The express wording of Section 101(7) of the Delaware Limited Liability Company Act (the LLC Act) provides that a “limited liability company is bound by its limited liability company agreement whether or not the limited liability company executes the limited liability company agreement.”1The Delaware Court of Chancery recently applied Section 101(7) of the LLC Act in Seaport Village Ltd. v. Seaport Village Operating Company, LLC2 (Seaport), finding that a limited liability company could enforce the fee shifting provision of its limited liability company agreement, even though the company was not a party to the agreement.
The Seaport Decision
In Seaport, Seaport Village Operating Company, LLC (Seaport LLC) sought to recover attorneys’ fees and expenses pursuant to a fee shifting provision of its limited liability company agreement that allowed the prevailing party in an action “brought by any party against another party” to recover reasonable attorney’s fees, costs and expenses incurred in the prosecution or defense of such action.3 Seaport Village Ltd. argued that because Seaport LLC had not signed its limited liability company agreement, it was not a “party” to the agreement and therefore could not recover its fees and expenses pursuant to the agreement.4 The Chancery Court was unpersuaded by the argument, finding that the defense failed as a matter of law.5 The Court summarized the statutory history of Section 101(7) of the LLC Act, which was amended in 2002 to codify case law holding that the limited liability company agreement of a Delaware limited liability company was binding on the company and its members, whether or not signed by the company.6
Implications of the Seaport Decision and Section 101(7) for Members of Delaware Limited Liability Companies
The Seaport decision is not surprising given the unambiguous language of the LLC Act. Section 101(7), however, contains provisions that reach beyond the question at issue in Seaport. As the Chancery Court pointed out in Seaport, Section 101(7) was further amended in 2005 to clarify that members also are bound by the limited liability company agreement, whether or not they execute the agreement.7 Section 101(7) provides that a limited liability company agreement may be any agreement, written, oral or implied, of the members as to the affairs of a limited liability company and the conduct of its business. It also states that a written limited liability company agreement may provide that an assignee of membership interest may become a party to the limited liability company agreement without executing the agreement, if the assignee complies with the conditions of becoming a member as set forth in the limited liability company agreement or any other writing.
Seaport highlights the critical importance of setting out the terms that will govern the limited liability company and its members in a written agreement that is signed by all members and the company, and revisiting the agreement anytime membership interest is issued or assigned. Members who begin operating a limited liability company based on a loose set of oral understandings while they work out the details of a written agreement may find they are bound by an ambiguous and unwritten operating agreement. Likewise, an assignee of a membership interest may be bound by the company’s existing operating agreement, including capital call provisions, transfer restrictions and limitations on management rights, even if the assignee never signs the agreement.
Jennifer Brady is a freelance writer and attorney admitted in the State of New York.