LLCs and "good corporate governance"

Delaware’s Chancellor Chandler has had some interesting comments about LLCs. These came in the midst of what looks like a corporate proxy contest, except that it involves an LLC. And according to the Chancellor, that may make a difference.

The case involves TravelCenters of America LLC.  Here’s an opinion from last week on a books and records claim (HT Pileggi), an order on a notice of intent to nominate a person to the LLC’s board, and a letter ruling on admission of the expert testimony of Randall Thomas (the last two via Steve Davidoff).

The Chancellor said in the books and records opinion: "Because of a lack of reported decisions in the LLC context, the Court may look to cases interpreting similar Delaware statutes concerning corporations and partnerships.”

In responding to the notice to nominate, the Chancellor said: "[L]imited liability companies are creatures of contract. They are entities governed strictly by the language set forth in their LLC agreements. It's that language that will in large part govern and control my decision today." He then proceeded to apply the language of the contract as well as federal proxy law.

In the order on expert testimony, ruling on admissibility of Professor Thomas’s testimony for the plaintiff on the relevant bylaws as “good corporate governance,” the Chancellor said:

Delaware does not impose a legal requirement on LLCs to draft their bylaws to be consistent with some abstract notion of “good corporate governance.” On the contrary, limited liability companies are creatures of contract, “designed to afford the maximum amount of freedom of contract, private ordering and flexibility to the parties involved.” [citing several Delaware cases] to the extent defendants intend to argue otherwise, plaintiff need not offer a rebuttal.”

Finally, note that the complaint alleged:

The LLC Agreement creates a nomenclature that in some respects resembles that of a corporation. Under the LLC agreement, membership interests in the Company are called “Shares” or Common Shares,” holders of membership interests are called “Shareholders,” and the business and affairs of the Company are managed exclusively by a “Board of Directors.” However, Despite this nomenclature, the rights and obligations of TravelCenters and its members are governed by the Delaware Limited Liability Company Act . . . and the LLC Agreement.

Putting this altogether, after acknowledging the lack of cases on LLC governance (which would apply particularly to somewhat corporatized LLCs like TravelCenters) and the need to look outside LLC law for authority, the Chancellor nevertheless was careful to analyze even this corporate-like LLC as an LLC.  That meant applying the contract, even in a case to which federal law is relevant.

This approach is fully consistent with my view of what the Delaware courts should be, and have been, doing in LLC cases.  I discussed this view most recently in my The Uncorporation and Corporate Indeterminacy, which I presented this paper at Symposium in which the Chancellor participated.

I worried in the paper

that the judicial tendency to apply corporate rules is always lurking and that courts have not yet completely severed the uncorporate cases from corporate indeterminacy. In particular, it is important to keep in mind that the uncorporate cases have arisen mainly in closely held firms and has not been fully tested under the conditions that corporate law has had to face. Courts may be particularly tempted to apply corporate rules to uncorporate firms that resemble large-scale corporations.

The TravelCenters case sets me more at ease. It gives an early glimmer that even LLCs that look somewhat like corporations will be treated like what they are, and not like what they’re not. That means particularly applying the contract rather than fitting them into the rigid corporate mold, created by generations of scholars, judges, practitioners and an industry of experts on “good corporate governance.”