Corporations and Limited Liability Companies Flashcards
What type of LLC is created when neither its certificate of organization nor its operating agreement specifies whether it is member-managed or manager-managed?
When the certificate of organization fails to specify whether the LLC is member-managed or manager-managed, the LLC is presumed to be member-managed, unless the members’ operating agreement specifies how the LLC is to be managed. See REVISED UNIFORM LIMITED LIABILITY COMPANY ACT (RULLCA) § 407(a) (2006). Here, given the absence of an express election to be manager-managed in either the certificate or the operating agreement, the LLC is member-managed.
[NOTE: Some examinees may discuss whether an LLC was properly formed. This question is not raised in the call and does not warrant additional credit. Generally, an LLC is formed when the certificate of organization (a.k.a. articles of organization) is filed with the Secretary of State and the LLC has at least one member. RULLCA § 201(d)(1). Here the certificate was filed and, after the three acquired their membership interests, the LLC had at least one member.]
In a member-managed LLC, does a member who purchases goods for the business have authority (actual or apparent) to bind the LLC when the member acted without the express approval of the other members?
Under RULLCA, “each member [in a member-managed LLC] has equal rights in the management and conduct of the company’s activities.” RULLCA § 407(b)(2). Thus, consistent with general agency law principles and with the approach of other acts governing LLCs, each member of a member-managed LLC can bind the company to contracts for apparently carrying on the ordinary business of the company unless the member lacks authority to do so and the other party to the contract has notice that the member lacks such authority. See, e.g., UNIFORM LIMITED LIABILITY COMPANY ACT(ULLCA)§ 301(a) (1996). Thus, a member of a member-managed LLC has the authority—both actual and apparent—to bind the LLC, much as a partner in a general partnership.
Here, the brother had actual authority to bind the LLC, given that he was a member of the LLC and was carrying out the company’s ordinary business by purchasing tires for the bike shop, even though the other members had not expressly approved these purchases. He also had apparent authority, given that the tire manufacturer had previously sold tires to the bike shop and could rely on the appearance that the brother was again properly acting for the LLC.
In a member-managed LLC, does a member who sells land on behalf of an LLC that operates a bike shop bind the LLC when the member acted without the approval of the other members as required in their operating agreement?
Whether there is actual authority for a non-ordinary transaction depends on the operating agreement of the LLC, which governs “relations . . . between the members and the limited liability company” and “the activities of the company.” RULLCA § 110(a)(1), (3). Here, the members’ operating agreement specified that sale of the company’s land required consent of all members. Thus, the cousin did not have actual authority to transfer the land without the consent of the other two members. That the cousin sold the land above fair market value is not relevant to the question of authority.
Is the LLC bound by the sale of the farmland? Explain
The 2006 RULLCA does not provide for “statutory” apparent authority, but instead leaves questions of a member’s authority to agency law principles. See RULLCA § 301(a), (b) (2006) (“A person’s status as a member does not prevent or restrict law other than this [act] from imposing liability on a limited liability company because of the person’s conduct.”). Under agency law principles, the cousin lacked actual authority to sell the farmland because the LLC’s operating agreement required consent by all the members for the sale of the company’s farmland.
In addition, the cousin lacked apparent authority to sell the land because the buyer could not reasonably rely on the cousin’s sole signature on behalf of the LLC. There is no indication that the LLC made any manifestations to the third-party buyer that the cousin was authorized to enter into the sale of the farmland or that the sale of farmland by a bike shop was in the ordinary course of the LLC’s business. See RULLCA § 407(b)(4) (in a member-managed LLC, matters “outside the ordinary course of the activities of the company” require the consent of all members).
Earlier LLC acts
Nonetheless, some earlier LLC acts provide that, absent a contrary provision in the certificate of organization, an LLC member has authority to sign and deliver a deed of the company’s interest in real property and “the instrument is conclusive” in favor of a bona fide purchaser for value without notice. See ULLCA § 301(c) (1996). Under these earlier statutes, acts of members not “in the ordinary course of the company’s business” bind the company only if authorized by the other members. Id. § 301(a)(2). Here, given that the ordinary business of the LLC was operating a bike shop, the buyer would not have been a bona fide purchaser because he should have had doubts that one LLC member alone could bind the company in the sale of land. Moreover, there is no indication that the buyer had reason to believe that the other LLC members had authorized the farmland sale.
[NOTE: Examinees might address whether the LLC could set aside the sale or seek a remedy against the cousin for his violation of fiduciary duties. This should not receive any credit, as the question asks only whether the LLC is bound by the sale of the farmland.]
In a member-managed LLC, does a member who withdraws unilaterally dissolve the LLC, thus forcing a winding up of the LLC’s business and distribution of its net assets?
Under RULLCA, the express will of a member to withdraw results in “dissociation.” Dissociation does not result in dissolution of the LLC.
Dissolution of the LLC under RULLCA requires the consent of all the members.
Here, the brother’s email reflects an express will to withdraw, thus causing him to be dissociated from the LLC. The brother’s dissociation results in (1) loss of his rights to participate in the LLC and (2) rights to distributions (payments by the LLC) only if and when made by the continuing members. Id. §§ 502(b), 603(a)(1),(3). He has no right to payment for his LLC interest, unless the operating agreement specifies that a withdrawing member has a right to payment upon dissociation, that the remaining members are to agree to have the LLC buy his interest, or that the other members are to consent to dissolution (and winding up of the business).
The result under the 2006 RULLCA (and other more modern LLC acts) is different from the result under some older LLC acts, including the 1996 ULLCA, which generally treat the withdrawal of a member of an at-will LLC (no term) in much the same way as the withdrawal of a partner in an at-will general partnership. See ULLCA § 601(1) (dissociation occurs on notice of member’s express will to withdraw), § 603(a)(1) (dissociated member’s interest in at-will LLC must be purchased by LLC), and § 701(a)(1) (providing that such interest be purchased by the LLC for “fair value” at time of dissociation).
[NOTE: Examinees might notice that the rights of a withdrawing LLC member are not like those of a partner in an at-will partnership, but rather more like those of a minority shareholder in a closely held corporation. Partner withdrawal in an at-will partnership, unless agreed otherwise, causes the dissolution of the partnership and a right to cash payment for the pro rata share of the withdrawing partner’s interest, after satisfying any creditor claims. The withdrawal of a minority shareholder in a closely held corporation results neither in dissolution of the corporation nor in any right to pro rata payment of the corporation’s net assets. Instead, the minority shareholder remains entitled to dividends and other distributions only if and when the board of directors (majority shareholders) chooses to authorize such payments.]
