THE AMERICAN LAW INSTITUTE Continuing Legal Education

Transcription

1 1 THE AMERICAN LAW INSTITUTE Continuing Legal Education Practical LLC and LP Opinions: What They Mean and How To Prepare Them June 23, 2014 Telephone Seminar/Audio Webcast Practical LLC and LP Opinions: What They Mean and How To Prepare Them Slides By Donald W. Glazer Goodwin Procter LLP Newton, Massachusetts Louis G. Hering Morris, Nichols, Arsht & Tunnell LLP Washington, D.C. James G. Leyden, Jr. Richards, Layton & Finger PA Wilmington, Delaware

2 2 DELAWARE LIMITED LIABILITY COMPANIES AND DELAWARE LIMITED PARTNERSHIPS OPINION LETTERS OPINIONS ON FORMATION, EXISTENCE, POWER, AUTHORIZATION, ENFORCEABILITY, VALIDITY OF LLC/LP INTERESTS, ADMISSION, PAYMENT OBLIGATIONS AND LIMITED LIABILITY OF MEMBERS/PARTNERS AND RELATED OPINIONS June 23, 2014 Presented by: Donald W. Glazer, Esq. Boston, MA Louis G. Hering, Esq. Morris, Nichols, Arsht & Tunnell Wilmington, DE James G. Leyden, Jr., Esq. Richards, Layton & Finger, P.A. Wilmington, DE

3 3 Overview/TriBar Opinion Committee Limited liability companies ( LLCs ) and Limited Partnerships ( LPs ) have become the preferred business entities in many private transactions and some public transactions. For example, Delaware has approximately 260,000 corporations as compared to approximately 78,000 Delaware limited partnerships and approximately 700,000 Delaware LLCs. Due to the popularity of LLCs and LPs, the TriBar Opinion Committee has been focusing upon third-party closing opinions involving LLCs and LPs. 3 Overview/TriBar Opinion Committee The TriBar Opinion Committee typically meets on a monthly or bi-monthly basis principally to work on reports on legal opinions relating to business transactions. The TriBar Opinion Committee published Third-Party Closing Opinions: Limited Liability Companies in the February 2006 edition of The Business Lawyer. [February 2006, The Business Lawyer, Volume 61 at 679.] The TriBar Opinion Committee published. : Opinions on LLC Membership Interests in the [August 2011 edition of The Business Lawyer, Volume 66 at 1065.] During the last 3 years, TriBar has been working on a report that deals with opinions that are often rendered (i) to persons entering into loan transaction or business transaction with a limited partnership and (ii) to purchasers of limited partnership Interests. The report once published will be titled Third-Party Closing Opinions: Limited Partnership. The sections will include The Status Opinion: Formation and Existence Power of Limited Partnership to Enter into and Perform its Obligations under Transaction Documents Due Authorization, Execution and Delivery Valid Issuance of LP Interests Admission of Purchasers of LP Interests as Limited Partners of the Limited Partnership Payments and Contributions of Limited Partners of the Limited Partnerships Liability of Limited Partners to Third Parties for obligations of the Limited Partnership Enforceability of Partnership Agreement The Committee has been considering whether or not opinions frequently given on corporate stock are appropriate for LLCs and LPs. 4

4 4 TriBar LLC The 2006 TriBar LLC : Discussed common third party closing opinions for LLCs that are similar to those given when a corporation enters into a loan transaction: Due formation, valid existence, and good standing The Company has been duly formed and is validly existing in good standing as a limited liability company under the laws of the State of Delaware. Power The Company has all necessary limited liability company power and authority to execute and deliver the [Transaction Documents], and to perform its obligations thereunder. Due authorization The execution and delivery by the Company of the [Transaction Documents], and the performance by the Company of its obligations thereunder, have been duly authorized by all necessary limited liability company action on the part of the Company. The 2006 and 2011 LLC s discuss differences between opinions on Corporations and LLCs. The importance of contract law because of the central role played by an LLC s operating agreement. The need for LLC to have an operating agreement before giving a legal opinion. The need for LLC to always have at least one member to avoid dissolution. 5 TriBar LLC TriBar 2006 LLC Also Discussed: Topics of Particular Interest: Impact of fiduciary duty law on authorization analysis In Delaware, fiduciary duties for LLCs can be expanded, restricted or eliminated (subject to the implied contractual covenant of good faith and fair dealing). The same is true for Delaware limited partnerships. Enforceability opinions Frequently, underwriters and purchasers of LLC interests (for example, in private equity transactions and hedge fund transactions) request enforceability opinions on LLC Agreements and LP Agreements. Lenders and rating agencies often request enforceability opinions in structured finance matters since they may want to confirm that restrictions on purposes and powers of an LLC and LP and covenants of members of an LLC and partners of an LP are enforceable. The 2006 LLC discussed the meaning of an enforceability opinion on an operating agreement. (i) Each specific remedy will be enforced subject to bankruptcy and equitable principles. (ii) Some remedy will be available for provisions for which agreement does not provide specific remedy, subject to bankruptcy and equitable principles. (iii) The other terms of an operating agreement, such as governing law provisions are enforceable. 6

5 5 TriBar LLC In 2011 the TriBar Opinion Committee published a supplemental report on opinions sometimes given to purchasers of interests in an LLC in both registered public offerings and private placements. Opinions cover: Valid issuance of LLC interests Due admission of members Obligations of members to make contributions to LLC Limited liability of members for LLC s obligations The report focuses on what opinions are appropriate concerning LLC interests, how those opinions should be worded, and what opinion preparers need to do to give them. 7 I Valid Issuance of LLC Interests The TriBar LLC did not discuss opinions on LLC interests, but reserved discussion until completion of the Preferred Stock in The Preferred Stock stated that: An opinion that shares of stock have been duly authorized and validly issued and are fully paid and non-assessable includes an opinion that the rights, powers and preferences of the preferred stock set forth in the charter do not violate the applicable corporation statute or the corporation s charter. 8

6 6 Is a duly authorized and validly issued opinion appropriate for an LLC? TriBar recommends an opinion that provides: The LLC Interests are validly issued (limited liability company interests in the LLC). Considerations: An LLC is a contractual entity that is largely governed by its operating agreement. There is usually no publicly filed document showing the number of LLC interests authorized for issuance. General conclusions: An authorization opinion normally adds nothing but may be given sometimes if regulators require it, and the operating agreement can be drafted to accommodate it. Valid issuance opinion is more appropriate than a duly authorized and validly issued opinion. Valid issuance opinion means that the LLC Interests have been issued in compliance with the procedures of the applicable LLC statute, the operating agreement and the certificate of formation, if applicable, and their terms do not violate any requirements in the applicable LLC statute or the operating agreement. 9 II Admission of Purchasers of LLC Interests as Members of an LLC While inapplicable to corporations, due admission is an appropriate subject for an opinion in the LLC context. An investor seeks the opinion because if it has not been admitted, it typically is not entitled to membership rights. Opinion is similar to that given to purchasers of partnership interests confirming their admission. Form of Opinion: Each of the Members has been duly admitted to the Company as a member of the Company. 10

7 7 Due admission opinions LLC Membership. Under many state LLC statutes, including Delaware s, purchasing or otherwise acquiring an LLC Interest does not by itself make a person a member. Satisfaction of specified conditions for admission are typically required by statute unless an LLC s operating agreement (and certificate of formation) otherwise provide. Operating agreements often specify conditions for admission. Conditions may differ for admission at LLC formation and admission at a later time. 11 Due admission opinions Opinion means that the purchasers of LLC Interests have been admitted as members of the LLC in compliance with the requirements, if any, of the LLC statute under which the LLC was formed and the requirements, if any, of the LLC s operating agreement (and, depending upon the state, its certificate of formation). Person being admitted meets statutory definition of member (11) of the Delaware LLC Act: Member means a person who has been admitted to a Delaware LLC as a member as provided in Section of the Delaware LLC Act. Person is broadly-defined in Delaware. Other states may have a different or narrower definition, or no definition. 12

8 8 Due admission opinions Some sales of LLC Interests involve subscription agreements; such agreements may contain conditions on admission. Admission opinion only covers conditions on admission in subscription agreements when they are made part of the operating agreement. When not part of the operating agreement, conditions need not, under LLC statutes like Delaware s, be satisfied for admission. Opinion givers nonetheless often expressly assume (or obtain certificates regarding) satisfaction or waiver of such conditions. If an LLC statute requires satisfaction of conditions in subscription agreement, the opinion covers compliance with those conditions. Opinion preparers must confirm or assume compliance. 13 Due admission opinions An opinion that a person or entity has been admitted as a member to an LLC is not an opinion that: The LLC or the other members can enforce the member s obligations under the operating agreement, or If the member is an entity rather than a natural person, that it has the power to be a member under the law under which the entity was formed. 14

9 9 III Obligations of Members: Is a fully paid and non-assessable opinion appropriate for an LLC? Problem areas for fully paid and non-assessable opinions may include: Transactions where members only have a commitment to contribute when the LLC acquires a business Indemnification obligations Clawback obligations 15 Purchasers of LLC Interests sometimes request an opinion that addresses their obligation to make payments to the LLC for their LLC Interests and contributions, if any, to the LLC in connection with their ownership of LLC Interests. Purchasers also sometimes request an opinion on their liability to third parties for liabilities of the LLC. 16

10 10 Obligations to Make Payments and Contributions TriBar suggests the following form of opinion on purchasers' obligations to make payments and contributions to an LLC [Under [name of LLC statute under which LLC was formed],] Purchasers have no obligation to make further payments for their purchase of LLC Interests or contributions to LLC solely by reason of their ownership of LLC Interests [or their status as members of LLC] [except as provided in their Subscription Agreements or the Operating Agreement] [and except for their obligation to repay any funds wrongfully distributed to them]. 17 Contractual Obligations May Be Covered: The bracketed exception to this opinion for obligations arising under the Subscription Agreements and the Operating Agreement excludes from the opinion's coverage purchasers' obligations to make future payments or contributions to the LLC under those documents. Opinion recipients sometimes ask opinion givers to address Purchasers' obligations under their Subscription Agreements and the Operating Agreement to make the payments and contributions otherwise excluded from the opinion by the bracketed exception. To do so, the opinion preparers could delete the bracketed exception and instead refer to the specific sections of the Subscription Agreements and the Operating Agreement that impose an obligation to make further payments or contributions (i.e., "except as provided in Section of the Subscription Agreements and Section, and of the Operating Agreement"). 18

11 11 Repayment of Wrongful Distributions When giving opinions on Delaware LLCs, some opinion givers, including many Delaware lawyers, include the bracketed exception for wrongful distributions out of concern that the provision of the Delaware LLC Act (Section (a)) exempting members from personal liability for liabilities of the LLC begins with the phrase "except as otherwise provided [in the Delaware LLC Act]" and thus might be read to exclude from the exemption provided by that provision the return obligations of members set forth in Section (b) and Section (c) of the Delaware LLC Act. Delaware lawyers also may include an exception for repayment obligations because their opinions often are not limited to the Delaware LLC Act and, without that limitation, the suggested form of opinion could be read to cover obligations to repay funds to the LLC that arise under other Delaware statutes such as Delaware's fraudulent transfer statute. Other opinion givers do not include this exception because they do not view the obligation under the Delaware LLC Act to repay wrongful distributions to be an obligation to make a payment for the purchase of an LLC Interest or a contribution solely by reason of ownership of an LLC Interest. Moreover, they do not believe that the obligation under the Delaware LLC Act to repay wrongful distributions is covered by the opinion because that obligation depends on a recipient's knowledge that a distribution is wrongful and, therefore, in their view, does not arise solely by reason of a Purchaser's purchase or ownership of LLC Interests. In TriBar's view, an express exception for the obligation of members to repay wrongful distributions is not necessary, but its inclusion is not objectionable. 19 Contrasting Fully Paid and Nonassessable Opinions with the Suggested Opinion: An opinion that LLC Interests are "fully paid" and "nonassessable" does not by its terms convey its intended meaning as clearly as the suggested form of opinion. Moreover, the meaning of "fully paid" and "nonassessable" cannot be ascertained by reference to a statutory definition because LLC statutes, unlike most corporation statutes, typically do not define those terms. "Fully paid and nonassessable" opinion could require numerous exceptions if the operating agreement or subscription agreements require purchasers to make further payments and contributions to LLC after the closing. For these reasons, TriBar does not recommend this form of opinion. Nevertheless, opinions that LLC Interests are "fully paid" and "nonassessable" are not uncommon, and TriBar believes that, when given, the opinion should be understood to have a meaning similar to the meaning of a "fully paid and nonassessable" opinion on the stock of a corporation. 20

12 12 Personal Liability to Third Parties As a supplement to the opinion discussed above, purchasers of LLC Interests sometimes request an opinion, analogous to the opinion often requested by purchasers of limited partnership interests, that as members of the LLC they will have no personal liability to third parties for debts, obligations and liabilities of the LLC. When given, this opinion typically is combined with the opinion on payment for LLC Interests. TriBar suggests that the combined form of opinion be worded as follows: [Under [supply name of LLC statute under which LLC was formed] (the Act ),] Purchasers have no obligation to make further payments to LLC for their purchase of LLC Interests or contributions to LLC solely by reason of their ownership of LLC Interests [or their status as members of LLC] and have no personal liability for the debts, obligations and liabilities of LLC, whether arising in contract, tort or otherwise, solely by reason of being members of LLC [except in each case as provided in their Subscription Agreements or the Operating Agreement] [and except for their obligation to reply any funds wrongfully distributed to them]. 21 Only Obligations Solely By Reason of Being a Member Are Covered: The phrase "solely by reason of being members" in the suggested form of opinion appears in Section (a) of the Delaware LLC Act, and its inclusion in the opinion together with the express reference to the Act in the brackets at the beginning of the opinion is intended to limit the coverage of the opinion to the effect of the Act. In other states the opinion should be tailored to the terminology of the comparable provision of the applicable LLC statute. An opinion on purchasers' personal liability for debts, obligations and liabilities of the LLC that, like the suggested form of opinion, is limited to liability solely by reason of their status as members does not address: (i) a Purchaser's status as a controlling person under the securities laws, environmental laws or other laws, (ii) a Purchaser's service in another capacity, for example, as a manager or an officer of the LLC, (iii) a Purchaser's own tortious or wrongful conduct, or (iv) application of a piercing-the-veil or similar doctrine. Although unnecessary, opinion givers may include language clarifying the point above. 22

13 13 Key Differences Between Opinion Issues for LLCs and Limited Partnerships Formation opinion may be more difficult to give for an LP than an LLC since two persons are needed to form a limited partnership and an LP must have at least one general partner and a different limited partner. (As with an LLC, a due formation opinion may be given if a defect in formation is corrected by the date of the opinion letter.) Validly existing opinion may be more difficult for an LP than an LLC since LPs may more easily dissolve under Delaware law than LLCs. (For example, dissolution may occur upon withdrawal of a general partner). Validly existing opinion also may be more difficult to give for an LP than an LLC since confirming that current partnership agreement was duly adopted may be more difficult. (Often an assumption that the LLC agreement or LP Agreement has been duly authorized, executed and delivered will suffice to excuse the opinion preparer from having to review prior partnership agreements of the limited partnership). In addition, assumptions and/or certificates can be helpful in dealing with potential dissolution issues. 23 Key Differences Between Opinion Issues for LLCs and Limited Partnerships Power/Authorization Opinions for LLCs and LPs are similar. Power opinions only include power under applicable partnership or LLC statute and not other potentially applicable statutes. Typically the general partners may authorize transaction documents unless power is granted to limited partners in the partnership agreement. Often resolutions will not be needed if the power of the general partner to approve transactions and related documents is clear under partnership agreement. Power and authorization opinions are often not as straightforward as corporation power/authorization opinions since LLCs /LPs are often formed for limited purposes and management structures often are different. Giving liability to Third-Parties opinions is more difficult since unlike LLCs, where members are not liable for the debts of an LLC, theoretically, limited partners may be liable for the debts of the limited partnership if they participate in the control of the business of the limited partnership within the meaning of the applicable limited partnership statute. Opinions are often given that state that Limited Partners will not be deemed to be participating in the control of the business of the Limited Partnership within the meaning of the Delaware LP Act if as limited partners of the Limited Partnership, they take no action other than those permitted by the Partnership Agreement. 24

14 14 This presentation and the material contained herein are provided as general information and should not be construed as legal advice on any specific matter or as creating an attorney-client relationship.