The Limited Liability Company

A. Introduction-A Tax Driven Entity

1. LLC = corporate form situated between partnership and corporation

   1. Tax like a partnership, no double taxation

   2. Limited liability

2. companies simply indicate whether or not they want to be treated as an LLC on their federal tax documents.

3. Two types of LLC

   1. Member managed: (more like a partnership), each member has authority

   2. Manager managed: (more like a corp), manager has authority

4. DL LLC act

   1. 18-401(b): the intent of the act is to give maximum effect to private ordering

      1. (e): you can privately order fiduciary duties

         1. you cannot get rid of implied covenant of good faith and fair dealing, i.e. a party cannot act in a way to destroy the benefits of a provision the other party has contracted for

      2. So LLCs have shifted from a business entity created for tax reasons to a business entity focused on private ordering

   2. 18-201: easy to file a certificate of formation

   3. 18-101: operating agreement

      1. Can be written OR ORAL (excluded from the statute of frauds)

   4. 18-402: (this is where statutes differ)

      1. DL default rule: members = managers

   5. 18-302: you can have different classes of members

   6. 18-701: members have no personal interest in LLC property

   7. 18-702: if members assign their rights to a third party, they do so without transferring management rights

   8. 18-704: new members need unanimous approval of existing members (like a partnership)

   9. 18-305: operating agreement or outside agreements should have reasonable standards for access to information

      1. Much less paternalistic for shareholders than corporate law (members have less protected interests to information)

B. Fiduciary Duties

1. Owners of an LLC owe each other a fiduciary duty to make full disclosure of all material facts (Salm v. Feldstein)

2. Duty of loyalty includes an implied duty to give notice of a merger. See, e.g., VGS, Inc. v. Castiel

3. “Entire fairness” standard: Solar Cells, Inc. v. True North Partners (Del)

   1. Fair dealing

      1. Process by which decision was made

      2. Looks at terms, structure and timing

   2. Fair price

      1. Includes all relevant factors “relating to the economic and financial considerations of the proposed merger”

C. Dissolution

1. Courts will only dissolve an LLC where the directors of the LLC are deadlocked, or where one owner acts in such a way as to prevent the LLC from achieving its business purpose

2. Courts are biased against dissolution of LLCs, and particularly on board deadlock grounds

XII. Fiduciary Obligations of Officers and Directors

A. Duty to be Attentive

1. MCBA

   1. Breach of duty

      1. Directors must discharge their duties in good faith and act as ordinarily prudent persons would under similar circumstances and in like positions. A director should acquire at least a rudimentary understanding of the business. Directors are under a continuing obligation to keep informed about the activities of the corporation. They are not required to do detailed inspections of daily activities but are required to generally monitor corporate affairs and policies.

         1. Attend board meetings regularly

         2. Maintain familiarity with financial status of corporation through regular review of financial statements

         3. Object if discover illegal course of action; resign/seek advice of counsel if corporation doesn’t take action

   2. Causation

      1. But for the breach by the specific director, the harm would have been avoided

2. Delaware

   1. No need to show causation

   2. If a plaintiff shows there was a breach of the duty of care, that showing overcomes the presumption of the business judgment rule and establishes a prima facie case of liability, even without a showing of injury

   3. Burden then shifts to the defendants to show that the transaction was entirely fair

      1. Fair dealing

         1. Process by which decision was made

         2. Looks at terms, structure and timing

      2. Fair price

         1. Includes all relevant factors “relating to the economic and financial considerations of the proposed merger”

3. MBCA §8.30

   1. a. Each director must act (1) in good faith and (2) in a manner the director reasonably believes to be in the best interests of the corporation.

   2. b. Members of board shall discharge their duties with the “care that a person in a like position would reasonably believe appropriate under similar circumstances.”

   3. c. When running a large corporation, don’t have to directly supervise subordinates and can rely on them unless a director has a good reason not to trust them.

   4. d. Directors are entitled to rely on reports unless have knowledge that makes reliance unwarranted.

   5. e. A director is entitled to rely on:

      1. i. One or more officers who are reliable and competent in functions performed

      2. ii. Experts (lawyers, accountants) within their expertise

      3. iii. A committee of board of directors of which director is not member if director reasonably believes committee merits confidence.

4. MBCA §8.31

   1. a. Director shall not be liable for any decision to take or not to take action unless plaintiff establishes that:

      1. There is an articles of incorporation provision eliminating the “no liability rule” under 2.02(b)(4), AND

   2. Challenged conduct was the result of:

      1. action not in a good faith, or

      2. a decision which

         1. directors did not reasonably believe to be in best interests (i.e. no rational basis)

         2. director was not informed to an extent director reasonably believed appropriate (i.e. Van Gorkum)

         3. lack of objectivity due to a personal/business relationship

         4. sustained failure of director to devote attention to oversight of corp.

         5. self-dealing

B. Substantive Standard for Care-Based Decision

1. BJR: A board of directors does not breach its duty of care to the corporation when the director (1) has no conflict of interest; (2) is reasonably well informed; (3) has a rational basis that the decision is in the best interest of the corporation (presumption of propriety); (4) makes the judgment in good faith.

C. Reasonable Investigation

1. Background knowledge

   1. A leveraged buyout (LBO) is when a company is purchased with a combination of equity...

Buy the full version of these notes or essay plans and more in our Business Association (Duke Cox) Outlines.