Management

Question 1

What are the ways in which an LLC can be managed?

Answer 1

An LLC can be:

1. Member-Managed LLC

Question 2

What is the default method of management for an LLC?

Answer 2

Management of LLC is presumed to be by all members, but the OPERATING AGREEMENT may provide for some other type of management

EXAMPLE –> by outside managers

Question 3

What is the default rule re: equality in management of LLC?

Answer 3

In LLC, each member (or manager, if manager-managed LLC) has equal rights in LLC’s management

Question 4

What is required to approve most decisions?

Answer 4

Default rule –> a majority vote of members (or managers) is required to approve most decisions

Question 5

In a member-managed LLC, what duties do members owe to each other and to the LLC (3) ?

Answer 5

In a member-managed LLC, members owe EACH OTHER and the LLC:

1. duty of care;
2. duty of loyalty
3. must discharge their duties and exercise rights consistently with the contractual obligation of good faith and fair dealing

Question 6

In a member-managed LLC, what is required under a member’s duty of loyalty?

Answer 6

Under duty of loyalty, a member must:

1. ACCOUNT to LLC for any benefit he derives in connection with LLC business; AND
2. refrain from DEALING ADVERSELY with the LLC (UNLESS the transaction is fair to the LLC); AND
3. refrain from COMPETING with the LLC’s business

HOWEVER –> members may authorize or ratify a specific act that would violate DOL AFTER disclosure of ALL MATERIAL FACTS

Question 7

In a member-managed LLC, what is required under a member’s duty of care?

Answer 7

Under duty of care –>

members must act with the care that a person in like position would exercise under similar circumstances, in a manner REASONABLY BELIEVED to be in the LLC’s best interests

Question 8

With regards to duty of care in a member-managed LLC, what is the business judgement rule?

Answer 8

Members who meet duty of care will NOT be held liable for decisions that in hindsight turn out to be poor or erroneous.

Question 9

What are the special rules re: DOL and DOC in a MANAGER-managed LLC?

Answer 9

In a MANAGER-MANAGED LLC

1. only MANAGERS are subject to DOL and DOC; AND
2. only MEMBERS can authorize or ratify an act by manager that would otherwise violate DOL

NOTE –> all members and managers STILL must discharge their duties and exercise their rights in accordance with the CONTRACTUAL obligation of GOOD FAITH and FAIR DEALING

Question 10

How may operating agreement alter duties of loyalty and duty of care?

Answer 10

IF doing so is not MANIFESTLY UNREASONABLE, operating agreement may:

1. ELIMINATE the duty of loyalty; and
2. ALTER the duty of care

NOTE –> operating agreement MAY NOT authorize INTENTIONAL MISCONDUCT or KNOWING violations of law

Question 11

How may operating agreement affect the contractual obligation of good faith and fair dealing?

Answer 11

Operating agreement MAY NOT eliminate the contractual obligation of good faith and fair dealing, BUT:

MAY –> prescribe STANDARDS for measuring performance of the obligation IF doing so is not MANIFESTLY UNREASONABLE