Below is a link to the latest post by Peter Mahler in his marvelous New York Business Divorce blawg. It’s about a defective operating agreement between two equal members of a realty holding company. It contains lessons for all of us.
The attached excellent new post by Peter Mahler, based on a very recent New York case, describes the very scary legal and persons consequences that can arise when members of a multi-member LLC fail to define adequately in their operating agreement the circumstances in which the members’ rights to share in LLC profits will change because of changing circumstances.
https://www.nybusinessdivorce.com/2019/10/articles/operating-agreement/the-perils-of-indeterminate-llc-membership-interests/
The new post under the link below discusses a Delaware Court of Chancery case that, in essence, upholds, despite traditional equitable considerations, LLC agreement terms providing that certain types of transfers of membership rights will be “null and void.” The issue addressed in the case lurks in many LLC operating agreements not only under the Delaware Limited Liability Company Act but under many other LLC acts.
Here’s the link:
Peter Mahler introduces the post below as follows:
“Half-Baked LLC Agreement Yields Improvised Valuation Decision”
By Peter Mahler
A rudimentary, “de facto” operating agreement with a cryptic withdrawal/buyout provision predictably set the stage for a unique valuation contest in the Delaware case highlighted in this week’s New York Business Divorce. Continue Reading…”
In connection with a February seminar on real estate transactions, the American Law Institute has published a very good model LLC agreement. Among its other virtues, the tables of contents of the agreement provide an excellent checklist of the issues that LLC lawyers should consider addressing in LLC agreements they are planning and drafting for their clients. The title page and tables of contents of the ALI agreement are below:
SA004 ALI-CLE 175
The American Law Institute Continuing Legal Education
ALI-CLE Course Materials
February 6 – 8, 2019
Modern Real Estate Transactions 2019
LIMITED LIABILITY COMPANY AGREEMENT
David Barksdale
Loeb & Loeb LLP
Los Angeles, California
Copyright (c) 2019 The American Law Institute; David Barksdale
LIMITED LIABILITY COMPANY AGREEMENT
OF
____________________,
a Delaware limited liability company
Dated as of _______________
TABLE OF CONTENTS
ARTICLE I DEFINITIONS
1.1 Definitions
1.2 Construction; Incorporation of Recitals
1.3 Interpretation
ARTICLE II GENERAL PROVISIONS
2.1 Formation of Company
2.2 Term
2.3 Purpose
2.4 Place of Business; Registered Office and Agent
2.5 Nature of Members’ Interests
2.6 Title to Company Property
2.7 Intentionally Omitted
2.8 Developer Member Representations and Warranties
2.9 Investor Member Representations and Warranties
2.10 Developer Investment Document [and Investor Sponsor Guaranty Obligations]
2.11 Transfer of Development Approvals
2.12 Initial Funding Conditions
2.13 Closing Costs
2.14 Indemnity by Developer Member
2.15 Verification
2.16 Subsidiaries
ARTICLE III CAPITAL CONTRIBUTIONS; LOANS
3.1 Capital Accounts
3.2 Pre-Development Contributions; Acquisition Capital Contributions
3.3 Additional Capital Contributions Upon Commencement of Operations
3.4 Failure to Make a Pre-Development Contribution or any Additional Capital Contribution
3.5 Construction Capital Contributions; Investor Member Construction Priority Capital Contributions
3.6 Conditions to Closing under Purchase Agreement and Commencement of the Project Work
3.7 Intentionally Omitted
3.8 Publicity
3.9 Intentionally Omitted
3.10 Intentionally Omitted
3.11 [Financing Options; Financing Termination Option
3.12 Termination Option
ARTICLE IV MANAGEMENT OF THE COMPANY
4.1 General
4.2 Major Decisions
4.3 Duties and Responsibilities of the Managing Member
4.4 Rights Not Assignable, etc
4.5 Development Agreement, Property Management and Leasing Agreement
4.6 Concerning Investor Member
4.7 Authority
4.8 Designated Representatives
4.9 Leases and Compliance with Leases
4.10 Environmental Responsibility
4.11 SPE Covenant
4.12 Third Party Financing
4.13 Guaranties
4.14 Assignment of Purchase Agreement
ARTICLE V DISTRIBUTIONS AND ALLOCATIONS
5.1 Distributions of Net Cash Flow and Net Capital Proceeds
5.2 [Tax Advances
5.3 Net Income and Net Loss
5.4 Regulatory Allocations
5.5 Intentionally Omitted
5.6 Allocations in Connection with the Liquidation of the Company
5.7 Tax Allocations; Section 704(c)
ARTICLE VI BOOKS AND RECORDS; TAX MATTERS
6.1 Accounting
6.2 Company Funds
6.3 Statements and Budgets
6.4 Inspection
6.5 Tax Matters
6.6 Tax Matters Representative
6.7 Noncompliance
6.8 Appraisals
6.9 Tax Service
6.10 Legal Fees
6.11 Developer Member and Affiliate Expenses
6.12 Credit Reports and Other Information
ARTICLE VII TRANSFER OF COMPANY INTERESTS; WITHDRAWAL OF MEMBERS
7.1 Transfer of Developer Member’s Interest
7.2 Transfer of Investor Member’s Interest
7.3 Bankruptcy
7.4 Waivers
7.5 Expenses
7.6 Withdrawal of Members
7.7 Compliance with Loan Documents
ARTICLE VIII SALE OF PROPERTY; DEADLOCK; BUY/SELL OFFER
8.1 Limitations on Exercise
8.2 Buy/Sell Offer
8.3 Additional Limitations on Exercise
8.4 Closing of Buy/Sell Offer
8.5 Investor Member Right to Initiate a IM Forced Sale Right
8.6 Investor Member Forced Sale Right
8.7 Closing of IM Forced Sale
8.8 DM Put Option
8.9 Reciprocal Put Option
8.10 Closing of Reciprocal Put Option
ARTICLE IX INSURANCE
9.1 Coverage
9.2 Insurance During Any Period of Construction, Repair, Restoration or Replacement
9.3 Evidence of Insurance; Notices
9.4 Concerning Liability Insurance
9.5 Miscellaneous Insurance Matters
9.6 Insurers
9.7 Contravention of Insurance
9.8 Waiver of Subrogation
9.9 Coordination with Loan Requirements
ARTICLE X DISSOLUTION AND TERMINATION
10.1 Dissolution
10.2 Appointment of Liquidating Member
10.3 Distributions and Other Matters
10.4 Distributions of Property
10.5 Actions of the Liquidating Member; Statements of Account; Certificates of Cancellation
ARTICLE XI DEFAULT
11.1 Defaults and Remedies
11.2 Removal of Developer Member as Managing Member
ARTICLE XII [INTENTIONALLY OMITTED]
ARTICLE XIII NOTICES
13.1 Notices
13.2 Change of Address
ARTICLE XIV MISCELLANEOUS
14.1 Indemnification
14.2 Intentionally Omitted
14.3 Estoppel Certificates
14.4 Remedies
14.5 Partial Invalidity
14.6 Governing Law; Successors
14.7 Amendment
14.8 Execution in Counterparts
14.9 Computation of Time
14.10 Titles and Captions
14.11 Independent Ventures
14.12 Employees
14.13 Intentionally Omitted
14.14 Prohibited Payments
14.15 Entire Agreement
14.16 Demands, Capital Calls, Notices, Consents and Approvals
14.17 Meetings
14.18 Preamble
14.19 No Brokers
14.20 Waiver Of Jury Trial
14.21 Attorneys’ Fees/Prevailing Party
14.22 Waiver of Partition
14.23 Limited Liability
14.24 Confidentiality
INDEX TO ADDENDA
Addendum A: Construction Capital Funding Addendum
INDEX TO EXHIBITS
Exhibit A: Form of Assignment and Assumption Agreement
Exhibit B: Schedule of Pre-Development Contribution Amounts and Maximum Capital Contributions
Exhibit C: Schedule of Environmental Audits
Exhibit D: Legal Description of Land
Exhibit E: Initial Leasing Guidelines
Exhibit F: Schedule of Permitted Encumbrances
Exhibit G: Pre-Development Budget
Exhibit H: Preliminary Project Budget
Exhibit I: Preliminary Project Plans and Specifications
Exhibit J: Developer Member Organizational Chart
Exhibit K: Other Personal Property
Exhibit L: Example of Dilution Calculation
Exhibit M: Preliminary Financing Guidelines
Exhibit N: Sample Calculation of Investor Return Multiple
Exhibit O: Reporting Requirement
Exhibit P: Sample Calculation of Straight Split
Exhibit Q: Straight Split Modifications
Exhibit R: CI Modifications
Exhibit S: Project Costs Incurred
Exhibit T: Development Approvals
Exhibit U: Design Professionals Fees
Exhibit V: Pre-Development Requisition Forms
Exhibit W: Construction Requisition Forms
Exhibit X: Final Lien Waivers
The attached post from Tom Rutledge, a leading U.S. LLC scholar and practitioner, addresses an interesting Pennsylvania case about the validity of certain types of votes by majority members of a multi-member LLCs.
https://kentuckybusinessentitylaw.blogspot.com/2019/02/except-as-otherwise-provided.html
Operating agreements for multi-member LLCs often contain non-competition provisions. Massachusetts lawyers who draft these agreements or who draft non-Massachusetts operating agreements intended to be effective in Massachusetts should be aware of Massachusetts’ new and stringent statutory restrictions on non-competition agreements. These restrictions undoubtedly apply to non-competition provisions in operating agreement. For an excellent overview of the new Massachusetts statute, click here: https://www.ebglaw.com/news/massachusetts-passes-new-law-governing-non-competition-agreements/
If your state’s LLC act provides members with the right to expel other members (as, for example, New Hampshire’s does under RSA 304-C:104), you can skip the post by Peter Mahler under the link below. But if it doesn’t, you’d better read his post!
Here’s the link: https://www.nybusinessdivorce.com/2018/09/articles/expulsion-and-removal/repeat-may-not-expel-member-new-york-llc-unless-operating-agreement-says/
This post by Peter Mahler in his great weekly blawg entitled “Business Divorce” addresses the issue—which arises all too often—of non-unanimous amendments of LLC operating agreements vs. the fiduciary duties of those signing the amendments towards those not signing them.
Here’s the link to Peter’s post: https://www.nybusinessdivorce.com/2018/10/articles/operating-agreement/decision-put-brakes-non-unanimous-amendments-operating-agreements/
