Limited liability companies were created as a new, more flexible form of business entity which would enable its members to exercise their freedom of contract to the fullest permissible limits. Because they are contractually malleable, the language of the operating agreement organically defining an LLC must be precise and judicious. In Synectic Ventures I, LLC v. EVI Corp., 353 Or. 62 (2012) the Oregon Supreme Court, reversing an earlier decision by the Court of Appeals, reiterated how critically important the operating agreement language is in determining the rights and obligations of limited liability members and managers both to their company and to each other.
In an April 26, 2011 blog post I discussed the Court of Appeals’ earlier decision in Synectic Ventures which affirmed the trial court’s award of summary judgment to the defendant who was both the managing member of a limited liability company and the chairman of the board, treasurer and equity owner of a corporation indebted to the limited liability company, who unilaterally altered the terms of the corporation’s indebtedness to the LLC without disclosure or consent of the LLC’s other members. The LLC’s other members and the LLC had challenged that unilateral alteration of the loan terms as a breach of the defendant’s duty of loyalty.
In awarding the defendant managing member and the defendant corporation summary judgment the trial court and the court of appeals had relied on language in the LLC operating agreement generally granting the defendant as managing member the right to bind the company. The Supreme Court rejected that analysis holding that any contractual modification of the general duty of loyalty which the defendant owed to the LLC and its members must be “specific” and consistent with the statutory restriction on elimination of a manager’s duty of loyalty in ORS 63.155(10)(a).
That is, the Court essentially seemed to hold in Synectic Ventures that any contractual reduction in the general duty of loyalty defined in ORS 63.155(2) must take the form of a specific identification of those “. . . types or categories of activities that do not violate the duty of loyalty, if not unconscionable . . . and “[s]pecify the number or percentage of members . . . or managers . . .” that may authorize or ratify a specific act or transaction that would otherwise violate the duty of loyalty. ORS 63.155(10)(a)(A) and (B). The Court will not, in short, imply a contractual diminishment of the duty of loyalty where such a contractual contraction of that duty is not specifically stated in accordance with the statutory provisions allowing the parties to modify that duty.
The Supreme Court’s holding in Synectic Ventures illustrates, again, the need for careful drafting both in limited liability company operating agreements and in most other contracts. As with the earlier decision by the Court of Appeals, it is the language of the operating agreement on which the court focuses.
The case also demonstrates the need for those thinking of forming or becoming members or managers of any limited liability company to obtain and consult with their own attorney concerning the terms of the operating agreement defining their rights and obligations. Caveat emptor.