When first entering the U.S. market, a number of foreign companies choose to form joint ventures with existing U.S. companies. The partners will often choose to organize their joint venture in the form of a limited liability company (LLC), with the U.S. company serving as the manager and the foreign company acting as a passive member. So long as their interests remain aligned, there are a number of benefits to this route for both parties involved. There is a risk, however, that a manager will overstep its bounds and cause the LLC to take an action that was not approved by the passive member, jeopardizing its investment and ability to continue operations.
The Tenth Circuit Bankruptcy Appellate Panel (BAP) was recently asked to consider whether a manager of an LLC had the authority to file for Chapter 11 bankruptcy protection on an LLC’s behalf if the LLC’s operating agreement specifically prohibited the manager from doing so. (DB Capital Holdings, LLC v. Aspen HH Ventures, LLC (In re DB Capital Holdings, LLC), 2010 Bankr. LEXIS 4176 (B.A.P. 10th Cir. Dec. 6, 2010).) The BAP answered in the negative and dismissed the bankruptcy case on the basis that the LLC’s operating agreement expressly barred the manager from filing a bankruptcy petition. For a more complete analysis of the case and its implications, please read "United States Bankruptcy Appellate Panel of the Tenth Circuit Upholds Provision in LLC Agreement Prohibiting Filing of Bankruptcy," available at http://www.pepperlaw.com/publications_update.aspx?ArticleKey=1976.
Although the above-referenced case specifically dealt with a manager’s ability to commence bankruptcy proceedings, it serves as a useful reminder of the need to draft LLC operating agreements carefully. A manager’s power and authority must be broad enough for it to conduct the LLC’s business in the ordinary course, but also sufficiently limited to protect the interests of its passive members. We encourage any clients considering an investment in the United States or with existing investments in the United States to contact us for further details on how to properly draft LLC operating agreements and protect your interests.