Corporations Analysis
ordinarily be precluded as a violation of the duty of loyalty. Id.; see also ULLCA § 409(b)(3)
(members have a duty to “refrain from competing with the company in the conduct of the
company’s activities before the dissolution of the company”).
Although the question does not state that ABC’s 100-room luxury hotel project and the
200-room Metro Inn would compete, their similarity and proximity in the same town suggest that
they would likely compete. Further, the fact that Alice and Carla are bothered by Bob’s interest
in Metro Inn suggests that competition is a strong possibility.
However, here the LLC operating agreement expressly allows members to have an
interest in a business that competes with the firm. Under most LLC statutes, members of an LLC
can agree to restrict or limit the duty of loyalty, provided the opt-out is specified in the operating
agreement. Thus, the operating agreement controls over the provisions of the statute. In this case,
when they became members of ABC, Alice and Carla agreed to abide by the terms of the
operating agreement, which expressly allow any member (i.e., Bob) to manage, own, and
otherwise have an interest in a business that competes with the firm.
States differ slightly on how the opt-out must be structured in order to be effective. Some
states, including Delaware, provide for total freedom of contract. See Elf Atochem North
America, Inc. v. Jaffari, 727 A.2d 286 (Del. 1999) (applying Delaware LLC Act § 18-1101(b)).
In these states, the terms of the operating agreement govern, unless they conflict with a
mandatory statutory provision designed to protect third parties. Id. at 292. Since Bob’s interest in
Metro Inn involves only the relationship between the contracting members—Alice, Bob, and
Carla—this exception is not implicated.
However, most states that permit opt-outs of the duty of loyalty follow the general
approach set forth in the Uniform Limited Liability Company Act (2006). According to ULLCA
§ 110(d)(1)(C), “If not manifestly unreasonable, the operating agreement may . . . restrict or
eliminate the duty . . . to refrain from competing with the company in the conduct of the
company’s business before the dissolution of the company.” In addition, so long as it is not
“manifestly unreasonable,” the operating agreement may also “identify specific types or
categories of activities that do not violate the duty of loyalty.” Id. § 110(d)(2).
In this case, the operating agreement is not a general waiver of the duty of loyalty, but
specifies the activities that do not violate the duty, namely “managing, owning, or otherwise
having an interest” in any competing business. Further, most courts would likely find this
provision not “manifestly unreasonable.” See McConnell, 725 N.E.2d at 1193.
Whether the provision is “manifestly unreasonable” is a question of fact. Nonetheless,
assuming that Alice and Carla each had notice of the provision when they signed the operating
agreement, it will be difficult for them to claim surprise. The provision clearly allowed each
member to manage, own, or otherwise have an interest in a competing business. This type of
provision, which is typical in commercial real estate deals, appears reasonable. Many investors
will likely want to be free to invest and exercise ownership rights in other similar real estate
ventures in the same area or town.
Point Two(a) (35%)
The designer may be able to hold Alice, Bob, and Carla proportionately liable, up to the amount
of the proceeds each received in dissolution, for ABC’s debt to the designer because the winding
up of ABC following dissolution was improper.
Like a corporation, the LLC provides limited liability for its members. ULLCA § 304(a). This
means that members of an LLC may not generally be held personally liable for the debts of the
firm. The general rule, however, does not apply in a few situations, including when (1) the
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