Investors Lose Vital Information When They Skip LLC Agreements

Olshan litigation partner Kerrin Klein published an article in Bloomberg Law entitled “Investors Lose Vital Information When They Skip LLC Agreements.” In the article, Kerrin provides insights on limited liability company (LLC) agreements as new investors are attracted to Delaware to invest in companies, especially following the recent New York Court of Appeals decision in Behler v. Tao. Under established Delaware law, LLC members are bound by the company’s limited liability company agreement whether or not they sign that LLC agreement. “Because members are ordinarily bound by LLC agreements even without their signatures, it is important for investors to seek legal advice prior to investing and carefully review these (LLC) agreements,” Kerrin explains. “All prospective LLC investors—and particularly minority investors—should carefully review and consider the terms of the applicable LLC agreement prior to investing.” In Behler, the New York Court of Appeals held that an investor who did not sign a company’s LLC agreement was bound by its terms, including the term that permitted the LLC’s managing member to unilaterally amend the LLC agreement. The investor was also bound by the terms of the company’s amended LLC agreement without his signature, including a merger clause and other terms that served to bar his claims against the LLC’s managing member for breach of an alleged oral agreement. Kerrin examines six terms that are prevalent in LLC agreements that investors need to be aware of as they enter into these types of agreements. “If they fail to do so, they run the risk of being bound to unfavorable terms,” she notes.