Unincorporated Business Entities Law

I have already noted the article by Contributing Editor Thomas E. Rutledge, & Steve G. Frost, RULLCA Section 301 – The Fortunate Consequences (and Continuing Questions) of Distinguishing Apparent Agency and Decisional Authority, 64 Business Lawyer 37 (2008). In RULLCA’s little agency problem, Prof. Larry Ribstein discusses the issue, and the article.

To review the bidding, ULLCA (2006) (aka  RULLCA) § 301 provides:

SECTION 301. AGENCY POWER OF MEMBER AS MEMBER

(a) A member is not an agent of a limited liability company solely by reason of being a member.

(b) A person’s status as a member does not prevent or restrict law other than this [act] from imposing liability on a limited liability company because of the person’s conduct

The Comment on 301(a) gives the thinking of the Drafting Committee:

Subsection (a) – Most LLC statutes, including the original ULLCA, provide for what might be termed “statutory apparent authority” for members in a member-managed limited liability company and managers in a manager-managed limited liability company. This approach codifies the common law notion of apparent authority by position and dates back at least to the original, 1914 Uniform Partnership Act. UPA, § 9 provided that “the act of every partner … for apparently carrying on in the usual way the business of the partnership … binds the partnership,” and that formulation has been essentially followed by RUPA, § 301, ULLCA, § 301, ULPA (2001), § 402, and myriad state LLC statutes.

This Act rejects the statutory apparent authority approach, for reasons summarized in a “Progress Report on the Revised Uniform Limited Liability Company Act,” published in the March 2006 issue of the newsletter of the ABA Committee on Partnerships and Unincorporated Business Organizations:

The concept [of statutory apparent authority] still makes sense both for general and limited partnerships. A third party dealing with either type of partnership can know by the formal name of the entity and by a person’s status as general or limited partner whether the person has the power to bind the entity.

Most LLC statutes have attempted to use the same approach but with a fundamentally important (and problematic) distinction. An LLC’s status as member-managed or manager-managed determines whether members or managers have the statutory power to bind. But an LLC’s status as member- or manager-managed is not apparent from the LLC’s name. A third party must check the public record, which may reveal that the LLC is manager-managed, which in turn means a member as member has no power to bind the LLC. As a result, a provision that originated in 1914 as a protection for third parties can, in the LLC context, easily function as a trap for the unwary. The problem is exacerbated by the almost infinite variety of management structures permissible in and used by LLCs.

The new Act cuts through this problem by simply eliminating statutory apparent authority.

PUBOGRAM, Vol. XXIII, no. 2 at 9-10.

Codifying power to bind according to position makes sense only for organizations that have well-defined, well-known, and almost paradigmatic management structures.

• flexibility of management structure is a hallmark of the limited liability company; and
• an LLC’s name gives no signal as to the organization’s structure,

it makes no sense to:

• require each LLC to publicly select between two statutorily preordained structures (i.e., manager-managed/member-managed); and then
• link a “statutory power to bind” to each of those two structures.

Under this Act, other law – most especially the law of agency – will handle power-to-bind questions. See the Comment to subsection (b).

In their article, Rutledge & Frost argue that RULLCA Sec. 301(a) eliminates the concept of apparent authority in both member-managed and manager-managed LLCs.  64 Business Lawyer at 47-50.  For example, they argue that "[i]t is noteworthy that RULLCA does not address either the actual or apparent authority of a manager when the LLC … elects to be member managed.  Id. at 48 & n.63 (emphasis added.  Although footnote 63 quotes a portion of the Comments to Section 407:

The common law of agency will also determine the apparent authority of an LLC’s manager or managers….

(emphasis added), Rutledge and Frost do not examine the effect of Section 407.  Their view seems to be that the only role of Section 407 is to allocate "decisional authority" in member-managed and manager-managed LLCs.  Ribstein seems to concur (noting that the rights granted members in member-managed LLCs under Section 407(b) "apparently [are] not enough to make a member an agent under 301(a). ").

In my view, RULLCA 407(b)(1)-(4) are clearly to the contrary:

(b) In a member-managed limited liability company, the following rules apply:

(1) The management and conduct of the company are vested in the members.

(2) Each member has equal rights in the management and conduct of the company’s activities.

(3)  A difference arising among members as to a matter in the ordinary course of the activities of the company may be decided by a majority of the members.

(4)  An act outside the ordinary course of the activities of the company may be undertaken only with the consent of all members.

RULLCA § 401(b)(1)-(4) (emphasis added).  Under Section 407(b)(2), the rights of each member are not limited to management ("decisional") rights, but also include the right to conduct the business of the LLC.  Both the UPA Section 18(e) and RUPA Section 401(f) include almost identical language.  Cases such as National Biscuit Co. v. Stroud, view UPA 18(e) as giving partners actual authority to conduct ordinary business, unless limited by a majority vote of the partners.  For manager-managed LLCs, RULLCA Section 401(c)(2)& (3), are identical to Section 401(b)(2) & (3).  The Comments indicate that Section 401(c)(2) & (3) are similar to their partnership analogues:

If (i) an LLC’s operating agreement merely states that the LLC is manager-managed and does not further specify the managerial responsibilities, and (ii) the LLC has only one manager, the actual authority analysis is simple. In that situation, this subsection:

• serves as “gap filler” to the operating agreement; and thereby
• constitutes the LLC’s manifestation to the manager as to the scope of the manager’s authority; and thereby
• delimits the manager’s actual authority, subject to whatever subsequent manifestations the LLC may make to the manager (e.g., by a vote of the members, or an amendment of the operating agreement).

If the operating agreement states only that the LLC is manager-managed and the LLC has more than one manager, the question of actual authority has an additional aspect.  It is necessary to determine what actual authority any one manager has to act alone.

Paragraphs (c)(2), (3), and (4) combine to provide the answer.  A single manager of a multi-manager LLC:

• has no actual authority to commit the LLC to any matter “outside the ordinary course of the activities of the company,” paragraph (c)(4)(C), or any matter encompassed in paragraph (c)(4); and
• has the actual authority to commit the LLC to any matter “in the ordinary course of the activities of the company,” paragraph (c)(3), unless the manager has reason to know that other managers might disagree or the manager has some other reason to know that consultation with fellow managers is appropriate.

The first point follows self-evidently from the language of paragraphs (c)(3) and (c)(4).  In light of that language, no manager could reasonably believe to the contrary (unless the operating agreement provided otherwise).

The second point follows because:

• Subsection (c) serves as the gap-filler manifestation from the LLC to its managers, and subsection (c) does not require managers of a multi-manager LLC to act only in concert or after consultation.
• To the contrary, subject to the operating agreement:
  • paragraph (c)(2) expressly provides that “each manager has equal rights in the management and conduct of the activities of the company,” and
  • paragraph (c)(3) suggests that several (as well as joint) activity is appropriate on ordinary matters, so long as the manager acting in the matter has no reason to believe that the matter will be controversial among the managers and therefore requires a decision under paragraph (c)(3).

RULLCA § 407 cmt. (emphasis added).  Although I might quibble as to whether and when possible disagreement suspends actual authority,

Given that Section 407(c)(1), (2), (3) and (4)(C) are identical in substance as Section 407(b)(1)-(4), the same reasoning applies to member-managed LLCs:  each member has actual authority to act in ordinary matters, unless limited by the other members.

posted by Gary Rosin

The awkwardly, but inclusively, named AALS Section on Agency, Partnerships, LLCs and Unincorporated Associations will meet on Friday, Jan. 9, 2009 in San Diego.  No fewer than six papers will be presented.  For details, go to Prof. Larry Ribstein’s blog, AALS Agency/Partnership Section.

posted by Gary Rosin

In Information Rights Under New Iowa LLC Law, Marc Ward points out that, under Sec. 489.410 of the Iowa RULLCA, members have the right to certain information without demand.  He notes the breadth of Section 489.410.1.b(1)–Section 410(a)(2)(A) of the RULLCA.  That part of Section 410 requires a member-managed LLC to furnish each member

[w]ithout demand, any information concerning the company’s activities, financial condition, and other circumstances which the company knows and is material to the proper exercise of the member’s rights and duties under the operating agreement or this chapter….

Section 410(a)(3) imposes the same obligation to disclose on members of member-managed LLCs, but only to the extent that they know that information.  Ward argues that this affirmative disclosure obligation should apply on where the LLC is affirmatively communicating with its members.

I would argue that the "member’s rights and duties" to which Section 410(a)(2)(A) refers are the rights and obligations relating to management of LLC by a member of a member-managed LLC.  Section 410(b)(1) makes this clear by providing that, in manager=managed LLCs,

[t]he informational rights stated in subsection a and the duty stated in subsection (a)(3) apply to the managers and not the members.

In manager-managed LLCs, the LLC (and its manager) are required to provided information without demand only

[w]henever this [act] or an operating agreement provides for a member to give or withhold consent to a matter, before the consent is given or withheld, the company shall, without demand, provide the member with all information that is known to the company and is material to the member’s decision.

RULLCA § 410(b)(4).

Regardless of whether a manager is a member, the manager’s right to relevant information relating to the management of the LLC should be much broader.  Where there is more than one manager, arguably, that should include the right to information about, and relating to, material actions by other managers.

posted by Gary Rosin