I so appreciate the opportunity to be a part of this micro-symposium, in which we can explore important issues at the intersection of contract law and fiduciary duties in the fastest growing form of business entity in the United States: limited liability companies (LLCs).  Today, I contribute some foundational information relating to, but not directly responding to, the micro-symposium questions.  These observations come from a panel discussion at the 2015 ABA LLC Institute in Washington, DC in which I was a participant.  I blogged from the Institute last week and promised this post in that first post.

The session at the Institute that I feature in today's post explored the legal and practical nature of an operating agreement (a/k/a, a limited liability company agreement).  Since the operating agreement is the typical locus of private ordering in the LLC form, its status under LLC and other law should be of interest to us.  Among other things, understanding the operating agreement may better enable us to understand when it is a valid, binding, and enforceable obligation among the parties.  That's an issue I have been exploring in some of my work.  But there is more in the legal status of the operating agreement than meets the eye . . . .

The operating agreement panel discussion at the LLC Institute was organized and facilitated by Bob Keatinge.  He began the discussion by offering many views about what an operating agreement is or can be, based on its contents and operation.  Among the documents–contracts and instruments–on his list:

  • an entity constitution (like articles of incorporation);
  • a business plan;
  • a grant of authority and consent to action;
  • a disclosure document memorializing or making disclosures of facts to members, a memorialization of intentions and aspirations of the parties;
  • an encumbrance or option on property to be contributed by, distributed to, or held for the LLC by, members;
  • an employment agreement for managers;
  • an election as to which default statutory provisions apply;
  • a power of attorney; and 
  • numerous other agreements and instruments, depending on context.

I hadn't really thought about the number of distinct functions an operating agreement may serve.  It is, at its core, an agreement that addresses both governance (management and control) and finance. But it's more than that.  Optimally, it binds together the firm and its internal constituents for purposes of organizing and sustaining a legal structure for their business, but it can and does do much other work.

Ann Conaway followed Bob's introduction with a summary of the ways in which operating agreements are statutorily defined and constituted (legally required elements and components of an operating agreement), and Kelley Bender continued along a similar theme by addressing the law relating to amendments to operating agreements and related points.  Key topics in this part of the session included requirements (and lack of requirements) of a writing, potential parties to an operating agreement, interactions between/among (and effects of) multiple documents that together may constitute an operating agreement, the articles/certificates of organization as a potential part of the operating agreement, the truth or fallacy of judicial (and other) observations that an LLC does not have an operating agreement, and the possibility that an operating agreement may be amended by majority (or other less-than-unanimous) consent.  And I know I am missing things from that list . . . .

Then, Jessica Liou and I briefly "debated" whether an operating agreement is a common law contract.  I argued against contract status; she argued for it.  (Neither argument necessarily represented our actual positions on the question or the embedded issues.)  We shared some possible ramifications of the status of an operating agreement as a contract (relating to bankruptcy law questions being debated in recent judicial opinions and the analysis of other, non-bankruptcy legal questions) at the conclusion of the debate.

Beth Fenton batted clean-up, before Bob closed out the program.  She shared observations about issues at the intersection of veil piercing and operating agreements.  Specifically, Beth described common attributes of LLC veil piercing cases and how the drafting of operating agreements may affect a court's analysis in veil piercing cases.

The entirety of the program was significant for me in a number of respects.  Honestly, there wasn't much "new news" in the panel presentations.  But the cumulation of all of this information about operating agreements in a single discussion was powerful.  Apropos of the theme of this micro-symposium, a major takeaway for me related to the relationship between the legal nature of the LLC operating agreement, the contractual focus of LLC law, and notions of fiduciary duty, good faith, and fair dealing in the LLC.  I will pick up on that theme in a separate post.