September 28, 2017

MONTH-IN-BRIEF: Corporations, LLCs & Partnerships

Tarik Haskins

Limited Liability Companies

Recent Amendments to Delaware Limited Liability Company Act

By R. Jason Russell, Morris, Nichols, Arsht & Tunnell LLP

The Delaware Legislature recently passed amendments to the Delaware Limited Liability Company Act effective as of August 1, 2017. These amendments generally provide greater flexibility with respect to formation requirements and the types of entities that may convert, domesticate, merge, and consolidate, but importantly, they also include an amendment to Section 18-407 of the Delaware Limited Liability Company Act, which, as a result of the amendment, now expressly provides that a manager or member of a limited liability company has the power and authority to delegate “any or all” of such member’s or manager’s rights, powers, and duties to manage and control the business and affairs of the limited liability company. This amendment was adopted in light of Obeid v. Hogan, Cal. No. 11900-VCL (Del. Ch. June 10, 2016), in which the Delaware Court of Chancery suggested that there could be certain limitations on the ability of a member or manager to delegate to non-managers or non-members.

 

Special Litigation Committee for an LLC Not Contemplated by Members’ Agreement Held as Invalid

By Lawrence A. Goldman, Gibbons PC

In a recent decision under New York law, the court determined that the appointment of a special litigation committee by managers of affiliated limited liability companies was an impermissible delegation of managerial authority. In the court’s view, the appointment of a special committee was a “major decision” under the company operating agreement, and major decisions were reserved to the members. The court’s decision was premised on the principle that LLCs are creatures of contract and that the contracts in question did not contemplate appointment of special litigation committees or the delegation of decision-making authority on major decisions to persons other than the members. The court observed that while the New York Limited Liability Company Act does not contemplate special litigation committees, if the parties’ agreement allows for such committees, the agreement will be enforced. Note that the Revised Uniform Limited Liability Company Act, adopted by a number of states, expressly provides for the appointment of special litigation committees and that Section 18-407 of the Delaware Limited Liability Company Act permits broad delegation of rights and powers to manage.

 

LLC Operating Agreement Intended to Frustrate a Bankruptcy Held Void as Against Public Policy and Unenforceable

By Lawrence A. Goldman, Gibbons PC

A recent decision by the U.S. Bankruptcy Court, Eastern District of Kentucky, held that provisions of an operating agreement added incidental to the closing of a commercial loan served no purpose other than to frustrate the LLC’s ability to commence a bankruptcy case. In re Lexington Hospitality Group, LLC, 2017 WL 4118117 (Bankr. E.D. Ky., Sept. 15, 2017). In short, the applicable provisions gave the lender the ability to block a filing. Notwithstanding state law policy of freedom of contract in LLC agreements, the court observed that enforceability of bankruptcy restrictions is a matter of federal law. The court’s holding follows two other recent decisions similarly voiding restrictions on the filing of a bankruptcy. See Intervention Energy Holdings, LLC, 553 B.R. 258 (Bankr. D. Del. 2016) and In re Lake Michigan Beach Pottawattamie rResort, LLC, 547 B.R. 899 (Bankr. N.D. Ill. 2016).

Tarik Haskins

Partner; Morris, Nichols, Arsht & Tunnell LLP

Tarik is a partner in the Commercial Law Counseling Group. His practice covers a range of commercial transactions including mergers and acquisitions, secured financings, joint ventures, and business counseling.