Must a Delaware LLC have a manager?
Steven D. Goldberg, Esq. Wilmington, DE
sgoldberg@stevendgoldberg.com
http://www.stevendgoldberg.com
Contact me if you need assistance in forming/organizing a Delaware business entity or any matter of Delaware law. Delaware Forms and Publications are available at http://www.delawarellclaw.com
Recently I have noticed a number of searches reaching this site asking whether a Delaware LLC must have a manager. In previous posts I have written about the duties of the manager of a Delaware LLC and that the LLC must have a company agreement, however I have not explored the question of whether it must have a manager.
The short and direct answer is NO.
Section 18-101(10) defines the manager as : (10) “Manager” means a person who is named as a manager of a limited liability company in, or designated as a manager of a limited liability company pursuant to, a limited liability company agreement or similar instrument under which the limited liability company is formed. The definition is somewhat of a tautology, it does not explain either the necessity or function of the manager.
Somewhat more instructive is 18-402:
§ 18-402. Management of limited liability company.
Unless otherwise provided in a limited liability company agreement, the management of a limited liability company shall be vested in its members in proportion to the then current percentage or other interest of members in the profits of the limited liability company owned by all of the members, the decision of members owning more than 50 percent of the said percentage or other interest in the profits controlling; provided however, that if a limited liability company agreement provides for the management, in whole or in part, of a limited liability company by a manager, the management of the limited liability company, to the extent so provided, shall be vested in the manager who shall be chosen in the manner provided in the limited liability company agreement. The manager shall also hold the offices and have the responsibilities accorded to the manager by or in the manner provided in a limited liability company agreement. Subject to § 18-602 of this title, a manager shall cease to be a manager as provided in a limited liability company agreement. A limited liability company may have more than 1 manager. Unless otherwise provided in a limited liability company agreement, each member and manager has the authority to bind the limited liability company.
The default rule is that unless you otherwise provide in your LLC company agreement, the management of the company is vested in its members, like the case of a general partnership, and the members vote upon management decisions “in proportion to the then current percentage or other interest of members in the profits of the limited liability company owned by all of the members.” Those members holding more than 50% of the interest have the absolute right to control the LLC, subject the the “implied contractual covenant of good faith and fair dealing”, the terms of the LLC agreement and any fiduciary duties applicable to the members. Delaware does not provide any so called “minority rights.”
A company managed it members is referred to as a member managed company. In a member managed company it is often the case that the company agreement will provide that less than all of the members will have the day to day authority to manage and bind the company. Some agreements will provide for a board of directors or board of managers who will set policy. Some agreements will designate one of the members to serve as the “managing member”. The term managing member is not found in the Act. It is often the case that the managing member is not designated as a manager as such person does not, under the agreement, have the full power and authority of a manager under 18-402 and 404.
If the agrement provides for the managment of the company by one or more managers, the agreement may give the manager or managers absolute authority to manage the company without any participation of the members, similar to a limited partnership. In other situations the authority of the manager may limitd such that he may not take specified actions without the prior consent of a stated percentage of the interests approving such actions. These specified actions are often referred to a “major decisions.” If the agreement call for more than one manager, it must also provide for rules to govern their actions and to provide a remedy if the managers deadlock.
A manager (as well as a member) need not be a natural person, but may be another LLC, corporation or other business entity. A single member LLC may also have a manager. The manager of any LLC, single member or multi-member need not be a member. Under Section 18-403, a manager may make a capital contribution to the company and share in the profits and distributions as a member. A person who serves both as a manager and member is subject to the rights and restrictions of both.
I continue to emphasize that proper drafting is essential. The company agreement is a contract governed by Delaware law and it is necessary for a Delaware attorney to review the agreement for compliance with Delaware law before execution. I have an active Delaware business practice as well as a practice in Delaware’s State and Federal courts. If you or your client have a business matter or a matter which you wish to litigate in Delaware or has a matter pending in Delaware, we would appreciate the opportunity to consult with you regarding our representation. Please remember that we do not accept representation without a written engagement letter.
