Tuesday, April 1, 2014

Drafting Texas LLC Agreements

Few, if any, know as much about Texas limited liability company law as Professor Elizabeth S. Miller of Baylor University Law School.  Professor Miller published a terrific article titled "Practical Pitfalls in Drafting Texas Limited Liability Company Agreements" in the Fall 2012 Texas Journal of Business Law.  It should be required reading for anyone drafting company agreements for Texas LLCs.  I could not find the article cited online, but a substantially similar article is available on Baylor's website here.

For example, Professor Miller notes in the article that the default rule under Texas LLC law is that a majority vote of the members of an LLC by number (rather than by percentage interest) is required to take many extraordinary company actions, such as approving a merger or other fundamental business transaction (See Sections 101.354 and 101.356(c) of the Texas Business Organizations Code ("TBOC")). That might come as a major shock to a member of an LLC holding say, 90% of the percentage interest, along with five other members whole collectively hold the remaining 10% of the percentage interests of the LLC!

Another default rule under Texas LLC law that might come as a surprise to LLC members is that members may take action informally without a meeting, such as by a series of phone calls or e-mails, rather than at a formal meeting of the members (See Sections 101.358 and 101.359 of the TBOC).  In fact, Section 101.359(2)(A) of the TBOC provides that a member may be deemed to have consented to a company action if the member knew about it but failed to object to the action in a timely manner.

Professor Miller reminds us that the default LLC rules can generally be modified by contrary provisions in an LLCs company agreement.  Drafters of LLC company agreements can avoid surprises by being careful to address each default provision that is not consistent with the LLC members' wishes.

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