Do We Have an Agreement? Delaware Says Yes
Corporate/business attorneys are frequently asked to form a limited liability company and to draft its liability company agreement (or “operating agreement”, as it is frequently referred to). Forming a limited liability company, especially in the State of Delaware (often the jurisdiction of choice), is typically a quick and easy process which usually takes no more than an hour or two. However, drafting and negotiating a limited liability company agreement can range from a simple 4-5 page agreement to a complex 100 page agreement, depending on the purpose of the limited liability company, as well as the number and sophistication of the parties involved.
A recent Delaware decision reminds us of the importance of being careful and clear when forming a limited liability company and/or drafting an operating agreement. In Seaport Village Ltd. v. Seaport Village Operating Company, LLC, the Delaware Court of Chancery held that even though a limited liability company did not sign its operating agreement, the limited liability company was still able to enforce the fee shifting provisions found therein – much to the chagrin of the company’s members who claimed that the provisions were unenforceable, due to the company’s failure to sign. The Court’s decision focused on Section 18-101(7) of the Delaware Limited Liability Company Act (the “Act”) which explicitly states that “[a] limited liability company is bound by its limited liability company agreement whether or not the limited liability company executes the limited liability company agreement.” The Court further noted that Section 18-101(7) was amended in 2005 to provide that even a member or manager of a limited liability company or an assignee of a limited liability company interest is bound by the limited liability company agreement whether or not such party signs the agreement. Given the clear language of the Act, the Court concluded that the operating agreement did not require signing by the company itself.
As mentioned above, and important to note, Section 18-101(7) of the Act explicitly states, that an assignee of a membership interest may be bound to the company’s existing operating agreement, including, but not limited to, the company’s distribution priority and transfer restrictions, even if the assignee never executed the operating agreement.
The Seaport case reminds us that although Delaware is one of the most popular and favorable jurisdictions in which to form a limited liability company, companies and members alike must be careful to set out terms that will govern the limited liability company in an agreement signed by all the parties. Otherwise, the parties may unintentionally be bound by an agreement that has not yet been fully negotiated and executed by all the parties.