June 6, 2011
Honoring Promotors' Entity Choices in Delaware
Recognizing the potential perils of self-promotion, I nonetheless offer this: The Harvard Business Law Review Online has just posted a short piece of mine called LLCs and Corporations: A Fork in the Road in Delaware?
In it, I take a look at Vice Chancellor Laster's decision in CML V, LLC v. Bax, 6 A.3d 238 (Del. Ch. Nov. 3, 2010) and argue that his view "should be the default rule in analyzing all LLC questions: '[T]here is nothing absurd about different legal principles applying to corporations and LLCs.'"
As I note in the paper, this may be a asking a little too much, as many courts don't even seem to appreciate that LLCs are "limited liability companies," not "limited liability corporations."
Where legislatures have decided that distinctly corporate concepts should apply to LLCs—such as allowing piercing the veil or derivative lawsuits—those wishes (obviously) should be honored by the courts. And where state LLC laws are silent, the court should carefully consider the legislative context and history, as well as the policy implications of the possible answers to the questions presented. Courts should put forth cogent reasons for their decisions, rather than blindly applying corporate law principles in what are seemingly analogous situations between LLCs and corporations.
The members of an LLC chose the LLC as their entity, and they should enjoy both the benefits and burdens of that choice. Where courts refuse to acknowledge the distinct nature of LLCs, the promoters’ choice of entity is, at least in part, ignored. (citations omitted)