Delaware Chancery Clarifies LLCs Aren't Just Contractual Entities
Delaware Chancery outlined 21 reasons LLCs transcend pure contract law.
Why it matters: This clarity affects corporate litigators and counsel by defining fiduciary duties and governance in LLCs beyond member contracts. It underscores the blend of state law authority and contractual flexibility in LLC structures.
- Delaware Chancery issued an opinion citing 21 reasons LLCs are not solely contractual entities.
- LLCs possess state-conferred powers like separate legal existence, perpetual life, and limited liability for members.
- The court emphasized LLC agreements can't be purely private contracts due to state-granted powers.
- The opinion references Professor Mohsen Manesh's 13 reasons supporting LLCs’ non-contractual nature.
The Delaware Court of Chancery recently published a comprehensive opinion explaining why Limited Liability Companies (LLCs) are not purely creatures of contract. The court laid out 21 specific reasons highlighting the inherent differences between LLCs and mere private agreements among members. This detailed ruling provides key insights for corporate and commercial litigators navigating LLC governance and fiduciary responsibilities.
The court emphasized that certain attributes of LLCs, such as separate legal existence, perpetual life, and limited liability for members, are conferred exclusively by the State of Delaware, not by private contracts. As the opinion states, "An LLC agreement cannot be an exclusively private contract among its members precisely because the LLC has powers that only the State of Delaware can confer." This underscores the hybrid nature of LLCs as both creatures of contract and state charter.
The opinion cited academic authority, referencing Professor Mohsen Manesh, who identified 13 reasons supporting why LLCs are not wholly contractual. Adding to this, the court detailed a broader set of factors—21 in total—underscoring the complex interplay between statutory law and member agreements.
Moreover, the court recognized the unique flexibility the LLC Act provides, allowing the drafters of LLC agreements to tailor governance structures. As noted, "Using the contractual freedom that the LLC Act bestows, the drafters of an LLC agreement can create an LLC with bespoke governance features or design an LLC that mimics the governance features of another familiar type of entity." This makes LLCs distinct from other entity forms purely governed by contract or statute.
For legal professionals, this ruling is a crucial reminder that LLC governance cannot be viewed solely as a contractual matter. Instead, fiduciary duties and governance frameworks must be understood through the lens of both contractual provisions and the underpinning statutory authority bestowed by the state.
Read the full Delaware Chancery opinion for the detailed explanation and analysis.
Additional commentary is available at the National Law Review.
By the numbers:
- 21 reasons outlined by Delaware Chancery why LLCs are not purely contractual.
- 13 reasons identified by Professor Mohsen Manesh supporting LLCs’ non-contractual nature.