2.0 The Status Opinion: Formation, Existence and Good Standing
A closing opinion for a transaction involving an LLC often contains an opinion that the LLC has been “duly formed” and is “validly existing.” If the Secretary of State of the state in which the LLC was formed issues “good standing” certificates for LLCs, an opinion that the LLC is in “good standing” in that state often is added after “validly existing.”
An opinion that an LLC has been “duly formed” means that the requirements for forming the LLC under the applicable LLC statute were met at some time on or before the date of the opinion letter. Delaware has two such requirements: the filing of a certificate of formation with the Delaware Secretary of State and entry into an operating agreement by at least one member who qualifies as a “person” as defined in the Delaware LLC Act and meets the requirements for being a member in the operating agreement. In Delaware as in some other states, the requirement that an LLC have an operating agreement need not be satisfied when the certificate of formation is filed, and as a result an LLC may be formed long after the filing of the certificate.
To give a duly formed opinion on a Delaware LLC, the opinion preparers ordinarily obtain from the Delaware Secretary of State (i) a copy of the certificate of formation, as amended to date, on file with and certified by the Secretary of State and (ii) a “good standing” certificate. They then confirm that the certificate of formation meets the requirements of the Delaware LLC Act and, if the certificate specifies a delayed effective date, that the delayed effective date has occurred. In addition, the opinion preparers ordinarily obtain a copy of the current operating agreement from an appropriate source and review it to confirm that (i) the name of the LLC in the operating agreement is consistent with the name of the LLC in the certificate of formation, (ii) any requirements in the Delaware LLC Act and any conditions in the LLC’s operating agreement for the LLC to be duly formed have been met and (iii) the LLC had or has at least one member.,
An opinion that an LLC is “validly existing” means that on the date of the opinion letter the entity on which the opinion is given exists as an LLC under the statute under which it was formed.
The work required to give a validly existing opinion on a Delaware LLC is essentially the same as the work required to give a due formation opinion except that the validly existing opinion must be based on the facts existing on the date of the opinion letter. To give a validly existing opinion, the opinion preparers obtain and rely on (i) a “good standing” certificate from the Delaware Secretary of State; (ii) a copy of the certificate of formation, as amended to date, on file with and certified by the Secretary of State; and (iii) a copy of the current operating agreement furnished to them by an appropriate source. As with the duly formed opinion, the opinion preparers then confirm that (i) the certificate of formation meets the requirements of the Delaware LLC Act, (ii) the name of the LLC in the operating agreement is consistent with the name of the LLC in the certificate of formation and good standing certificate and (iii) the LLC has at least one member. The opinion preparers also confirm that any conditions in the operating agreement on its becoming effective have been met (which they also will do if they are giving a due formation opinion).
In Delaware (as well as many other states) dissolution of an LLC does not alone terminate the LLC’s existence. Rather, for the LLC’s existence to terminate, its certificate of formation must be cancelled. Therefore, in Delaware so long as an LLC’s certificate of formation has not been cancelled, the fact an LLC has dissolved will not in and of itself prevent the giving of an opinion that the LLC validly exists. Nevertheless, the opinion preparers will need to address the possibility the LLC has dissolved when, as is often the case, they are giving not only a status opinion but also the power and action opinions discussed in Sections 3.0 and 4.0 of this report.
An opinion that a Delaware LLC is validly existing sometimes states that it is given solely in reliance on a Delaware Secretary of State’s “good standing” certificate. The Committee notes, however, that a validly existing opinion on an LLC based solely on a Delaware Secretary of State’s “good standing” certificate adds nothing analytically to the limited information provided by that certificate.
Period Before Delivery of Opinion Letter
An opinion that an LLC has been duly formed means that the LLC was duly formed at some time on or before the date on which the opinion is given; an opinion that an LLC is validly existing means that the LLC exists on the date the opinion is given. Those opinions do not address the date when the LLC was duly formed or whether it existed as an LLC on any particular date before the date of the opinion letter. If an opinion recipient is concerned about the status of the LLC before the date of the opinion letter or the legal consequences of a specific action taken by the LLC before that date, the recipient is always free to request an opinion specifically addressing that concern.
3.0 Power of LLC to Enter Into and Perform Its Obligations Under Agreements Being Entered Into by LLC
The opinion that an LLC has the power to execute, deliver and perform its obligations under specified agreements being entered into by the LLC (the “LLC power opinion”) requires that the LLC exist, and it means that the LLC has the requisite power, whether by virtue of the LLC statute under which it was formed or, to the extent permitted by that statute, its operating agreement (and in some states its certificate of formation). By analogy to the corporate power opinion, the LLC power opinion often refers to “limited liability company” or “LLC” power but is understood to have the same meaning whether or not it contains that qualifier.
Subject to only limited exceptions, most state LLC statutes grant LLCs the power to carry on any lawful business or purpose except as otherwise provided in their operating agreements (or in some states their certificates of formation). Taking full advantage of this broad statutory grant, many LLCs have included in their operating agreements no limits on the activities in which they are permitted to engage apart from those imposed by statute. Other LLCs, however, are formed for a particular purpose, and have included in their operating agreements provisions limiting their powers to those necessary to pursue that purpose. In either case, to give an LLC power opinion, the opinion preparers must confirm that under the applicable LLC statute and the LLC’s operating agreement (and in some states its certificate of formation) the LLC has the power to take the actions covered by the opinion. When the opinion preparers cannot do so with the requisite confidence, they often arrange for the operating agreement (and, if necessary, the certificate of formation) to be amended in a manner that allows them to give the opinion.
The possibility that an LLC has dissolved presents an additional issue for the giving of an LLC power opinion. Although in Delaware a dissolved LLC continues to exist until its certificate of formation is cancelled, the Delaware LLC Act, like many other LLC statutes, requires that, once an LLC has dissolved, “its affairs shall be wound up.” Because a dissolved LLC’s entering into an agreement that is inconsistent with its winding up would violate this statutory requirement, when giving an opinion that an LLC has the power to enter into an agreement, opinion preparers need to address (as discussed below) the possible dissolution of the LLC.
Some operating agreements provide for an LLC to dissolve on a specified date or on the occurrence of a specified event, such as the sale by the LLC of particular assets or substantially all its assets. LLC statutes also may specify events of dissolution. For example, the Delaware LLC Act provides that an LLC will dissolve when it has no members.
LLC statutes ordinarily do not require public notice that an LLC has dissolved or a filing with a Secretary of State or other governmental office. Therefore, when giving an LLC power opinion, the opinion preparers cannot rely simply on a certificate of the Secretary of State or other government official but also must address in some other way the possibility that the LLC has dissolved. Sometimes, the opinion preparers will have personal knowledge that no event of dissolution has occurred (as they might, for example, when the LLC is formed just before the closing of the transaction covered by the LLC power opinion). In other circumstances, the opinion preparers may be able to rely on a combination of personal knowledge, a manager’s, member’s or officer’s certificate and factual representations in the operating agreement or the transaction documents. In still other circumstances, they may choose to address the issue by, for example (i) including in the opinion letter an express assumption that no event of dissolution has occurred or (ii) stating in the opinion letter that they have not conducted a factual investigation into the possibility that the LLC has dissolved.
A Delaware LLC that has dissolved may revoke its dissolution and thereby cure problems that may have arisen as a result of its engaging in activities that were beyond its powers as a dissolved LLC. Therefore, if the opinion preparers are aware that a Delaware LLC has dissolved and the transaction in question is inconsistent with the winding up of its affairs, they still may be able to give an LLC power opinion if they are able to arrange for the dissolution to be revoked on or before the date of the opinion letter. To assure that an LLC, especially one formed long before the date of the opinion letter, has not dissolved, some opinion preparers out of an abundance of caution request that the operating agreement be amended or other steps be taken to revoke any dissolution that may have occurred.
If an LLC has dissolved and its dissolution has not been revoked, opinion preparers could still give a power opinion if the transaction is consistent with the winding up of the dissolved LLC’s affairs. Nevertheless, when giving a power opinion on a dissolved LLC, although not required to do so, opinion preparers may point out the LLC’s dissolved status in the opinion letter.
Like an opinion on the power of a corporation or limited partnership, an LLC power opinion is understood as a matter of customary practice to address only the limitations on an LLC’s power that are imposed by the LLC statute under which the LLC was formed and its operating agreement (and in some states its certificate of formation). Thus, the opinion does not address limitations imposed by other statutes, for example, statutes requiring licenses or permits to engage in specified activities. An LLC’s compliance with limitations imposed by other statutes, even statutes covered by the opinion letter, is addressed, if at all, by another opinion.
An LLC power opinion is not an opinion that the LLC has obtained the approvals required by the applicable LLC statute and its operating agreement (and in some states its certificate of formation) for it to enter into the agreement or agreements addressed by the opinion. The opinion that the LLC has obtained those approvals is discussed in the following section.
4.0 Due Authorization, Execution and Delivery of Agreements Being Entered Into by LLC (the “Action” Opinion)
The opinion that an LLC has duly authorized, executed and delivered an agreement requires that the LLC exist and have the LLC power to enter into the agreement. Assuming those requirements are satisfied, the opinion means that: (i) the steps required by the applicable LLC statute and the LLC’s operating agreement (and in some states its certificate of formation) to approve the agreement have been taken; (ii) the agreement has been executed by a person (often but not necessarily a member, manager or officer) having authority to act on the LLC’s behalf; (iii) the agreement has been executed and delivered by the LLC in accordance with the requirements of the applicable LLC statute and the LLC’s operating agreement (and in some states its certificate of formation); and (iv) the execution and delivery of the agreement complied with the law of the state or states, if any, whose law relating to the execution and delivery of an agreement also is covered by the opinion.
Subject to limited exceptions, state LLC statutes allow LLCs broad discretion to specify in their operating agreements (i) the approvals they need for particular actions, quorum requirements for meetings and voting rights of classes or groups of members or managers and (ii) the procedures for exercising voting rights, including the calling and holding of meetings of members or managers, actions by written consent without a meeting and the fixing of record dates. Often, operating agreements impose fewer formal requirements for approval of matters than do corporation statutes and corporate bylaws.
Operating agreements take many different approaches to decision-making. Some, for example, grant the managers exclusive power over all matters. Others grant them broad powers but require them to obtain member approval of major transactions, for example a sale of all or substantially all their assets. Still others require them to obtain member approval of a broader range of matters, such as agreements for more than a specified dollar amount.
In preparing an action opinion, the opinion preparers also: (i) determine what approvals, if any, the applicable LLC statute and the operating agreement (and in some states the certificate of formation) require for the LLC to enter into the agreement on which the opinion is being given; (ii) confirm that those approvals do not violate the applicable LLC statute; and (iii) confirm that those approvals were given in accordance with the applicable LLC statute and the operating agreement (and in some states the certificate of formation). Opinion preparers can confirm that required approvals were given by obtaining a certificate or representation from an appropriate person detailing the action taken or, if the action requires a meeting or written consent, by examining a copy of the minutes of the meeting or written consent or a copy of the authorizing resolution. However, obtaining a certificate, a representation or a copy of the LLC’s minutes will not be necessary if an operating agreement expressly authorizes a member, managing member, manager, officer or some other person to enter into an agreement on behalf of the LLC without the approval of anyone else. Under those circumstances, the opinion preparers need do no more than confirm that the agreement has been executed on behalf of the LLC by an authorized person.
The opinion preparers also confirm that the persons who executed and delivered the agreement on behalf of the LLC were authorized to do so. Sometimes, the operating agreement authorizes a particular person (such as a member, managing member, manager, officer or some other specified person) to execute and deliver agreements on behalf of the LLC. The due execution and delivery part of an action opinion on an LLC generally has the same meaning and requires the same work as its counterpart in an action opinion on a corporation or a limited partnership.
When the managing member or manager is an entity, the question arises whether the opinion also confirms that the managing member or manager has the power under the entity statute under which it was formed and its organizational documents to take the actions covered by the opinion and has obtained whatever internal authorizations it needs to take those actions. As a matter of customary practice, lawyers giving an action opinion do not have to address those matters but are permitted to assume, without so stating, that, when a managing member or manager is an entity and is acting on behalf of an LLC, it (i) is the type of entity it purports to be; (ii) has the entity power and took any internal steps it was required to take to authorize it to take the actions covered by the opinion; and (iii) authorized the individuals acting on its behalf to take those actions, including signing the agreement in its name and delivering the agreement. These same unstated assumptions apply to each entity further up the chain. If an opinion recipient is concerned about these matters, it should request a separate opinion covering them.
5.0 Valid Issuance of LLC Interests
Like opinions on corporate stock and limited partnership interests, opinions on LLC Interests typically state that the LLC Interests have been “validly issued.” A validly issued opinion on LLC Interests means that the creation and issuance of the LLC Interests satisfied the requirements, including requirements relating to payment for those interests, of the applicable LLC statute and the operating agreement. If the LLC statute or operating agreement requires that a resolution be adopted or that other action be taken to approve the issuance, the opinion also means that the resolution or other action was duly adopted or taken and that the issuance complied with any conditions on issuance in that resolution or other action. To determine the requirements for creating and issuing LLC Interests, opinion preparers ordinarily review the applicable LLC statute, the operating agreement, the resolution or other action, if any, approving the issuance and, in some states, the certificate of formation. They then confirm that the requirements they have determined are applicable have been met.
A validly issued opinion on LLC Interests requires an LLC to have the power under the applicable LLC statute, its certificate of formation and its operating agreement to create and issue the LLC Interests covered by the opinion. Because LLC Interests may not grant members rights that are not permitted by, or deny them rights that are mandated by, the applicable LLC statute, the operating agreement or, in some states, the LLC’s certificate of formation, opinion preparers giving a validly issued opinion must confirm that the LLC Interests do not grant or deny the members such rights. To illustrate, opinion preparers could not give an opinion that LLC Interests have been validly issued if the LLC Interests purport to grant holders two votes for each LLC Interest they hold when the operating agreement specifies that each LLC Interest shall entitle holders to one vote.
An opinion that LLC Interests have been validly issued does not address the enforceability of the terms of the LLC Interests. Nor does the opinion address the issuance’s compliance with other applicable laws or the status of the LLC Interests as general intangibles or securities (certificated or uncertificated) under the Uniform Commercial Code. These matters, if addressed at all, would be covered in separate opinions.
Some opinion preparers state not only that LLC Interests have been validly issued but also, using the language of the analogous opinion commonly given on corporate stock, that the LLC Interests have been “duly authorized.” Unlike corporation statutes, LLC statutes do not require or specify procedures for the creation of authorized capital, and although some operating agreements specify procedures, many do not. Consequently, unlike the analogous opinion for corporate stock, an opinion stating that LLC Interests have been duly authorized does not cover matters beyond those covered by the validly issued opinion and should not be understood to add anything to the validly issued opinion.
6.0 Admission of Purchasers of LLC Interests as Members of the LLC
An opinion that the purchasers of LLC Interests have been duly admitted as members of an LLC means that the purchasers have satisfied the admission requirements, if any, of the LLC statute under which the LLC was formed and its operating agreement (and, in some states, its certificate of formation).
Under many state LLC statutes, including the Delaware LLC Act, purchasing or otherwise acquiring an LLC Interest does not by itself make the holder of that LLC Interest a member of the LLC. Instead, LLC statutes typically require that specified conditions be satisfied for a person to become a member unless the operating agreement otherwise provides. Operating agreements often specify conditions for admitting members, and those conditions sometimes differ depending on when members are admitted (e.g., when the LLC was formed or later). To support an opinion that purchasers of LLC Interests have been duly admitted as members, opinion preparers confirm that all requirements for admission in the applicable LLC statute and the operating agreement (and in some states the certificate of formation) have been satisfied or waived, except any requirements they expressly assume to have been met or expressly exclude from the opinion’s coverage.
Subscription agreements for LLC Interests may also impose conditions on the admission of purchasers as members. An opinion that purchasers have been admitted as members covers compliance with those conditions when they are incorporated in or otherwise made part of the operating agreement. The Delaware LLC Act does not expressly require that conditions on admission that are not part of the operating agreement be satisfied for a purchaser to become a member. Nevertheless, some opinion givers, to avoid any misunderstanding, either expressly assume in their opinion letters that any such conditions have been satisfied or state that they have relied on a certificate confirming compliance with those conditions.
An opinion that a person has been admitted as a member of an LLC is not an opinion that (i) the person can enforce the obligations the operating agreement imposes on the LLC, the manager or other members; (ii) the LLC, the manager or the other members can enforce against that person its obligations under the operating agreement; or (iii) if the person is an entity rather than a natural person, it has the power to be a member under the statute under which it was formed and its constituent documents.
7.0 Obligations of Purchasers
Purchasers of LLC Interests sometimes request an opinion on their obligation to make payments to the LLC after the closing for their LLC Interests and to make future contributions to the LLC by reason of their ownership of LLC Interests. A form of that opinion is suggested and discussed in Section 7.1 below. Purchasers also may request that the opinion in Section 7.1 be supplemented by an opinion regarding their liability to third parties for debts, obligations and liabilities of the LLC. A suggested form of that opinion is discussed in Section 7.2 below.
7.1 Payments and Contributions
Opinions regarding the obligation of purchasers to make payments and contributions to the LLC in connection with their purchase and ownership of LLC Interests can take different forms. Some, tracking the opinion normally given on corporate stock, may state that the LLC Interests are “fully paid and non-assessable.” Others may take a similar approach to that historically taken in opinions on interests in limited partnerships. For the reasons discussed below, the Committee suggests that opinion givers adopt the following form of opinion on purchasers’ obligations to make payments and contributions to the LLC:
Under [name of LLC statute under which LLC was formed], Purchasers have no obligation to make further payments for their purchase of LLC Interests or contributions to LLC solely by reason of their ownership of LLC Interests [or their status as members of LLC] [except as provided in their Subscription Agreements or the Operating Agreement], [and except for their obligation to repay any funds wrongfully distributed to them] [or as they otherwise may have agreed].
The bracketed exception to this opinion for obligations of purchasers to the LLC provided in purchasers’ subscription agreements and the operating agreement (i.e. the bracketed exception immediately following note 109) excludes from the opinion’s coverage purchasers’ obligations to make future payments or contributions to the LLC under those documents. Often, purchasers of LLC Interests in privately held LLCs agree in their subscription agreements or otherwise are obligated under the LLC’s operating agreement to make contributions to the LLC after the closing, for example, to satisfy capital calls or to provide funding for a specified event such as the acquisition by the LLC of a particular business or property. Opinion preparers often include the bracketed exception based on the belief that purchasers should not need a third-party opinion on factual matters that they (or their counsel) can readily determine for themselves by reading the LLC’s operating agreement and their subscription agreements. An opinion containing the bracketed exception thus requires the opinion preparers to consider, apart from the operating agreement and purchasers’ subscription agreements, whether under the law covered by the opinion purchasers have any obligation following the closing to make payments for their LLC Interests or contributions solely by reason of their ownership of LLC Interests. The effect of the bracketed exception, therefore, is to leave to purchasers the responsibility for knowing what their obligations are to make payments and contributions under the operating agreement and their subscription agreements.
Opinion recipients sometimes ask opinion preparers to cover the purchasers’ obligations to the LLC under the purchasers’ subscription agreements and the LLC’s operating agreement. If the opinion preparers are willing to do so, they should omit from the opinion the bracketed exception immediately following note 109 in the above suggested form of opinion and instead refer in the opinion to the specific sections of the operating agreement and the subscription agreements that impose obligations on purchasers of LLC Interests to make further payments or contributions (e.g., “except as provided in Sections __, __ and __ of the Operating Agreement and Section __ of the Subscription Agreements”).
The Committee recommends that opinion givers use the suggested form of opinion rather than an opinion, worded like the opinion ordinarily given on corporate stock, that LLC Interests are “fully paid and non-assessable.” Standing alone, the words “fully paid” and “nonassessable” do not clearly convey what the opinion is intended to cover, typically are not defined in LLC statutes and do not have a generally understood meaning with respect to LLC Interests.
7.2 Liability to Third Parties
As a supplement to the opinion discussed in Section 7.1, purchasers of LLC Interests may request an opinion, analogous to the opinion often requested by purchasers of limited partnership interests, that as members of the LLC they will have no personal liability to third parties for debts, obligations and liabilities of the LLC. Opinions on corporations do not address this issue, and the trend in recent years is for opinions not to be given on the personal liability of LLC members to third parties for liabilities of the LLC except in some private equity transactions and some transactions involving hedge funds or joint ventures. When given, the opinion normally does not take the form of a stand-alone opinion but is combined with the opinion discussed in Section 7.1. The Committee suggests that a combined opinion be worded as follows:
Under [name of LLC statute under which LLC was formed] (the “Act”), Purchasers have no obligation to make further payments for their purchase of LLC Interests or contributions to LLC solely by reason of their ownership of LLC Interests [or their status as members of LLC] and no personal liability for the debts, obligations and liabilities of LLC, whether arising in contract, tort or otherwise, solely by reason of being members of LLC [except in each case as provided in their Subscription Agreements or the Operating Agreement], [and except for their obligation to repay any funds wrongfully distributed to them] [or as they otherwise may have agreed].
Like the suggested form of opinion in Section 7.1, the exception in brackets immediately preceding notes 127 and 128 in the above suggested form of opinion has the practical effect, as discussed in Section 7.1, of leaving to each opinion recipient responsibility for knowing its obligations under its subscription agreement and the operating agreement. Again, as with the suggested form of opinion in Section 7.1, if the opinion recipients request that the opinion cover purchasers’ personal liability (if any) under their subscription agreements and the LLC’s operating agreement to third parties for the debts, obligations and liabilities of the LLC, the opinion preparers, if they agree, can do so by adding language along the lines discussed in the second to last paragraph of Section 7.1.
The phrase “solely by reason of being members” in the suggested form of opinion appears in Section 18-303(a) of the Delaware LLC Act, and its inclusion in the opinion together with the express reference to the Act in the introductory clause of the opinion is intended to limit the coverage of the opinion to the effect of the Act. For LLC’s formed under another state’s LLC statute, the opinion should use the terminology used in the analogous provision in that statute.
Some opinion givers historically have included more exceptions than are set forth in the suggested form of opinion. The Committee believes that many of these exceptions, such as the exception sometimes included for the liability of a member for the member’s own conduct or acts, are unnecessary because they do not relate to liabilities attributable solely to a person’s status as a member. However, even if not required, opinion preparers may wish to include language in the opinion such as that quoted in the last paragraph of this section to make clear the limits of the coverage of the opinion.
An opinion on purchasers’ personal liability for debts, obligations and liabilities of the LLC that, like the suggested form of opinion, covers liability solely by reason of purchasers’ status as members does not address the liabilities that state and federal laws, such as securities and environmental laws, impose on controlling persons of an entity because those liabilities do not derive solely from purchasers’ status as members. In addition, the opinion does not address the liability of purchasers under a piercing-the-veil, alter ego or similar theory, the liability of purchasers for their tortious or wrongful conduct, or their liability for actions they take in some other capacity, for example, as managers. Although the following paragraph is unnecessary, to avoid any misunderstanding when giving an opinion that addresses the personal liability of purchasers to third parties for obligations of the LLC, opinion givers may choose to include it (or a paragraph along the same lines) in their opinion letters:
The phrase “solely by reason of being a member” in opinion paragraph __ is taken from [insert applicable section of applicable LLC statute] and, together with the reference in the opinion to the Act, has been included to make clear that the opinion does not cover personal liability that a Purchaser may have that is not attributable solely to a Purchaser’s status as a member, such as the personal liability a Purchaser may incur as a result of (i) a Purchaser’s status as a controlling person under the securities laws, environmental laws or other laws, (ii) a Purchaser’s service in another capacity, for example, as a manager or an officer of the LLC, (iii) a Purchaser’s own tortious or wrongful conduct or (iv) application of a piercing-the-veil or similar doctrine.
In recent years LLCs have become increasingly common. By providing guidance to both opinion givers and counsel for opinion recipients on the wording and meaning of opinions on LLCs and the work needed to support them, this report is intended to facilitate the giving of those opinions and as a result to improve the opinion process.