Delaware Chancery Court decision points up risk of a “broad” purpose clause in a Delaware LLC agreement

Steven D. Goldberg, Esq. Wilmington, DE
sgoldberg@stevendgoldberg.com
http://www.stevendgoldberg.com
Contact me if you need assistance in forming/organizing a Delaware business entity or any matter of Delaware law. Delaware Forms and Publications are available at http://www.delawarellclaw.com

Section 18-802 of the Delaware LLC Act provides: “On application by or for a member or manager the Court of Chancery may decree dissolution of a limited liability company whenever it is not reasonably practicable to carry on the business in conformity with a limited liability company agreement. ”

In the case of In re Arrow Investment Advisors, LLC, Vice Chancellor Strine was presented with a case where one of the three founding members of the LLC sought an order to dissolve the LLC because it “was no longer practicable to carry out Arrow’s business.” arrow_investments_4091-vcs_opinion

Arrow’s purpose clause provided that it was formed “for the purpose of acting as an investment adviser to certain investment funds and for such other lawful business as the Management Committee chooses to pursue” (emphasis in original) The Court determined that it must look to the LLC agreement to determine the purpose of the LLC and not to an initial business plan that any rational businessperson would expect to evolve over time”.

From the Court’s fact statement it appears that in 2008 the LLC suffered financial reverses and the Company’s management committee determined to explore additional, investment related business opportunities for the LLC rather than continuing to serve as the investment advisor to the funds as stated in the LLC agreement.

Arrow was formed by three individuals who became its initial “management committee”. The Petitioner was removed from management under the terms of the LLC agreement by the two remaining managers. Petitioner subsequently sued seeking dissolution under 18-801 and 18-802 of the Delaware LLC Act. According to the Petitioner, the new efforts were inconsistent with the initial business plan (which was not included in the LLC agreement). The Petitioner further alleged that the two other members of the management committee had breached their fiduciary duties to the LLC.

It is well established under Delaware law that the remedy of dissolution is an extraordinary remedy which the court is reluctant to invoke. The Court held:

Given its extreme nature, judicial dissolution is a limited remedy that this court grants sparingly. The court will not dissolve an LLC merely because the LLC has not experienced a smooth glide to profitability or because events have not turned out exactly as the LLC’s owners originally envisioned; such events are, of course, common in the risk-laden process of birthing new entities in the hope that they will become mature, profitable ventures. In part because a hair-trigger dissolution standard would ignore this market reality and thwart the expectations of reasonable investors that entities will not be judicially terminated simply because of some market turbulence, dissolution is reserved for situations in which the LLC’s management has become so dysfunctional or its business purpose so thwarted that it is no longer practicable to operate the business, such as in the case of a voting deadlock or where the defined purpose of the entity has become impossible to fulfill. (Footnotes omitted)

The Court pointed out that there are situations where a court even when faced with a broad purpose clause may order dissolution.

“Dissolution of an entity chartered for a broad business purpose remains possible upon a strong showing that a confluence of situationally specific adverse financial, market, product, managerial, or corporate governance circumstances make it nihilistic for the entity to continue. In other words, a petitioner might obtain dissolution by making a convincing showing that the perpetuation of the entity, irrespective of its managers’ intentions to pursue a business line allowed by its governing instrument, was obviously futile and would not result in business success. One need not speculate on exactly what circumstances of that type might suffice to make that showing in order to confidently conclude that Hamman cannot state a claim for dissolution by simply alleging that a two-year-old LLC with a broad purpose clause has experienced some adversity and therefore ought to be dissolved. By that standard, investors could state a claim for dissolution against virtually all entities on a regular basis, especially in years of economic turbulence like this one.”
“Moreover, an important reason for parties to include a broad purpose clause in an entity’s governing instrument is to ensure that the entity has flexibility to adapt in the face of changing circumstances. Having agreed to such a clause in the Arrow LLC Agreement, and therefore having contemplated that Arrow may one day be something other than an investment advisor, Hamman cannot now seek to prematurely end Arrow’s existence because he is unhappy with how Arrow’s management chose to exercise its discretion.”

In footnotes to the decision the Court noted several cases where dissolution was mandated, in almost all of those cases there was misconduct involved on the part of the parties seeking the continuance of the LLC.

The Court pointed out that the Petitioner’s fiduciary duty claims are derivative in nature and the Petitioner was attempting to make an end around the demand requirements in 18-1003. Additionally as noted by the Court, the LLC agreement contained mandatory alternative dispute resolution provision which include claims for breach of fiduciary duties. Delaware law favors alternative dispute resolution and the Court determined that the Petitioner must pursue that remedy.

In Arrow the Petitioner conceded that the parties had contemplated that the LLC may, in the future, pursue additional avenues. Where the parties to the agreement anticipate the need for future flexibility it is not unusual for the drafter to have included a broad purpose clause. However, in those cases where the parties have formed the LLC for a specific purpose and do not intend that the company pursue any other activities you would expect that the purpose clause of the LLC agreement would be narrow. An example of a narrow purpose clause would state that the LLC was formed to “own, operate, lease, finance, refinance and sell or otherwise dispose of [the office building located at _____,] and to engage in such other activities which a Delaware Limited Liability Company may lawfully engage pursuant to the Delaware Limited Liability Company Act (the “Act”) which are incident thereto or connected therewith.” A broad purpose clause would state that  “the purpose of the company is to engage in such business or business as a Delaware Limited Liability Company may lawfully engage pursuant to the Delaware Limited Liability Company Act (the “Act”) and shall include the doing of any and all things incident thereto or connected therewith.” The decision as to the particular purpose clause in the LLC agreement is often the subject of much negotiation and is an issue which should be of concern to counsel for each of the parties to the agreement.

My email address is sgoldberg@stevendgoldberg.com.com

Delaware Chancery Court imposes personal liability on affiliates of a LLC Managing Member

Steven D. Goldberg, Esq. Wilmington, DE
sgoldberg@stevendgoldberg.com
http://www.stevendgoldberg.com
Contact me if you need assistance in forming/organizing a Delaware business entity or any matter of Delaware law. Delaware Forms and Publications are available at http://www.delawarellclaw.com

On April 20, 2009 the Delaware Court of Chancery, Vice Chancellor Strine, issued an opinion, on a motion for summary judgment, in the case of Bay Center Apartment Owners, LLC v. Emery Bay PKI, LLC, Emery Bay ETI, LLC, Alfred E. Nevis, and Emery Bay Member, LLC.  memorandum_opinion_3658-vcs This case is important as the Court determined on summary judgment that it could imposed personal liability upon the non party individual who controlled the managing member of the LLC and an affiliate which he also controlled based upon a breach of the implied contractual covenant of good faith and fair dealing, a breach of fiduciary duties, aiding abetting and fraud.

FACTS. The case arose out of a failed real estate development. The facts of the case are complicated and convoluted. The basic facts are that the plaintiff (Bay Center) and Emory Bay PKI, LLC (PKI) entered into an LLC Agreement for Emory Bay Member, LLC (Emory Bay) to develop a property. Under the LLC agreement PKI was the managing member with general authority to manage the LLC , subject to certain matters upon which Bay Center must approve. PKI cause Emory Bay to enter into a construction loan which Nevis personally guaranteed. PKI renegotiated the loan on several occasions without giving Bay Center notice as required under the LLC Agreement. The negotiations avoided defaults which would have triggered Nevis’ guarantee. The LLC and ETI, an affiliate of PKI, also owned by Nevis, entered into a Development Management Agreement (DMA) under which the affiliate was given general authority to manage the project. Bay Center transferred the property being developed to a LLC owned by Emory Bay in exchange for an unsecured note (Note) and a pledge of certain cash flows.The project was mismanaged and eventually failed. The renegotiations of the loan diverted cash flows which were pledged to Bay Center without Bay Center’s approval.

Bay Center sued PKI, the other member of Emory Bay, as well as the LLC itself, Nevis, the individual who controlled PKI and ETI, the party to the DMA which was also controlled by Nevis. Plaintiff alleged that PKI, ETI and Nevis

1. violated the implied covenant of good faith and fair dealing
2. breached fiduciary duties owed to Emory Bay and Plaintiff
3. aided and abetted a breach of fiduciary duty
4. committed fraud against Plaintiff

1.  PKI was a signatory to the LLC agreement but not a party to the either the DMA or the Note. Nevis, while he had signed the documents on behalf of his controlled companies, was not personally a party to any of the agreements. In examining the application of the implied covenant the Court stated:

Delaware courts rightly employ the implied covenant sparingly when parties have crafted detailed, complex agreements, lest parties be stuck by judicial error with duties they never voluntarily accepted.
Nevertheless, Delaware courts have “recognized the occasional necessity of implying contract terms to ensure the parties’ reasonable expectations are fulfilled.” In the context of corporate entities, “[t]he implied covenant functions to protect stockholders’ expectations that the company and its board will properly perform the contractual obligations they have under the operative organizational agreements.” Part of corporate managers’ proper performance of their contractual obligations is to use the discretion granted to them in the company’s organizational documents in good faith
Here, PKI had the obligation to manage Emery Bay and the discretion to cause the Supporting Agreements to be performed. PKI was required to carry out these functions in good faith, meaning PKI could not engage in “arbitrary or unreasonable conduct” that had the effect of preventing Bay Center from “receiving the fruits of the bargain.”

This bargain was, essentially, that in exchange for contributing the real estate to be developed, Bay Center would reap the rewards of PKI’s project management skills and efforts. PKI’s conduct allegedly frustrated the parties’ intent to develop a profitable condominium complex because PKI in bad faith failed to force the entities that were contractually obligated to perform tasks that were crucial to the Project’s success to fulfill their obligations, even though PKI had the express authority to do so.

And Bay Center has pled facts from which it can reasonably be inferred that PKI’s decision not to cause performance of the Supporting Agreements was not in good faith. For starters, Emery Bay’s alleged breaches of the Bay Center Note benefited PKI by diverting cash that Emery Bay was supposed to use to repay the Note to fund the depleted A&D Loan reserves, which PKI would have otherwise had to fund through capital calls. And, the decision not to pursue claims against ETI under the Development Management Agreement was a conflicted one because Nevis, as the controller of both Emery Bay and ETI, stood on both sides of it.

2. The LLC Agreement was poorly drafted and contained conflicting provision regarding the presence of fiduciary duties. For the purpose of summary judgment the court found that PKI had fiduciary duties to the LLC and to Bay Center. The court then went on to explore the extension of those duties to Nevis personally:

 The analysis regarding Nevis is less straightforward. Nevis himself is  not a member or officer of Emery Bay, and is thus beyond the normal scope of those who owe fiduciary duties in the corporate context. Bay Center’s theory of liability rests on a line of cases, beginning with In re USACafes, L.P. Litigation holding that “those affiliates of a general partner who exercise control over the partnership’s property may find themselves owing fiduciary duties to both the partnership and its limited partners.” Importantly, the defendants do not challenge the general applicability of this doctrine in the LLC context. Instead, the defendants argue that USACafes type liability can only be imposed in limited circumstances that are not present here.

It is true that USACafes does not apply to all affiliates in all circumstances. First, to have any fiduciary duties to an entity, the  affiliate must exert control over the assets of that entity. Here, the defendants concede that Bay Center has sufficiently pled that Nevis himself exerted direct control over Emery Bay’s property. Second, USACafes suggests that controlling affiliates do not have the full range of traditional fiduciary duties, although that case specifically disclaims any effort to fully delineate the scope of controlling affiliate duties:

While these authorities extend the fiduciary duty of the general partner to a controlling shareholder, they support as well, the recognition of such duty in directors of the General Partner who, more directly than a controlling shareholder, are in control of the partnership’s property. It is not necessary here to attempt to delineate the full scope of that duty. It may well not be so broad as the duty of the director of a corporate trustee. But it surely entails the duty not to use control over the partnership’s property to advantage the corporate director at the expense of the partnership.

Later cases have similarly declined to expound on the full scope of USACafes duties. In practice, the cases applying USACafes have not ventured beyond the clear application stated in USACafes “the duty not to use control over the partnership’s property to advantage the corporate director at the expense of the partnership.” Limiting the application of USACafes to this duty provides, in my view, a rational and disciplined way of protecting investors in alternative entities with managing members who are themselves entities, while not subjecting all the individuals who work for managing members to wide-ranging causes of action. Bay Center must therefore plead that Nevis benefited himself at the expense of Emery Bay in order to withstand this motion to dismiss.

The court held that Bay Center had met it burden of proof because Nevis used his control over Emery Bay’s assets to stave off personal liability.

3. The court held that to state a case for aiding and abetting the plaintiff must demonstrate (1) the existence of a fiduciary relationship, (2) the fiduciary breached its duty, (3) a defendant, who is not a fiduciary, knowingly participated in a breach and (4) damages to the plaintiff resulted from the concerted action of the fiduciary and the non fiduciary. The court found each of the elements present.

4. Next the Court found that the defendants committed fraud from “silence in the face of a duty to disclose.” As previously stated, the Court found that PKI was subject to the traditional fiduciary duties of a director of a Delaware corporation.

As a general matter, the board of directors of a corporation has a “fiduciary duty to disclose fully and fairly all material information within the board’s control when it seeks shareholder action.” The principle applies by analogy to the fiduciaries of an LLC when they seek members’ consent. Here, the LLC Agreement requires Bay Center’s consent, which necessarily requires disclosure to Bay Center, of any refinancing or restructuring of the A&D Loan. Bay Center alleges that the A&D Loan was modified on seven separate occasions, but that PKI only informed Bay Center of one of the modifications. The fiduciary duty of directors to disclose material facts when shareholders are required (or have the right) to make a decision is precisely implicated here. Emery Bay had a right to make a decision regarding the renegotiations of the A&D Loan, and PKI therefore had a fiduciary duty to inform Bay Center of all material facts concerning the renegotiations. The alleged fact that PKI failed to inform Bay Center that most of the renegotiations were taking place illustrates PKI’s failure to make Bay Center aware of even the most basic facts that Bay Center was entitled to know. Thus, Bay Center has sufficiently pled a fraud claim against PKI based on PKI’s failure to disclose material facts in the face of its fiduciary duty to do so.

And, because Bay Center has pled that Nevis personally participated in this fraud by PKI, Bay Center has also stated a claim against Nevis individually. Under settled Delaware law, “[a] corporate officer can be held personally liable for the torts he commits and cannot shield himself behind a corporation when he is a participant.” This includes situations where a corporate agent participates in corporate fraud.

A Member has not met his capital requirement, what can we do?

Steven D. Goldberg, Esq. Wilmington, DE
sgoldberg@stevendgoldberg.com
http://www.stevendgoldberg.com
Contact me if you need assistance in forming/organizing a Delaware business entity or any matter of Delaware law. Delaware Forms and Publications are available at http://www.delawarellclaw.com

This is unfortunately a common problem.  Section 18-502 of the Delaware LLC Act addresses this question.  Under Section 18-501 the contribution may be in the form of  “cash, property or services rendered or a promissory note or other obligation to contribute cash or property or to perform services.” The problem thus arises when the future obligation is not met.

Section 18-502(a) provides in part that “a member is obligated to a limited liability company to perform services, even if the member is unable to perform because of death, disability or any other reason.” The Section goes on to state that in the case the member fails to meet his or her obligation they are obligated to the company for the moneys-worth of the obligation. “The forgoing option shall be in addition to, and not in lieu of, any other rights, including the right of specific performance, that the limited liability company may have against such member under the limited liability company agreement or applicable law.”

Section (c) provides in part that the agreement “may provide that the interest of any member who fails to make any contribution … shall be subject to specified penalties for, or specified consequences of, such failure. Such penalty or consequence may take the form of reducing or eliminating the defaulting member’s proportionate interest in the limited liability company, subordinating the member’s limited liability company interest to that of nondefaulting members, forced sale of that limited liability company  company interest, the lending by other members for the amount necessary to meet the defaulting member’s commitment, a fixing of the value of his or her limited liability company interest by appraisal or by formula and redemption or sale of the limited liability company interest as such value, or other penalty or consequence.”

As we can see the Act gives the drafter of the company agreement many options to enforce the member’s obligation by way of penalties or consequences. In the absence of a carefully drafted agreement the remedy for a member failing to make the contribution is a suit at law to enforce the monetary obligation or an action at equity to specifically enforce that obligation.  In a recent case the Court of Chancery invoked some of these remedies in the case of a member who flagrantly and repeatedly violated the agreement to the financial detriment of the other members. Given the level of violation in that case I would not rely on that case on lieu of a carefully drafted agreement.

The question, and the provisions of Section18-502, point up the need for a carefully and professionally drafted agreement. You may reach me at sgoldberg@stevendgoldberg.com.

Guidelines For Preparing Minutes of The Board of The LLC or Corporation

Steven D. Goldberg, Esq. Wilmington, DE
sgoldberg@stevendgoldberg.com
http://www.stevendgoldberg.com
Contact me if you need assistance in forming/organizing a Delaware business entity or any matter of Delaware law. Delaware Forms and Publications are available at http://www.delawarellclaw.com

 In our last post we answered the question of whether you need to keep minutes for your LLC. In this post we will discuss the basic requirements for the minutes themselves. Many company agreements are drafted to include in the management framework of the LLC, a board of directors. The minutes should evidence on their face compliance with the requirements of the company agreement in the case of a LLC or the bylaws in the case of a corporation. The minutes should reflect: 

• Time, date and place of the meeting.
• Compliance with notice requirements. If notice is written, a copy of the notice should be attached to the minutes and if oral, a written waiver of notice should be attached.
•  The attendees to evidence that quorum requirements have been met.
• The name and title of the person presiding over meeting and the person acting as secretary of the meeting recording the minutes. 
•  All non-board members in attendance as well as those board members excused or absent. If board members leave and rejoin the meeting or are late joining the meeting, the points at which various individuals join and leave the meeting should be noted.
• The minutes should identify in general terms each agenda item that was discussed.
• The minutes generally should reflect in general terms the discussion of the  matters considered and the participation of the directors in the discussion. It is the function of minutes to summarize the board’s discussion of various factors which underlie its decisions. Comments and questions are generally not be attributed to individual directors as minutes are not intended to be a verbatim transcript but rather a summary record.
•  To provide evidence that the board made an informed decision and to evidence that the board met its the duty of care, that it satisfied the standards underlying the business judgment rule and met its other fiduciary duties, a summary of the factors considered by the board in reaching such decisions should be reflected. The minutes again are not intended to be a verbatim transcript. Minutes reflect a summary of the board’s considerations, recognizing that minutes are inherently a significantly condensed writings. Factors considered should be described generally, not necessarily in detail, and need not include all of  the specifics of the analysis and consideration.
•  If the board received the advice, opinion, or report of advisers, including lawyers, accountants, a committee, or an officer, the minutes should reflect the board’s consideration of those matters. If the board has privileged discussions with legal counsel, the minutes should reflect that a privileged discussion with counsel on a particular matter was held. Executive sessions should be noted but the matters discussed in executive session need not be detailed. 
• The resolutions adopted or other decisions made or decisions not to take an action should be reflected in the minutes. The minutes are not required to reflect individual votes cast, however in some circumstances directors may wish the minutes to reflect their individual votes. The minutes should reflect any directors who recused themselves from a decision or a vote, any abstentions, and, at the request of a director, any dissent.

                 The minutes constitute the company’s official record of its meetings. It is advisable to keep minutes in electronic form such as a PDF file as paper files can be lost or damaged.

 If you need assistance with preparing minutes, a company agreement or any other matter of Delaware law, please contact me at sgoldberg@stevendgoldberg.com

Do I Need To Keep Minutes For My LLC?

Steven D. Goldberg, Esq. Wilmington, DE
sgoldberg@stevendgoldberg.com
http://www.stevendgoldberg.com
Contact me if you need assistance in forming/organizing a Delaware business entity or any matter of Delaware law. Delaware Forms and Publications are available at http://www.delawarellclaw.com

A corporation formed under the Delaware General Corporation Law (DGCL) is required to have an annual meeting of shareholders and at least an annual meeting of its board of directors.  Minutes must be kept of the meetings and the minutes are available for inspection by shareholders and directors.

Unlike corporations the LLC Act does not mandate annual meetings of members or managers. While there is no statutory mandate for meetings, nevertheless should an LLC hold meetings of its members and keep minutes of those meetings? The answer in my view is yes.

As the LLC organizes there should be a record of the decisions made, similar to the organizational minutes of a corporation. The minutes will reflect the decisions of the members as to who will be responsible for the day to day management of the company, if the company is to have officers, an identification of the offices and who holds those offices, decisions as to banking, borrowing and the admission of members among other major decisions.

Under the LLC Act, §18-305,  subject to reasonable standards as may be set forth in the company agreement, the records of the LLC are available for inspection by members and managers, subject to the right of the manager to keep confidential any information which  the manager reasonably believes to be in the nature of trade secrets or which could damage the business of the LLC.

Whether the LLC is member managed or manager managed, the members have a function in the company, though that function may be limited in the case of a manager managed LLC. When members do meet there should be a person to whom the responsiblity to keep the minutes is delegated. Minutes form an important record of the deliberations of the members and provide a historical record of the company’s business decisions. It is my view that even in the case of a sole manager, that manager should prepare minutes to reflect major decisions, such as the admission of members if the manger is responsible for admissions and other matters such as borrowing.

Just as the sole manager should keep minutes to reflect his or her decisions, the sole member of a LLC should likewise keep minutes to reflect his or her decisions in the management of the LLC.

Delaware Supreme Court Further Defines Director Liability, Sets High Bar

Steven D. Goldberg, Esq. Wilmington, DE
sgoldberg@stevendgoldberg.com
http://www.stevendgoldberg.com
Contact me if you need assistance in forming/organizing a Delaware business entity or any matter of Delaware law. Delaware Forms and Publications are available at http://www.delawarellclaw.com

Delaware courts have increasingly applied corporate rules to LLC’s. In a new decision the Delaware Supreme Court has further defined the conduct which will impose liability on corporate directors in the sale of  the company and sets the bar high for any plaintiff to prevail in the future. This further definition of the fiduciary duty of loyalty may well find its way into LLC decisions.

Lyndell Chemical Co. v. Ryan (Del. Supr. March 25, 2009) involved the merger of the company with Basell AF and addressed just what duties are imposed by Delaware Law on the Board of Directors and when those duties become applicable.

Unlike other typical sale cased, there was no evidence from which the court could infer that the defendant directors knowingly ignored their legal responsibilities when overseeing the sale of the company. The plaintiff, a shareholder of Lyndell, alleged breach of the fiduciary duty of loyalty in connection with the merger of Lyndell and Basell AF. The Supreme Court accepted an interlocutory appeal from the Court of Chancery on the issue of whether the directors breached their duty of loyalty by failing to act in good faith to obtain the best price in selling the company under the requirements set down in 1986 in the case Revlon v. MacAndrews & Forbes Holdings, Inc.

In the appeal Lyondell asserted that the court below erred by not following historical precedent. In In re Walt Disney Co. Derivative Litigation(2006) the court concluded that the issue of “bad faith” encompasses not only an intent to harm but an intentional dereliction of duty. In Stone v. Ritter(2006) the court in addressing the concept of bad faith in the context of corporate oversight adopted the so called Caremark Standard (In re Caremark International Derivative Litigation, 1996) and found that standard to be consistent with Disney. In Stone the court also stated that “imposition of liability requires a showing that the directors knew that they were not discharging fiduciary obligations.”

The Court imposed “Revlon Duties” only when a company embarks on a transaction that will result in a change of control or when it responds to an unsolicited offer. Just because the company is “in play” does not trigger these duties to obtain the best possible price. There is only one Revlon Duty, to get the best price for the shareholders, but there is not just one way to reach that end. The court stated that “Instead of questioning whether disinterested, independent directors did everything that they (arguably) should have done to obtain the best sale price, the inquiry should have been whether those directors utterly failed to obtain the best sale price.”

The record clearly established that the directors did not breach their duly of loyalty by failing to act in good faith.

The company’s bylaws exculpated the directors from liability under a duty of care, only the duty of loyalty is not exculpated, for that reason the Plaintiff had to persue a loyalty case, not a breach of duty case.

This case sets the bar high for plaintiffs in change of control cases.

sgoldberg@stevendgoldberg.com

2009 Delaware LLC Act Amendments

Steven D. Goldberg, Esq.
Wilmington, DE
sgoldberg@delcorp.com
Contact me if you need assistance in forming/organizing a Delaware business entity or any matter of Delaware law.

[These Amendments were approved by the Delaware General Assembly on June 19, 2009 and signed into law by the Governor on June 23, 2009]

The 2009 Delaware Limited Liability Company Act (LLC Act) amendments will be introduced in the Delaware General Assembly shortly. Here is a black line showing the sections to be amended. 2009 LLC Amendments

Present Section 18-111 grants jurisdiction to the Court of Chancery to hear actions to “interpret, apply or enforce” the provisions of a LLC agreement or the duties and obligations of the members and managers to the LLC or the rights or powers of, or restriction on, the LLC its members or managers. The amendment broadens the reach of the section to include the authority for the court to determine those rights or powers of, or restrictions on the LLC, its member or managers under  “or any provision of this chapter, or any other instrument, document, agreement or certificate contemplated by any provision of this chapter.” The amendment broadens the reach of the Section and is intended to avoid arguments that 18-111 limits the court’s jurisdiction.

The amendment to Section 18-204 is intended to clarify who, and on behalf of which entity, a certificate of merger or consolidation is to be signed.

The amendment to Section 18-209(a) clarifies the meaning of the term “other business entity” as used in Section 18-204.

Previously Section 18-209(c)(4) permitted the certificate of merger to change the name of the surviving domestic LLC. The amendment will now permit the certificate of merger to also change the registered office or registered agent.

A little understood feature of Section 18-209 is the ability within the context of  a merger or consolidation to amend the LLC agreement or to adopt a new LLC agreement notwithstanding language to the contrary in the existing agreement placing limitations or special voting or consent requirements on amendments, requiring a super majority vote to amend the agreement or a prohibition on amendments. The new language contained in the amendments confirms this authority and provides that only in the case where the limitations on amendments by its terms applies in connection with a merger or consolidation will the limitation in the agreement prohibit the adoption of an amendment or new agreement in connection with a merger or consolidation.

The Section 18-302 amendment is a conforming amendment for the 18-209(f) amendment.

A recent decision of the Delaware Court of Chancery raised the legal question of whether the corporate doctrine of independent legal significance applies in the context of a LLC. The amendment to 18-1101 to add a new subsection (h) is intended to confirm that the doctrine of independent legal significance applies to LLC’s.

Do I Really Need A Company Agreement?

Steven D. Goldberg, Esq. Wilmington, DE
sgoldberg@stevendgoldberg.com
http://www.stevendgoldberg.com
Contact me if you need assistance in forming/organizing a Delaware business entity or any matter of Delaware law. Delaware Forms and Publications are available at http://www.delawarellclaw.com

My company is just me or just me and my friend, do I really need to have a company agreement? The answer is yes and that it is because the Delaware LLC Act requires that every LLC have a company agreement. Under Delaware law the agreement may be written, oral or implied. The company agreement is sometimes called an operaing agreement.

You think, maybe, that you will just have an oral agreement? Your banker probably will not like that idea when you apply to open an account or apply for a loan.  The obvious risk with an oral agreement for a company with 2 or more members is that there may not be a real meeting of the minds on the business terms or in the event of a dispute you and the other member(s) may not remember the agreement in the same way.

If your oral agreement contains terms such as when a member withdraws from the company he or she will be paid out for their investment over time, there is now the real risk that the agreement itself may be unenforceable as it violates the Statute of Frauds. The Statute of Frauds holds that any oral agreement which cannot be performed within one year is uninforcable. A recent Delaware Chancery case held that such a provision was uninforcable.

The result is that your company must have a company agreement and that agreement should be written. A good source for Delaware LLC forms is www.delawarellclaw.com

My company has not done any business, do I still have to pay a Delaware tax?

Steven D. Goldberg, Esq. Wilmington, DE
sgoldberg@stevendgoldberg.com
http://www.stevendgoldberg.com
Contact me if you need assistance in forming/organizing a Delaware business entity or any matter of Delaware law. Delaware Forms and Publications are available at http://www.delawarellclaw.com
Yes, Virginia, you have to pay the Delaware corporate franchise tax for your corporation and the LLC and LP tax for your LLC or LP even though the company has not done any business.

The Delaware franchise tax and LLC/LP tax are priveledge taxes assesssed for the priveledge of having a company formed in Delaware, whether or not the company has done business and whether or not the company has earned any income.

The franchise tax was due for all corporations by March 1 and is calculated on the number of shares authorized. The minimum payment was $100 ($75 minimum tax and $25 report fee) If the corporation has “par value” stock Delaware offers the option to calculate the tax based on the company’s assets as reported on its US corporate income tax return and the number of shares outstanding. Generally this alternative method produces a lower tax obligation. If the tax is not paid timely or the report is not filed with complete information, there is a $100 late payment fee and the tax accrues interest at the rate of 1.5% per month.

The LLC and LP tax will be due on June 1 and is a flat tax of $250 payable by all LLC’s and LP’s. There is no report filed by either LLC’s or LP’s. For failure to pay the tax in a timely manner there is a $100 late payment fee and interest accrues at the rate of 1.5% per month. In the case of corporations, interest, franchise taxes and late penalties accrues for only 3 years, however for LLC’s and LP’s there is no limitation on the time during which interest, taxes and penalties accrue and therefore the cost to revive a LLC or LP which has failed to pay its annual tax is substantial ($350 per year plus interest).

2009 Delaware Corporation Law Amendments

Steven D. Goldberg, Esq. Wilmington, DE
sgoldberg@stevendgoldberg.com
http://www.stevendgoldberg.com
Contact me if you need assistance in forming/organizing a Delaware business entity or any matter of Delaware law. Delaware Forms and Publications are available at http://www.delawarellclaw.com

This Blog is about Delaware LLC law, and there will be some minor amendments to the Act introduced in the Delaware Legislature this year, however substantial amendments to the Delaware General Corporation Law (DGCL) were signed into law on April 10, 2009. This Blog is quick review of those amendments. Click here to see the amended sections of the DGCL. 2009-dgcl-amendments

In a recent decision by the Delaware Supreme Court upon a question certified to it by the SEC, the Court held that a bylaw which permitted nominations of directors, access to the company’s proxy materials and reimbursement of proxy expenses under certain circumstances would not violate the DGCL. New Section 112 and 113 implement that decision.

In another Delaware decision the Court of Chancery upheld the right of a corporation to change the indemnification rights of a former director prior to the director asserting a right to indemnification. The amendment to Section 145(f) creates a default rule that the right to indemnification or advancement for expenses under a bylaw or the certificate cannot be changed after the occurrence of the event that gave rise to the claim for indemnification. As with most default rules in Delaware they may be changed, in this case the bylaw or certificate in effect at the time of the event may “authorizes such elimination or impairment after such action or omission has occurred.”

Section 225(c) is new and give the Court of Chancery the power to remove a director under limited emergency circumstances.

To Comply with SEC rules and to eliminate voting by persons who may no longer have an ownership interest in a company, the amendments to Sections 213, 211, 219, 222, 228, 262 and 275 authorize the Board to designate different record dates for notices to stockholders and voting by stockholders to bring those dates closer to the date of the meeting.

The amendment to Title 10, Section 3114(c) eliminates the need for duplicate notices to directors or officers in those cases where no residence address appears or when the last known address is the address of the corporation.