The Delaware Supreme Court recently issued a decision that effectively requires all limited liability company agreements (“LLC Agreements”) for Delaware LLCs to be in writing. The decision holds that LLC Agreements are subject to Delaware’s Statute of Frauds, which requires certain types of contracts to be in writing in order to be enforceable. This decision appears to contradict the express language of Section 18-101 of the Delaware Limited Liability Company Act (the “Act”), which states that a limited liability company agreement may be “written, oral or implied”
Although clients typically commit an agreement to writing, some small or relatively newly formed LLCs operate pursuant to an oral understanding or implied course of dealing among the members. For example, members of an LLC may have orally agreed upon or may have simply accepted over time a certain distribution of profits and losses, or assumed that voting rights were distributed among the members in a certain way.
A member seeking to assert his or her rights in court, however, could not rely upon the oral agreement or implied understanding as an LLC Agreement governing the operations of the entity, despite the language of the Act.
This decision reinforces the importance of putting an LLC Agreement in writing as early as possible, and having all members sign the agreement. Business partners or investors in the first stages of an exciting business opportunity often do not foresee (or do not consider) the possibility of a later disagreement and the potential need to assert their respective rights, but putting the terms governing the operations of an LLC in writing at an early stage protects the interests of everyone involved.