To continue the previous post, here are additional possible provisions of an LLC Agreement that would facilitate the representative-manager arrangement:
- The right of the designated or representative manager to:
- Provide confidential information of, or about, the LLC to the designating member – Because obtaining information is often a key reason to have a representative manager, this will likely be important to the designating member. It will also be important to the LLC and the other members that the information not be disclosed or used by the designating member in a way that would harm the LLC or its business and affairs. Frequently, if the designating member is enabled freely to receive material confidential information from its representative manager, the negotiations focus on covenants regarding confidentiality and restrictions on use of information by the designating member.
- Withhold information of, or from, the designating member from the other managers of the LLC – During the course of its investment in the LLC, the designating member may obtain from other sources information relevant to the LLC that the designating member would prefer not to share with the LLC or its other members. In the absence of a provision like this, if the information is shared with or becomes known to the representative manager, he or she might have an obligation to disclose it to the other members of the LLC’s board of managers.
- Advocate the position or interest of the designating member in any and all deliberations by the LLC’s board of managers – This should not be controversial, and consent to this may well be implied or deemed given by virtue of the agreement to the arrangement. But there is no reason not to make this clear. The representative manager should be careful to indicate when he or she is advocating the designating member’s interests at board meetings or in other communications.
- Vote or express consent as a manager in favor of the position or interest of the designating member – In most situations, the representative manager’s exercise of his or her voting or consent right will not involve any conflict between the designating member and the LLC and its members generally, because their interests will (more or less) be aligned. In a few situations, however, this right may be critical for the designating member, particularly if the designating member owns a separate class of LLC membership interest. Negotiation of this may depend on the standards for board authorization or approval that the LLC’s members include in the LLC Agreement, and may result in the identification of only certain matters regarding which this is acceptable.
- Abstain from voting or other actions to be taken by the LLC’s board of managers, if the representative manager deems it necessary – Despite the other provisions of the LLC Agreement regarding the arrangement, the representative manager’s judgment may be that, in a particular situation or regarding a particular matter, he or she may be able to avoid a violation of duty, and corresponding liability, to the LLC and its members only by recusing himself or herself from the board’s decision-making process. If the representative manager’s vote or other action is not required to achieve the result desired by the designating member, then the designating member will not be affected by this. Otherwise, the designating member will have to acknowledge and accept that the representative manager should not be required to take or omit to take action that may create personal liability to the LLC and its members.
- Resign from the LLC’s board of managers, if the representative manager deems it necessary – Although it may be an extreme circumstance, if the conflict between the obligations to the LLC and its members and the obligations to the designating member cannot otherwise be resolved, the representative manager should have the right to resign his or her position, without such resignation being deemed a violation of any fiduciary duty to the LLC or its members or of any obligation to the designating member.
- Provide that the designating member will not be deemed to have any fiduciary duties or liability to the LLC or any of its other members as a manager because of the arrangement – Under Delaware and Texas law, an LLC member, with respect to its ownership in the LLC (like a corporate stockholder or shareholder with respect to its shares), may generally pursue its own interests as it sees fit. Because the representative manager may be deemed an agent of the designating member, however, it is possible that the arrangement would result in (a) the imposition on the designating member of fiduciary or other duties to the LLC and its other members, with corresponding liability for any violation, or (b) restrictions on the designating member’s right to deal with its LLC membership interest in its sole discretion. Such duties might be imposed by law or, at the insistence of the LLC’s other members, in the LLC Agreement. Although the designating member may be willing to accept some obligations it might not otherwise have (in the absence of the representative-manager arrangement), like the covenants regarding material confidential information of the LLC described above, the designating member should be careful to avoid the imposition of fiduciary duties to the LLC and its other members by law. The designating member should disclaim any such duties in the LLC Agreement. Any obligations that the designating member accepts should be specifically negotiated and clearly stated in the LLC Agreement. An approach that may somewhat mitigate this issue, at least to the extent arising because of the designating member’s desire for information from and about the LLC, is for the designating member to request and negotiate for a provision in the LLC Agreement that would entitle it, solely in its capacity as an LLC member, to specified information from the LLC.
Because fiduciary duties derive from case law rather than statutes, the propriety of a manager’s conduct will depend on the circumstances. Therefore, it may not be possible to predict the full effect of all or any of the possible provisions of the LLC Agreement before they are tested in litigation. Nevertheless, existing Delaware and Texas law suggests that those provisions would be helpful to a designating member and a representative manager of an LLC.