It is typical for an investor that becomes a member of a manager-managed limited liability company (the “LLC”) to desire and bargain for a right to designate one or more persons to be managers of the LLC. This is particularly the case when the member is a professional investor, like a private equity or venture capital firm.  Such an investor often designates a manager to represent it on the LLC’s board of managers for two principal purposes:

  • to provide financial and other business skills and direction to the LLC, with the expectation that the skills and direction so provided would also promote the investor’s own interest, and
  • to ensure the investor’s receipt of information from and about the LLC, with the intent to protect the investor’s own interest.

The election or appointment of such a representative manager usually is a condition to the designating member’s investment in the LLC and is agreed to by the LLC’s other members.

Nevertheless, unless properly documented as part of the LLC’s operating or company agreement (the “LLC Agreement”), the designating member may not achieve, or achieve to the extent desired, the principal purposes of having a representative manager. The fiduciary duties imposed by Delaware or Texas law on the representative manager, and the corresponding potential liability of that manager for any violation of those duties, may impede the ability of the representative manager to act as intended by the designating member. (The issues addressed in these posts may well arise under other states’ laws, but these posts address only Delaware and Texas law).

In succeeding posts, I will suggest some provisions that might be included in the LLC Agreement to enable the representative manager to represent the designating member to the full extent contemplated – i.e., to achieve the principal purposes of the representative-manager arrangement.  The next post will describe the background, including the fiduciary duties imposed by law on the representative manager.