLC to have the broadest discretion in drafting their DLLC agreement and to furnish rules concerning the internal governance of the DLLC only in situations where members have not expressly included provisions in their agreement. Thus, for example, members of a DLLC are free to contract among themselves concerning the management standards governing the internal affairs of the DLLC, including the establishment of classes or groups of members, voting rights, procedures for holding meetings of members, action by consent without a meeting, the establishment of record dates, quorum requirements, voting in person or by proxy, or any other matter with respect to the exercise of any right to vote.

When drafting a DLLC agreement that grants a right to vote, it is important to consider the procedures relating to:

• notice of the time, place or purpose of any meeting at which any matters are to be voted on by any members;

• waiver of any such notice;

• action by consent without a meeting;

• the establishment of a record date;

• quorum requirements; voting in person or by proxy;

• or any other matter with respect to the exercise of any such right to vote.

In other words, the DLLC agreement should contain provisions relating to voting rights since the act does not set forth such procedures in most instances. Similar provisions exist in the DLLC Act relating to the ability to have classes and groups of managers and voting by managers.

Generally, directors of a Delaware corporation may not act by proxy, but, absent a provision to the contrary in a DLLC agreement, members and managers of a DLLC may act by proxy. In addition, directors of a Delaware corporation, when acting by written consent, must act by unanimous written consent of the board of directors. The default rule for a DLLC is that such action by written consent shall be effective if it is signed by members or managers, as the case may be, having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting.

Unless otherwise provided in a DLLC agreement, management of the DLLC is vested in its members in proportion to the current percentage or other interest of members in the profits of the DLLC, the decision by members owning more than 50 percent controlling. Therefore, if the members of a DLLC desire that management be by managers in whole or in part, such management structure should be set forth in the DLLC agreement. Moreover, even if the DLLC will be member managed, if the members of the DLLC do not desire that all management decisions be determined by a majority in interest of the members based on the then current percentage or other interest in profits of the DLLC, such management structure should be set forth in the DLLC agreement. For example, it is permissible to include in an agreement super-majority voting provisions and unanimous voting provisions of members or managers for certain DLLC actions.

Section 18-402 of the DLLC Act also states, "Unless otherwise provided in a DLLC agreement, each member and manager has authority to bind the company." If the members do not want each of the members or each of the managers to be permitted to bind the DLLC to third-party contracts, the default rule in § 18-402 of the DLLC Act needs to be modified in the DLLC agreement. It is generally advisable to include in a DLLC agreement provisions relating to who may bind the DLLC. In addition, § 18-407 of the DLLC Act permits members and managers to delegate management rights to other persons unless otherwise provided in the DLLC agreement. Therefore, if delegation of management rights is not desired, the DLLC agreement should so provide.

An advantage of the DLLC Act is the contractual flexibility afforded in structuring the management of a DLLC. Management may be vested in members, managers, or partially in members and partially in managers. Management functions may be delegated to other persons, unless otherwise provided in the DLLC agreement. Section 18-402 of the DLLC Act makes clear that a DLLC may have more than one manager, if desired. There is no limit on the number of managers (or classes or groups of managers) that may be used in managing a DLLC, and thus the DLLC Act grants members the flexibility to have a board of managers or a board of representatives of members who may act in a manner similar to a board of directors of a Delaware business corporation if so provided in a DLLC agreement.

It is also permissible to provide in a DLLC agreement for separate classes and groups of managers including "independent managers" or "alternate managers" and it is permissible to designate "directors," "independent directors" and "alternative directors" of a DLLC as "managers" within the meaning of the DLLC Act. DLLCs may also be structured to have officers with titles and duties similar to officers of a corporation organized under the Delaware General Corporation Law if so provided in the DLLC agreement. This feature has been particularly beneficial in corporate joint venture transactions conducted through a DLLC.

It cannot be overemphasized how important it is to draft carefully the management structure if a manager-managed DLLC structure, managing-member structure or a corporate-management type of structure is desired since there are few "default rules" in the DLLC Act to deal specifically with issues that are not addressed by the DLLC agreement. Thus, it is permissible to structure a DLLC with a management structure similar to a corporation, general partnership, limited partnership, trust or sole proprietorship or a combination of such management structures.

The members of a DLLC are also free to contract with respect to the DLLC’s financial aspects and thus, profits and losses and distributions of assets may be allocated in the manner provided in a DLLC agreement. The DLLC Act is primarily a "default rule" statute and governs the allocations of DLLC profits and losses and distributions of DLLC assets among the members of a DLLC in the absence of controlling provisions in a DLLC agreement.

One of the most important examples of contractual flexibility contained in the DLLC Act relates to the duties and liabilities of members and managers to the DLLC and the other members and managers. The act provides that,

To the extent that, at law or in equity, a member or manager or other person has duties (including fiduciary duties) and liabilities relating thereto to a DLLC or to another member or manager, (1) any such member or manager or other person acting under a DLLC agreement shall not be liable to the DLLC or to any such other member or manager for the member’s or manager’s or other person’s good faith reliance on the provisions of the DLLC agreement, and (2) the member’s or manager’s or other person’s duties and liabilities may be expanded or restricted by provisions in a DLLC agreement.

Therefore, fiduciary duties may be defined contractually in a DLLC agreement. Moreover, a member, manager or other person (such as a director, officer or stockholder of a member) should not be liable for breach of fiduciary duty if such person relies in good faith on the provisions of the DLLC agreement. This has been perceived by many to be a significant advantage of the DLLC Act.

A similar provision to § 18-1101(c) of the DLLC Act is § 17-1101(d) of the Delaware Revised Uniform Limited Partnership Act. Section 17-1101(d) has been held to prevent a breach of fiduciary duty where a general partner relied in good faith on the provisions of a limited partnership agreement. (See United States Cellular Investment Co. of Allentown v. Bell Atlantic Mobile Systems Inc. , C.A. No. 12984 (Del. Ch. March 11, 1994)).

The ability to modify fiduciary duties by contract is different from that permitted by the Delaware General Corporation Law. Under the corporation law, as a general rule, the fiduciary duties of loyalty and care may not be modified by contract. Under Delaware law, it is possible to limit the monetary liability of a director for the breach of the duty of care.

The DLLC Act does not define the scope of the duties that a member or manager owes to a DLLC and to other members and managers, and does not state whether any duty even exists. It does, however, enable members and managers to modify such duties, if any, by the terms of a DLLC agreement. Thus, if such duties and liabilities are expressly provided for in a DLLC agreement, the members and managers will have greater assurance that actions taken in accordance with such provisions will be protected. If such duties and liabilities are not set forth in a DLLC agreement, there is some uncertainty as to what standards and what laws will apply (such as, corporate, limited partnership, general partnership or trust laws).

Based on the emerging law in the Delaware limited partnership area, it is likely that a member or manager will owe fiduciary duties to the DLLC and its members to the extent that such member or manager controls DLLC property for the benefit of another. Delaware corporate law fiduciary-duty principles may also be applicable in many cases since in the limited partnership area Delaware courts have looked to the Delaware corporate law for guidance when the limited partnership agreement and the Delaware Revised Uniform Limited Partnership Act did not address the issue.

Under Delaware law, directors of a Delaware corporation stand in a fiduciary relationship with the corporation and its stockholders. As fiduciaries, directors owe duties of loyalty and care to all corporation stockholders. In addition, directors owe a fiduciary duty of disclosure to the stockholders of the corporation. Simply stated, the directors’ duty of loyalty mandates that a director not consider or represent interests other than the best interest of the corporation and its stockholders. A director must not only affirmatively protect the interests of the corporation, but also must refrain from doing anything that would injure the corporation or deprive it of profit or advantage that his or her skill and ability might properly bring to it.

Thus, a director of a Delaware corporation generally has a duty of undivided and unselfish loyalty to the corporation that demands that there be no conflict between such duty and the director’s self-interest. It may be determined by Delaware courts that the members and managers who manage DLLC assets possess a duty of loyalty similar to that of directors of Delaware corporations in the absence of provisions in a DLLC agreement that modify such duty.

Simply stated, the duty of care under Delaware law requires that directors inform themselves, prior to making a business decision, of all material information reasonably available to them. In determining whether a director’s judgment is informed, a court will consider the material or advice the board of directors had available to it, and whether the directors have a sufficient opportunity to acquire knowledge concerning the matter before acting. Directors have the affirmative duty to protect the financial interest of the corporation and its stockholders and must proceed with a critical eye in assessing information. The duty of loyalty and duty of care, as generally described above, would apply to the members and managers of a DLLC if corporate fiduciary duty principles are applicable to DLLCs and the DLLC agreement does not otherwise provide.

It should be noted that if a manager or a representative of a member also serves on the board of another entity, such as a Delaware corporation that is a member of the DLLC, such manager or representative of a member will likely owe an equal fiduciary duty of good management to the DLLC and the member. Unless otherwise provided in the DLLC agreement, such manager representative will not be able to act in the best interest of the member who appointed such person as a manager or representative, but will be required to act in the best interest of the DLLC and all of its members when engaging in actions relating to the DLLC. This duty to both entities can lead to interesting conflict-of-interest issues. Such dual directorship issues should be carefully considered, particularly in DLLC joint venture and strategic alliance transactions.

In addition to addressing the fiduciary duties of members and managers and other persons managing the DLLC, depending on the particular DLLC transaction, it may be advisable to address the fiduciary duties, if any, of affiliates of members and managers, such as the directors, officers and stockholders of a corporate member that is in a position of control of a DLLC, as well as agents, employees, officers and representatives of the DLLC. In addition, to the extent that members appoint representatives of members to manage the DLLC, it is prudent to specify to whom such representatives owe their duty, that is, the DLLC and all members equally or the member that appointed them.

Because of the language of § 18-1101(c) of the DLLC Act, compliance with a DLLC agreement should help protect a member, manager or other person controlling a DLLC from liability for breach of fiduciary duty. In the event that the terms of a DLLC agreement do not define the fiduciary duty of a member, manager or other person controlling a DLLC, such duty and liability for breach of such duty will be left for the courts to define. Whether the courts will look to corporate law, limited partnership law, general partnership law or trust law is unclear and may depend on the specific circumstances presented.

Another example of contractual flexibility afforded members and managers of a DLLC is with respect to their right to indemnification. Section 18-108 of the DLLC Act provides that, "A DLLC shall have the power to indemnify and hold harmless any member or manager of a DLLC or other person from and against any and all claims and demands whatsoever, subject to such standards and restrictions, if any, as are set forth in a DLLC agreement." To the extent members desire that the DLLC indemnify certain persons, including members and managers, such provisions should be included in the DLLC agreement. A provision similar to § 18-108 of the DLLC Act is found in § 17-108 of the Delaware Revised Uniform Limited Partnership Act.

In Delphi Easter Partners Limited Partnership v. Spectacular Partners Inc., C.A. No. 12409 (Del. Ch. Aug. 6, 1993), the Delaware Chancery Court quoted § 17-108 of the Delaware Revised Uniform Limited Partnership Act and expressly acknowledged that § 17-108 is "broadly enabling." The court then recognized that § 17-108 permits contractual indemnification in a greater number of circumstances than the Delaware General Corporation Law’s statutory right to indemnification (8 Del.C. Section 145). "In fact, § 17-108 defers completely to the contracting parties to create and to limit rights and obligations with respect to indemnification and advancement of expenses." Id., slip op . at 3. There is no reason to believe that the indemnification provisions of the DLLC Act will not also be interpreted as broadly enabling.

The DLLC Act authorizes a DLLC to merge or consolidate with or into another DLLC. The act also permits a DLLC to merge or consolidate with or into other business entities such as corporations. When working on a merger involving a DLLC merging with or into another entity, the law of the jurisdiction of formation or organization of the other entity needs to be considered in determining whether or not that entity can merge or consolidate with or into a DLLC.

In addition, a non-U.S. business entity may become a DLLC by domesticating as a DLLC by complying with the DLLC Act. When a non-U.S. entity has become domesticated as a DLLC following the DLLC Act, the DLLC shall, for all purposes of the laws of the state of Delaware, be deemed to be the same entity as the domesticating non-U.S. entity. In addition, unless otherwise agreed, or as required under applicable non-Delaware law, the domesticating non-U.S. entity shall not be required to wind up its affairs or pay its liabilities and distribute its assets, and the domestication shall not be deemed to constitute a dissolution of such non-U.S. entity and shall constitute a continuation of the existence of the domesticating non-U.S. entity in the form of a DLLC. Thus, it is permissible to organize a DLLC that may be subject to the laws of two jurisdictions.

Another way for an existing legal entity to become a DLLC is to convert the other entity to a DLLC. It should be noted that other business entities, including, without limitation, a corporation, business trust, partnership or a foreign limited liability company, may convert to a DLLC by complying with the act. Section 18-214(g) of the DLLC Act provides that unless otherwise agreed, or as required under applicable non-Delaware law, the converting other entity shall not be required to wind up its affairs or pay its liabilities and distribute its assets, and the conversion shall not be deemed to constitute a dissolution of such other entity and shall constitute a continuation of the existence of the converting other entity in the form of a DLLC. When another entity has been converted to a DLLC according to the DLLC Act, the DLLC shall, for all purposes of the laws of the state of the Delaware, be deemed to be the same entity as the converting other entity.

Similar to a merger transaction, when working on a domestication transaction or a conversion transaction, the law of the jurisdiction of the domesticating entity or converting entity, as the case may be, needs to be considered in determining whether or not that entity can domesticate to a DLLC or convert to a DLLC.

A DLLC will have perpetual existence unless otherwise provided in the DLLC agreement. A DLLC will dissolve at the time, or on the happening of events, as provided in a DLLC agreement. A DLLC may also dissolve in a manner specified in the DLLC Act. Once dissolved, similar to a Delaware limited partnership, the business of a DLLC continues only to the extent reasonably necessary to gradually settle and wind up the DLLC’s affairs.

Section 18-801(a)(4) of the DLLC Act provides that a DLLC is dissolved and its affairs should be wound up at any time there are no members, provided that a DLLC is not dissolved and is not required to be wound up if the DLLC is continued by a new member in a manner permitted by the DLLC Act or the DLLC agreement. It is also permissible to include a provision in a DLLC agreement that provides that the personal representative of the last remaining member shall be obligated to agree in writing to continue the DLLC and to the admission of the personal representative of such member or a nominee or designee to the DLLC as a member, effective as of the occurrence of the event that terminated the continued membership of the last remaining member.

Section 18-801(a)(4) has been deemed to be a significant advantage of a DLLC when structuring a bankruptcy remote DLLC to be used in asset-securitization transactions. In addition, it is permissible to provide in a DLLC agreement that a person may be admitted as a member of a DLLC without acquiring a limited liability company interest or without being required to make a contribution to a DLLC effective when an event occurs that causes the last remaining equity member to cease to be a member of a DLLC. Thus, springing members are permitted under the DLLC Act.

Another issue to consider when forming a bankruptcy-remote DLLC is whether the bankruptcy of a member will cause the member to cease to be a member of the DLLC. Section 18-304 of the DLLC Act does provide that a person ceases to be a member of a DLLC on the bankruptcy of a member unless otherwise provided in a DLLC agreement, or with the written consent of all members. In structuring a bankruptcy-remote DLLC, it is often advisable to provide that the bankruptcy of a member will not cause a member to cease to be a member of the DLLC, and the business of the DLLC shall be continued without dissolution on the occurrence of such an event.

A very important provision of the DLLC Act relating to dissolution of a DLLC is § 18-801(b), which provides that, unless otherwise provided in a [DLLC agreement], the death, retirement, resignation, expulsion, bankruptcy or dissolution of any member or the occurrence of any other event that terminates the continued membership of any member shall not cause the DLLC to be dissolved or its affairs to be wound up, and on the occurrence of any such event, the DLLC shall be continued without dissolution. Thus, if a DLLC agreement is properly drafted, under Delaware law, the bankruptcy or dissolution of a member, even the last remaining equity member, will not, by itself, cause the DLLC to be dissolved or its affairs wound up.

When drafting a DLLC agreement, it is very important to focus on the winding-up provisions. For example, such issues as who will wind up the affairs of the DLLC, how assets of the DLLC should be distributed to members on dissolution after satisfaction of creditors’ claims (whether by payment or the making of reasonable provision for payment), whether assets may be distributed in kind to the members on dissolution, the period of time allowed for the winding up of the DLLC, and other matters relating to the winding up of the DLLC, should be addressed in the DLLC agreement.

The ability to form a legal entity that provides for limited liability for all its members regardless of their participation in such entity’s management and that may be treated as a partnership or a branch or division of a member (single-member DLLCs) for federal income tax purposes makes the DLLC a very attractive type of business organization. In many cases, the use of a DLLC will provide a competitive business advantage to clients. The contractual freedom relating to flexibility in structuring management, voting rights, economic rights, fiduciary duties, liability of members and managers to the DLLC and other members and managers, and indemnification, enhance the attractiveness of the DLLC. The DLLC Act expressly provides in § 18-1101(b) that, "It is the policy of this chapter to give maximum effect to the principle of freedom of contract and to the enforceability of DLLC agreements."

In addition to the advantages of the DLLC Act noted here, Delaware has the unique advantage that its Court of Chancery may have jurisdiction over disputes that could arise involving members and managers of a DLLC with appeal rights to the state Supreme Court. Section 18-111 of the DLLC Act confirms that any action to interpret, apply or enforce the provisions of a DLLC agreement may be brought in the Court of Chancery.

The Court of Chancery and the Supreme Court are the same courts that often handle Delaware corporate, limited partnership and business trust litigation and have substantial experience in resolving business disputes. The Delaware courts have recognized, for example, that many partnership agreements are drafted by sophisticated commercial lawyers and the Delaware courts attempt to give effect to the words used in the partnership agreement. It is likely that Delaware courts will take a similar view when interpreting DLLC agreements and the rights and duties of members and managers.

In light of the many advantages of DLLCs, the entity has been received with great enthusiasm by the business community. In most instances, such DLLCs are not conducting business in the state of Delaware and have no assets or activities in the state of Delaware (other than the maintenance of a registered agent and office), but are being formed as DLLCs in order to obtain the benefits and advantages of Delaware’s laws and courts.

Leyden is a member of Richards, Layton & Finger, P.A., in Wilmington, Del.

Back to May/June Business Law Today | Back to Business Law Home Page