Business Organizations

23 June

• LLC needs to be in the name
• Management of LLCs and how this relates to partnerships and corporations. A member-managed LLC is like a partnership, except that the members are not liable for the obligations of the entity. A manager-managed LLC is more like a corporation-- the manager(s) do not need to be owners.
• ULLCA § 301(a): each member is an agent of the LLC for the purpose of its business, in a member-managed LLC.

  (b) in a manager-managed, members are not agents, but managers are.

• § 302: the LLC is liable for torts, etc.
• § 303: members and managers aren't personally liable solely by reason of being members or managers.
• Piercing the veil-- basically you allege that the corporation is a big sham. They weren't following any of the formalities of being a corporation. But LLCs don't have these formalities by default. That's § 303(b).
• Inside consequences: article IV. Liability for contributions, rights to payments and reimbursement.
• § 404(a): member-managed LLCs are managed like partnerships (equal rights for all).

  (b) manager-managed LLCs are managed by managers.

(c) things that require the unanimous consent of all members: modification of the operating agreement, admission of a new member, sale of the company, etc.

(d) action requiring the consent of members or managers may be taken without a meeting. In corporations, a meeting is required.

(e) a member or manager can appoint a proxy to vote. This is different from corporations: shareholders can vote by proxy, but not directors.

• Tag-along rights protect minority owners when there's a buy-out (buyer has to buy our shares too; also known as "piggyback rights"). Drag along rights protect majority owners from being held hostage by minority owners.
• § 405: distributions prior to dissolution and winding up must be in equal shares.
• § 406: you can't make a distribution if it prevents the LLC from being solvent and paying its creditors. Creditors could claw back.
• See also 408, 409, 502. Also 103 (what you can't waive).
• The exam: bullet-points, outlines, single-word answers. One question with a lot of facts: choice of entity, the interests of the parties, allocating contributions as loans, etc.
• Gottsacker v Monnier
  Interpreting the operating agreement.

  Now, this is a company that owns really only one asset: can they sell it without the consent of one of the members? Under the model act, probably not: § 404(c).

  This is member-managed. So any member can sign over the deed and bind the company. But if he didn't have authority to do that, there are internal consequences. But still, they can take action without notice; that didn't happen, though.

  But this isn't really like the case: there's no third party here. But they're maybe violating their fiduciary duties: self-dealing, e.g.

• Taghipoor v. Jerez
  So Jerez is the manager, but the operating agreement says that the LLC can take on any loans without the resolution of the members.

  This decision related more to statutory construction than to LLCs. There's one rule that says any deed signed by the manager of a manager-managed LLC is binding. And another that says any manager can bind the LLC unless provided otherwise in the operating agreement.

  We aren't going to make operating agreements public record, but we want third parties to be able to verify things without too much busywork. You can put things in the articles of organization, though.

  So the court could have said the manager's action was binding to third parties, unless the information was available in the articles of organization.

• Horton v. Dynastar
  Piercing the corporate veil. This decision is a mess.

  But for LLCs, there's less formality, so therefore the veil is less piercy, perhaps. So there's got to be the alter-ego problem, but also causation.

  What's the point of limited liability when the guy who owns the company is also the guy who runs the company? That's why we pierce that veil: limited liability isn't protecting otherwise innocent shareholders.

  There's sort of a balancing test we apply to determine whether there's unfair shifting of risk: an LLC with insurance, for example, isn't such a worry. A reason to allow an individual to limit liability is to allow an individual to put some of their assets at risk, but not all of them.

  When we're trying to decide whether the veil should be pierced, we look at things like whether the company is undercapitalized, who the directors are, etc.

25 June

• What we're really looking for: applying the statutes to the facts in the cases.
• Things we need to pay attention to: managing risk and managing cash flow. Think about what the people in these various situations are really thinking about and really motivated by.
• Interesting scenario: if a going concern has more value than the assets, selling might be a breach of duty.
• RULLCA backs off a bit from ULLCA's stance on fiduciary duties (these are the only duties! § 408: loyalty and care), and some acts take an even looser approach.
• § 408(a): rights to access records. (b): LLC must give enough information to voters to allow them to vote (failure to do this, in a corporate context, can nullify the vote). (c) right to a copy of the operating agreement.
• For the exam, we will stick with what's in § 409, with respect to fiduciary duties, but the trend is towards more liberal standards. Note that these are duties to member-managed companies, that's why they're so much like partnership rules. And also note that simple negligence is not a breach of duty. Pay extra close attention to (h).
• So, the duties of the members and managers here are to the company and the members. Shareholders don't necessarily have the same interests as creditors, so it's important whether directors have fiduciary duties to shareholders or to the entity.
• §103(b) what the operating agreement may not do: interfere with things like 408, 409, etc.
• Purcell v. Southern Hills
  Should we have fiduciary duties for LLCs? Does this help people have trust in LLCs and thereby facilitate business, or does it make investors lazy about their investments because they just trust that they're protected by the courts?

  If we have fiduciary duties for all other business arrangements, it would sort of make sense to have them for LLCs as well, lest people be blindsided by their absence.

• Tzolis v. Wolff
  This is already a famous case even though it's only 1 year old. Derivative suits on behalf of LLCs: should they even be allowed?

  A member may have some damage when the value of the LLC decreases. They may be allowed to file suit in the name of the LLC in order to correct this, even if they're minority owners and the majority (who caused the harm) are refusing to proceed.

  See §§ 1101-1104. That governs derivative actions. A minority member suing on behalf of the LLC can get attorney fees if successful (and proceeds of the action go to the LLC). There are some restrictions on the pleadings: you have to show that the suit wouldn't happen elsewise. Suing derivatively is different from forcing the company to sue: you derive your standing from your position as a member of the LLC, but it's you who are suing (and if you lose, you bear the costs, as a result).

  It's an imperfect system, to say the least, and allowing derivative suits on behalf of LLCs isn't obviously a good idea. It might be, but that's debatable.

• Now, on to dissolution. This, too, is much like partnerships. Dissociation leads to dissolution which leads to winding up and liquidation/termination.
• § 601 (1)-(5), (8): when is a member dissociated?
• § 602: a member can withdraw (rightfully or wrongfully) unless the operating agreement provides otherwise.
• § 701: buy out of dissociated member's interest
• § 704: a statement of dissociation (different from 805: articles of termination) to let the public know that a member has left
• § 801: when must we dissolve and wind up? (1) and (2)
• Valinote v. Ballis
  Now remember, this is an LLC, not a partnership. The members aren't liable. Looks like Valinote made a mistake: he paid $79K but didn't get any indemnity for it, because the loan wasn't guaranteed by the LLC, it was guaranteed by Valinote. Once you dissociate, you're no longer a member, so the cost-shifting clause in the operating agreement no longer has any effect.

  Even though it's an LLC, it turns out ironically that he's worse off than he would have been in a GP, because they altered the default rules.