Negotiating the Operating Agreement: Key Business Terms 1 ... and 08 McCarthy and... ·...

Seattle-3563358.1 0059000-03935

Negotiating the Operating Agreement: Key Business Terms

1. Checklist of Possible Provisions in Limited Liability Company Agreement for Delaware Limited Liability Company 1 2. Abbreviated Checklist of Possible Provisions Related to ERISA and Federal Income Tax Laws 6 3. Excerpts from Confidential Term Sheet for Magnificent Tower LLC, a Delaware limited liability company 11

Law Seminars International | Real Estate Joint Ventures and Funds | 02/08/10 in Seattle, WA

Joseph P. McCarthy of Stoel Rives LLPThomas J. Parkes of Foster Pepper PLLC

Speaker 7a: 1Speaker 8a: 1

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Checklist of Possible Provisions in Limited Liability Company Agreement

For Delaware Limited Liability Company

1. Definitions 2. Organizational Matters

2.1 Name; Trade Name 2.2 Jurisdiction; Certificate of Formation 2.3 Registered Office; Registered Agent 2.4 Principal Place of Business 2.5 Foreign Registrations 2.6 Purposes and Limitations 2.7 Term 2.8 Names and Addresses of Members

3. Capital Contributions

3.1 Initial Capital Contributions

(a) Cash Contributions (1) amount (2) due date (3) conditions of funding (4) payment mechanics

(b) Property Contributions

(1) separate Contribution Agreement for real estate owned or under contract

(2) project development plans, specifications, studies, permits, entitlements, contracts

(3) lease commitments, financing commitments, other business plan assets

(4) conditions of contribution (5) agreed upon values (6) liabilities associated with contributed property

(c) Project Completion Guaranty

(1) identity of guarantor




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(2) terms; scope and deadline (3) treatment of payments upon completion guaranty (4) fee or other compensation (5) reimbursement and contribution issues

(d) Third Party Financing Guaranty

(1) identity of guarantor (2) scope: non-recourse carve-outs, or full; caps; release (3) fee or other compensation (4) reimbursement and contribution issues

3.2 Additional Capital Contributions

(a) scheduled vs. unscheduled

(b) capital call mechanics

(1) by whom; (2) what preconditions; (3) in what form and amounts? (4) valuation of existing and contributed interests

(c) mandatory vs. permissive

(d) failure to make mandatory capital contribution

(1) substitute loan (2) substitute capital contribution (3) deemed loan plus contribution (4) loss of management rights (5) default remedies

3.3 Capital Withdrawals

3.4 Project Mortgage Financing

3.5 Operating Deficit Loans 3.6 Reserves

(a) completion reserves; (b) lease up reserves; (c) operating reserves

4. Management of Joint Venture

4.1 Managing Member or Other Structure




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4.2 Scope of Manager’s Authority 4.3 Limitations on Manager’s Authority

(a) ERISA and REIT limitations (b) major decisions (c) conflict of interest transactions (d) compliance with budget

4.4 Approval Procedures (Multiple Members)

(a) notice and meetings; consents (b) failure to respond (c) discretion standard

4.5 Delegation of Manager’s Authority

(a) officers (b) agents (c) third parties (d) responsibility for conduct of delegee

4.6 Standard of Conduct by Manager

(a) general standard (b) time commitment (c) fiduciary duties; limitation of liability

4.7 Competitive Activities By Members

(a) manager and affiliates (b) other member(s) (c) fiduciary duties of members

4.8 Conflict of Interest Transactions

(a) pre-approved contracts (b) future events: alternative mechanisms

4.9 Removal of Manager

(a) standards (b) consequences (c) contracts with affiliates (d) mortgage financing limitations




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4.10 Indemnification of Manager, Officers, Agents

4.11 Compensation of Manager

(a) membership interest (b) management fee (c) expenses; budget (d) affiliate contracts

5. Cash Distributions

5.1 Heart of the Business Deal

5.2 Net Cash Flow vs. Capital Proceeds

5.3 Waterfalls: Preferred Returns and Promotes

5.4 Mandatory vs. Discretionary Distributions

(a) tax distributions (b) liquidating distributions

5.5 Withholding on Distributions

6. Allocations of Profit and Loss

6.1 Key Distinction: Net Income vs. Cash 6.2 Capital Accounts 6.3 Tax Requirements

7. Transfers of Membership Interests

7.1 Additional Members 7.2 Transfer of Manager’s Membership Interest

(a) prohibitions; limited exceptions (b) change of control of Manager (c) removal of Manager

7.3 Transfer of Non-Manager’s Membership Interest

(a) permitted transfers (b) change of control of non-managing member




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(c) general prohibitions (d) substitution procedures

7.4 Right of First Refusal/Right of First Offer

8. Dispute Resolution

8.1 Default Provisions 8.2 Mediation/ Arbitration 8.3 Buy-Sell and Marketing Provisions

(a) lock-up period (b) buy-sell (Russian Roulette/Baseball/Other) (c) mandatory project sale and liquidation (d) drag along/tag along

9. Administrative Matters

9.1 Books of Account 9.2 Accounting

(a) fiscal year (b) consolidation (c) joint venture’s accountants

9.3 Financial Statements and Other Reports 9.4 Tax Returns 9.5 Tax Matters Partner 9.6 Member Inspection Rights

10. Dissolution and Liquidation

10.1 Dissolution Triggers 10.2 Winding Up

(a) responsibility for wind up (c) protection of members




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Abbreviated Checklist of Possible Provisions in Limited Liability Company Agreement

Related to ERISA and Federal Income Tax Laws

Pension Plan Funds and Other Tax-Exempt Investors 1. ERISA.

1.1 Pension Plan (or other ERISA entity), and its managers, are subject to extensive regulation under Employment Retirement Income Security Act of 1974 and federal regulations thereunder.

(a) Fiduciary Responsibility Provisions. (b) Prohibited Transactions. (c) Self-Dealing Prohibitions.

1.2 Key Issue: In a real estate joint venture in which a Pension Plan wishes to invest,

will the joint venture’s real estate and personal property become “Plan Assets”?

(a) If so, all ERISA restrictions will be applicable to activities of joint venture, and joint venture (and its manager) will become ERISA fiduciaries.

(b) If not, membership interest held by Pension Plan will be a “Plan Asset,”

but joint venture will generally not be subject to ERISA regulation.

1.3 Plan Asset Regulations (29 C.F.R. § 2510.3-101) establish several categories of entities which will be “exempt” (that is, underlying assets owned by such entity will not be considered “Plan Assets”). Three exemptions are most likely to be applicable to a joint venture formed to own and operate real estate. They are as follows:

1.4 “Limited Benefit Plan Participation” Entity.

(a) The assets held by an entity will not be considered Plan Assets if less than

25% of the equity interest in that entity is held by “benefit plan investors.” 29 C.F.R. § 2510.3-101(a)(2)(ii), (f). Benefit plan investors include non-




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ERISA plans, such as government and foreign plans, as well as ERISA plans.

(b) Difficult exemption to use (tracing ownership problems).

1.5 Venture Capital Operating Company (“VCOC”).

(a) An entity, such as a partnership, that invests in venture capital companies

will not be deemed to hold Plan Assets if certain conditions are met. 29 C.F.R. § 2510.3-101(d).

(i) At least 50% of the assets of the partnership must be invested in

venture capital investments (or certain “derivatives” of such investments), including true operating companies and REOCs.

(ii) The partnership must actually exercise management rights in the

ordinary course of its business for at least one company in the partnership’s portfolio.

(b) Occasionally useful for tiered real estate joint venture structures and for

joint ventures formed to acquire real estate-related securities.

1.6 Real Estate Operating Company (“REOC”).

(a) An entity, such as a partnership, that invests in real estate will not be deemed to hold Plan Assets if certain conditions are met. 29 C.F.R. § 2510.3-101(e).

(i) At least 50% of the partnership’s assets must be invested in real

estate.

(ii) The partnership must substantially participate in the management or development of that real estate.

(b) Most useful in the real estate industry, and most frequently applied to real

estate joint ventures.

1.7 Structuring Issues Re REOC Status.

(a) Entity must qualify as REOC from date of its first investment. Potential traps (e.g., initial use of joint venture’s capital pending acquisition of real estate).

(b) Use of development services, construction management and property

management contracts with independent contractors, or even with minority partner/developer affiliates, a potential trap.




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(c) Allocation of responsibility for maintaining REOC status, and

consequences of loss of status. 2. Federal Tax Law: Unrelated Business Taxable Income (“UBTI”).

2.1 A tax-exempt investor will typically require that its investment in a real estate joint venture not generate significant UBTI. (If the investor wishes to avoid any potential UBTI whatsoever, it will invest through a “blocker” corporation, which will recognize and pay tax on all income and gain, whether of a UBTI nature or not---effectively “blocking” the tax-exempt investor from earning UBTI and being required to report UBTI on its annual return.)

2.2 Common sources of UBTI:

(a) Services to tenant - if services provided to a tenant are other than those

customarily provided in connection with the rental of space for occupancy, all “rent” received from such tenant will be UBTI. Problem areas: parking, concierge service, cleaning or maintenance of tenant-specific assets or space.

(b) Lease of personal property - if portion of rent under a real estate lease

attributable to associated personal property exceeds 10% of all rent due under that lease, then the rent attributable to the personal property is UBTI. If the rent portion attributable to personal property exceeds 50%, all rent under such lease will constitute UBTI.

(c) Participating rent - rent based (to any degree) on net profits of a tenant

derived from the leased property, all of such rent will constitute UBTI. Rent may, however, be based on gross revenues or gross profits of the tenant.

(d) Sales of dealer property - if property is held for sale to customers in the

ordinary course (e.g., condo sales, property acquired to flip, property acquired solely to refurbish and sell), the gain from such sales will be taxable as UBTI.

(e) Debt Financing/Fractions Rule - If property is financed with debt, a

portion of the income and gain from such property will generally be characterized as UBTI. However, indebtedness incurred to acquire or improve real property will, subject to certain exceptions, not result in UBTI, provided that if the property is held in a partnership, the partnerships tax allocations satisfy the “fractions rule.” The fractions rule essentially requires that no tax-exempt can ever be allocated a share of partnership income/gain that exceeds the tax-exempts lowest share of partnership expense/loss for any year. Only certain types of tax-exempts




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may benefit from the fractions rule exception; primarily pension plans and educational endowments.

(f) Most troublesome real estate asset classes:

(i) Hotels. (ii) Condominiums. (iii) Multiple lot residential subdivisions. (iv) Parking structures or elements.

Real Estate Investment Trusts 1. Real Estate Investment Trust (“REIT”) defined: company otherwise taxable as a

“C corporation” under federal income tax laws but qualifying for exemption from normal corporate-level income taxation under Code § 856.

2. General Requirements: In order for a company to qualify as a REIT, it must comply with

certain provisions within the Internal Revenue Code. A REIT must:

• be an entity that is taxable as a corporation;

• be managed by a board of directors or trustees;

• have shares that are fully transferable;

• have a minimum of 100 shareholders;

• have no more than 50 percent of its shares held by five or fewer individuals during the last half of the taxable year;

• invest at least 75 percent of its total assets in real estate assets;

• derive at least 75 percent of its gross income from rents from real property or

interest on mortgages financing real property;

• have no more than 20 percent of its assets consist of stocks in taxable REIT subsidiaries; and

• pay annually at least 90 percent of its taxable income in the form of shareholder

dividends. 3. REIT as capital source for real estate joint venture: implications (simplified):




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3.1 Sale restrictions: joint venture cannot engage in dealer sales (e.g., condominium or lot sales) or sale of real estate not held for investment.

3.2 Mortgage debt: REITs tend to have lower mortgage debt limits for real estate

assets (e.g., 60% or lower maximum leverage). 3.3 Reporting: a publicly traded REIT as investor will impose additional reporting

requirements on the real estate joint venture and its property manager. 3.4 Accounting: Difficult issues of potential consolidation of the joint venture with

REIT for financial reporting purposes. 3.5 Qualifying income issues: Certain kinds of real estate-related revenues (e.g.,

tenant service and parking income) may not be indirectly received by REIT without potentially jeopardizing its favorable tax status.

3.6 Distribution requirements: a REIT must distribute to its shareholders each year at

least 90% of its taxable income or pay income tax. A REIT as investor will impose mandatory cash flow and capital proceeds distribution requirements on a real estate joint venture.

3.7 Buy-sell provision: REIT’s typical longer term held perspective will lead to lock-

out period in joint venture agreement, during which buy-sell provision may not be exercised.

3.8 Troublesome asset classes: Because of the foregoing (and other) rules applicable

to REITs, an REIT will probably have the greatest difficult structuring and investment in a real estate joint venture formed to own and/or operate a hotel or to engage in condominium unit or residential lot sales.




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Excerpts from Term Sheet

Magnificent Tower LLC,

a Delaware limited liability company

Confidential Term Sheet

This Confidential Term Sheet is a nonbinding expression of interest by Institutional Investment Fund LLC (herein “Investor”) to form a joint venture with Local Development Partners LLC (herein “Developer”), an affiliate of Local Development Company, for the purpose of acquiring a certain site at 1234 Fifth Avenue, Gotham, WA (the “Site”) at which the joint venture will develop, design, construct, mortgage, own and operate the Project hereinbelow described.

1. The Project. The “Project” will consist of a Class A mixed-use tower encompassing approximately 300,000 square feet and consisting of underground parking facilities for approximately 120 vehicles, a ground floor and two additional floors of rental retail space, three (3) floors of office/commercial space, and twenty-five (25) residential floors containing approximately 220 luxury rental apartment units.

2. Sources and Uses of Funds. The parties currently anticipate that the joint venture will acquire the Site and develop, design, construct and lease the Project to the milestone of Project Stabilization (as hereinafter defined) using the following Sources and Uses of Funds.

Sources of Funds First Mortgage Loan $ 65,000,000 Cash Capital Contributions Investor $ 31,500,000 Developer 3,500,000 Total Sources $100,000,000 Uses of Funds Site Purchase Price $ 10,000,000 Construction Period Soft Costs $ 12,000,000 GMC Construction Contract $ 78,000,000 Total Uses $100,000,000

3. Form and Name of Joint Venture. The joint venture will be in the form of a limited liability company organized under Delaware’s Limited Liability Company Act and governed by a limited liability company agreement (the “Operating Agreement”) to be negotiated containing terms and conditions substantially consistent with those set forth herein and such other terms and conditions as shall be mutually agreeable. The joint venture (the




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“Company”) shall be named “Magnificent Tower LLC” or such other name as is hereafter mutually approved by Investor and Developer (collectively, the “Members”).

4. Management. Developer shall serve as initial Manager of the Company. As such, Developer shall have the management duties and authorities set forth below and shall be subject to removal from management by Investor for any of the reasons hereinbelow described.

5. Initial Capital Contributions. At the Equity Closing (as hereinafter defined), and subject to satisfaction of the funding conditions hereinafter described, the Members shall make initial capital contributions to the Company by wire transfer of cash in the following amounts and shall receive the following percentage ownership interests in the Company: Developer: $ 3,500,000 10% Investor: $31,500,000 90%

At the Equity Closing, Developer shall also contribute, for no additional consideration, by assignment to the Company (subject to assumption of all related prospective obligations) the following:

(i) the existing real estate purchase and sale agreement with Fifth Avenue Associates LLC (the “Site Owner”), together with all earnest money deposits, title insurance commitments and due diligence reports and studies obtained or prepared by Developer in connection with the pending purchase of the Site;

(ii) the existing architectural services contract with XYZ Architects LLP (the

“Architect”), together with all studies, schematics, designs, drawings, models, plans and specifications prepared by the Architect in connection with the Project;

(iii) the existing development phase services contract with ABC Construction

Company, Inc. (the “General Contractor”), together with all cost estimates, analyses, studies, bids and proposals prepared by the General Contractor in connection with the Project;

(iv) all construction, building, street use, sidewalk use, and other permits and

licenses obtained by Developer from the City in connection with the Project and all applications submitted by Developer for any such licenses not yet issued (collectively, the “Permits”); and

(v) the loan commitment dated February 9, 2009, issued by Optimism Bank,

N.A. (“Construction Lender”) for a construction loan in the amount of $65,000,000 in connection with the Project, and all deposits posted and payments made by Developer pursuant thereto.

At the Loan Closing (as hereinafter defined), Developer shall also provide to or for the benefit of the Company, for no additional consideration, the following:




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(i) a guaranty to Construction Lender of payment of all non-recourse carve-out liabilities to which the Company will be subject under the governing documents for the Construction Loan, in form and substance reasonably satisfactory to the Construction Lender; and

(ii) an environmental indemnity agreement for the benefit of the Construction Lender, to which the Company will also be liable with respect to the ongoing environmental condition of the Site and the Project, in form and substance reasonably satisfactory to the Construction Lender.

6. Equity Closing Funding Conditions. Each Member’s obligation to complete its initial capital contribution shall be subject to fulfillment (or waiver by Investor in its sole discretion) of the following conditions precedent: ….

* * *

9. Additional Capital Contributions: Construction Phase. During the Construction Phase, if Investor reasonably determines that the proceeds of the initial capital contributions and the Construction Loan will not be sufficient to complete development, design and construction of the Project and achieve Project Stabilization, Investor may issue a mandatory capital call notice for additional capital contributions that, in the aggregate, will eliminate such deficit. Such notice, when issued, shall require each Member to complete an additional contribution of cash to the Company, in proportion to its percentage interest, not later than thirty (30) days after such notice. Such additional capital contribution proceeds shall be delivered to the Construction Lender (if required by the Construction Loan documents) for disbursement or otherwise applied by the Company as described in the capital call notice. If either Member fails to complete an additional capital contribution when due, the other Member shall have the right to advance the shortfall as a loan or substituted or additional capital contribution, with applicable interest rate or preferred return, according to Investor’s customary operating agreement provisions.

Developer’s failure to make an additional capital contribution when due shall also be a grounds for removal as Manager of the Company (as hereinafter described) and also constitute a “Default” (as hereinafter defined). If Developer commits a breach of its duties as Manager of the Company and such actions are the cause of a capital deficit during the Construction Phase, Investor may (but is not obligated to) issue a mandatory capital call notice without waiving the Company’s, or Investor’s, claims against Developer for such breach.

10. Additional Capital Contributions - Operating Phase. After Project Stabilization, if each Member reasonably determines that, for the current year. revenues from operation of the Project, plus any remaining proceeds from capital contributions and the Construction Loan or the Term Loan (as hereinafter described), will be insufficient to meet all of the Company’s operating expenses and debt service obligations and maintain a reasonable level of working capital in such year, such Member may issue a capital call notice for voluntary additional capital contributions in the aggregate amount of the projected capital deficit. If either Member chooses not to make the requested additional capital contribution, the other Member may make a loan to the Company




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(if then permitted by the terms of the Construction Loan or Term Loan), in the amount of the shortfall, bearing a commercially reasonable rate of interest and having other loan terms according to Investor’s customary operating agreement provisions.

* * *

13. Major Decisions. All of the following actions (the “Major Decisions”) shall require the express prior written approval of Investor before the Manager is authorized to act on behalf of the Company:

(1) Any modification to the contracts assigned to the Company on the Equity Closing Date, with the Site Seller, the Architect and the General Contractor;

(2) The Design Development phase and Construction Documents phase plans

and specifications for the Project prepared by the Architect (or any replacement architect);

(3) A Construction budget;

(4) Any modification of the Permits assigned to the Company, and any new

permits of a material nature;

(5) Form and content of any agreement with the General Contractor for construction of the Project, and any amendments, extensions or assignments thereof;

(6) Any modification to the loan commitment from the Construction Lender,

the definitive Construction Loan documents, and all modification thereto;

(7) The incurring of other material indebtedness for or on behalf of the Company;

(8) All Construction Loan draw requests and other material communications

to the Construction Lender during construction of the Project;

(9) Any agreement for the acquisition of real property (other than the Site) or material tangible personal property to be acquired by the Company, and any amendments or modifications thereto;

(10) Any service contract for the Site or the Project that is not cancelable by the

Company upon thirty (30) days’ notice;

(11) The sale, assignment, transfer, conveyance, ground lease, easement, lease or other disposition of any portion of the Site or the Project;

(12) Any parking agreement or arrangement concerning the parking spaces

constructed as part of the Project;




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(13) Any engagement of a leasing agent to lease any portion of the Project

(other than the Property Management Agreement with Developer’s Affiliate approved pursuant to the Operating Agreement);

(14) Any engagement of a property management company to manage any part

of the Project (other than the Property Management Agreement);

(15) All annual operating budgets, which budgets shall include parameters for minimum rental rates and maximum tenant improvement allowances, and all annual business plans;

(16) The investment of Company funds in any asset other than the Site or the

Project, or any transaction that is not in the ordinary course of business of the Company or that is not directly related to the acquisition of the Site and development, construction, leasing and operation of the Project;

(17) Any agreed-upon condemnation (or any conveyance in lieu of

condemnation) of all or part of the Project;

(18) Selection of insurance carriers, determination of insurance coverages to be obtained by the Company, and settlement of insurance claims in excess of an agreed amount;

(19) Institution or settlement of any lawsuit, arbitration or other legal

proceeding or confession of any judgment against the Company;

(20) Any press release or other public dissemination of non-public information with respect to the Company or the Project;

(21) Granting of all approvals, waivers and consents on behalf of the Company

under the Property Management Agreement (and Developer as Manager shall have no discretion or authority in such matters);

(22) Enforcement of the terms and conditions of the Property Management

Agreement on behalf of the Company (and Developer as Manager shall have no discretion or authority on such matters);

(23) Adoption by the Company of the “Leasing Guidelines” referred to in the

Property Management Agreement, all subsequent modifications thereto, adoption of forms of retail, office/commercial and residential leases to be used at the Project, and all modifications to any of the foregoing;

(24) Execution of any lease in the Project for retail or office/commercial space

not in conformity with the Leasing Guidelines, the economic terms set forth in the




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applicable annual operating budget and annual business plan, or the applicable approved form of lease;

(25) Any action by the Company or Manager constituting or effecting a

bankruptcy of the Company;

(26) Any business or activity by the Company other than the business(es) or activity(ies) contemplated by this Term Sheet, or any action by the Company not in the ordinary course of the Company’s business; and

(27) Entering into any agreement to do any of the foregoing.

Exhibit A: Sections 18-502 and 18-1101 of Delaware Limited Liability Company Act




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Exhibit A

Excerpts from Delaware Limited Liability Company Act (6 Del. Code Ch. 18)

§ 18-502. Liability for contribution. (a) Except as provided in a limited liability company agreement, a member is obligated to a limited liability company to perform any promise to contribute cash or property or to perform services, even if the member is unable to perform because of death, disability or any other reason. If a member does not make the required contribution of property or services, the member is obligated at the option of the limited liability company to contribute cash equal to that portion of the agreed value (as stated in the records of the limited liability company) of the contribution that has not been made. The foregoing option shall be in addition to, and not in lieu of, any other rights, including the right to specific performance, that the limited liability company may have against such member under the limited liability company agreement or applicable law. (b) Unless otherwise provided in a limited liability company agreement, the obligation of a member to make a contribution or return money or other property paid or distributed in violation of this chapter may be compromised only by consent of all the members. Notwithstanding the compromise, a creditor of a limited liability company who extends credit, after the entering into of a limited liability company agreement or an amendment thereto which, in either case, reflects the obligation, and before the amendment thereof to reflect the compromise, may enforce the original obligation to the extent that, in extending credit, the creditor reasonably relied on the obligation of a member to make a contribution or return. A conditional obligation of a member to make a contribution or return money or other property to a limited liability company may not be enforced unless the conditions of the obligation have been satisfied or waived as to or by such member. Conditional obligations include contributions payable upon a discretionary call of a limited liability company prior to the time the call occurs. (c) A limited liability company agreement may provide that the interest of any member who fails to make any contribution that the member is obligated to make shall be subject to specified penalties for, or specified consequences of, such failure. Such penalty or consequence may take the form of reducing or eliminating the defaulting member’s proportionate interest in a limited liability company, subordinating the member’s limited liability company interest to that of nondefaulting members, a forced sale of that limited liability company interest, forfeiture of the defaulting member’s limited liability company interest, the lending by other members of the amount necessary to meet the defaulting member’s commitment, a fixing of the value of the defaulting member’s limited liability company interest by appraisal or by formula and redemption or sale of the limited liability company interest at such value, or other penalty or consequence. (68 Del. Laws, c. 434, § 1; 70 Del. Laws, c. 186, § 1.)




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§ 18-110 1. Construction and application of chapter and limited liability company agreement. (a) The rule that statutes in derogation of the common law are to be strictly construed shall have no application to this chapter. (b) It is the policy of this chapter to give the maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements. (c) To the extent that, at law or in equity, a member or manager or other person has duties (including fiduciary duties) to a limited liability company or to another member or manager or to another person that is a party to or is otherwise bound by a limited liability company agreement, the member’s or manager’s or other person’s duties may be expanded or restricted or eliminated by provisions in the limited liability company agreement; provided, that the limited liability company agreement may not eliminate the implied contractual covenant of good faith and fair dealing. (d) Unless otherwise provided in a limited liability company agreement, a member or manager or other person shall not be liable to a limited liability company or to another member or manager or to another person that is a party to or is otherwise bound by a limited liability company agreement for breach of fiduciary duty for the member’s or manager’s or other person’s good faith reliance on the provisions of the limited liability company agreement. (e) A limited liability company agreement may provide for the limitation or elimination of any and all liabilities for breach of contract and breach of duties (including fiduciary duties) of a member, manager or other person to a limited liability company or to another member or manager or to another person that is a party to or is otherwise bound by a limited liability company agreement; provided, that a limited liability company agreement may not limit or eliminate liability for any act or omission that constitutes a bad faith violation of the implied contractual covenant of good faith and fair dealing. (f) Unless the context otherwise requires, as used herein, the singular shall include the plural and the plural may refer to only the singular. The use of any gender shall be applicable to all genders. The captions contained herein are for purposes of convenience only and shall not control or affect the construction of this chapter. (g) Sections 9-406 and 9-408 of this title do not apply to any interest in a limited liability company, including all rights, powers and interests arising under a limited liability company agreement or this chapter. This provision prevails over §§ 9-406 and 9-408 of this title. (68 Del. Laws, c. 434, § 1; 69 Del. Laws, c. 260, § 35; 72 Del. Laws, c. 389, §26; 73 Del. Laws, c. 221, § 1; 74 Del. Laws, c. 275, §§ 13, 14.)




Negotiating the Operating Agreement: Key Business Terms 1 ... and 08 McCarthy and... ·...

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