Thursday, April 21, 2016

Does Big Board = Big Problem for Texas LLC?

Texas limited liability companies have tremendous flexibility in choosing how they may be governed. That can be a blessing and a curse.  Let me explain.

Each Texas LLC must elect to be member-managed or manager-managed in its certificate of formation.  Then the LLC's company agreement generally determines if the company may or may not have officers representing the company and how the management rights will be allocated among the officers (if any), managers (if any), and members.  The benefits of this flexibility are easy to see: the LLC can choose to slice-and-dice the management and control functions of the company in any number of ways that suit its interests.  For example:

  • officer(s) might be responsible for day-to-day management of the company in the ordinary course; 
  • manager(s) approval might be required for more substantial matters, such as taking out a loan or entering into a material contract; and
  • member(s) approval might be required for major decisions, such as entering into a merger, accepting a new member, or amending the company agreement.    
LLCs often seek to establish a Board of Managers which would be analogous to a Board of Directors of a corporation. In that case, it is not unusual for the LLC's company agreement to provide that no individual manager has the power or authority to bind the company (much like a single director of a corporation with multiple directors would not be able to bind the corporation).  Such a provision would be effective to deny any particular manger the actual authority to bind the company.

But might a rogue manager nonetheless have apparent authority to bind the LLC? Probably so. Recall that a manager-managed Texas LLC must identify its initial managers in its certificate of formation. So the world would be on notice as to the identity of the mangers - but not necessarily the scope of their authority, which in this example is limited by the company agreement which is not publicly filed. The default presumption under the Texas Limited Liability Company Law is that a manager is an agent that may bind the LLC (see Section 101.254 of the Texas Business Organizations Code).

Bottom line, a Texas LLC has at least some risk that a rogue manager might act without actual authority (but with apparent authority) to bind the company.  That's a risk a Texas corporation does not face - a director of a corporation generally does not have apparent authority to bind a corporation because corporations generally act through their officers, not their directors.

Thanks to Allen Sparkman for highlighting this issue in a paper he presented to the UT-CLE Securities Regulation and Business Law Conference.

No comments:

Post a Comment