Wednesday, October 5, 2011

Kentucky versus Delaware

Kentucky versus Delaware –
Amending the Operating Agreement

I always enjoy hearing that businesses are organized in Delaware because the law there (as contrasted with that in Kentucky) is so settled.  While it is true that the Delaware Courts have given us a deep body of case law, it does not follow that the Delaware law has resolved questions that Kentucky has not.
Take, for example, the fundamental question of amending an LLC’s operating agreement.  Under Kentucky law since 1998, unless otherwise provided in writing, the agreement may be amended by a majority-in-interest of the members.  KRS § 275.175(2)(a).
Surely, if this point is so well settled in a “fly over” state like Kentucky, it must be equally as well resolved in Delaware.  That is not, however, the case.
It was only in 2011 that Delaware adopted a statutory default rule of the unanimous approach of the members in order to amend the operating agreement.  Further, this rule is applicable only to those LLCs whose certificate of formation is filed on or after January 1, 2012.   Delaware first adopted its LLC Act in 1992.  For all LLCs formed from that date through the end of this year, there is no statutory default rule as to the requirement to amend the operating agreement.  The Delaware Bar is in disagreement as to what is today the rule, namely all members or all parties.  Assume a non-member manager of a Delaware LLC.  Some argue that the manager’s approval is required to amend the operating agreement; others say the manager’s consent is not necessary.  The Delaware courts have not addressed the question.
Things are not always more clear in Delaware.

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