My October 29 article, The Trust Protector As Fiduciary, And Why Maybe That Is A Bad Idea, generated a surprising amount of discussion throughout various cyber-communities that deal with estate planning and trusts.
I will not rehash that article, except to say that a Trust Protector is somebody who is empowered to fire a Trustee, as a way of looking out for the Trust and making sure that it stays on the intended course. Ideally, the Trust Protector has little power except to fire a Trustee, and the successor is then appointed according to the Successor Trustee provisions of the Trust Document.
The purpose of this article is to point out that basically the same thing can be done with Limited Liability Companies (LLCs) and Limited Partnerships (LPs), by drafting similar provisions into the Operating Agreement or Partnership Agreement.
For simplicity in writing, I'm just going to refer to LLCs and Operating Agreements, but this all can apply to LPs and Partnership Agreements too.
Modern LLC laws, as embodied in the Uniform Limited Liability Company Act ("ULLCA") and its revisions, are meant to give the parties to LLCs the maximum flexibility to do their deals. In other words, ULLCA provides an expansive framework for deals to be done within LLCs, but with only minimal limitations on the terms of those deals. Even many, if not most, of the default provisions of the ULLCA can be "contracted away" by simply having the Operating Agreement provide otherwise.
Here, we are not talking about taking away any provisions, but instead about adding an additional layer to the LLC that is not found by default within the ULLCA. That additional layer, which I call a "Steering Committee" (but you can call it whatever pleases you) serve for the LLC the same role as that of the Protector in a Trust.
LLCs do not typically have Boards of Directors (though nothing in the ULLCA prohibits such a Board, although the Operating Agreement would be funky) who hire and fire the Executive Officers as with a corporation. Instead, the Members of the LLCs vote to elect Managers, and the Managers have the legal power to run the operations of the LLC on a day-to-day basis.
Members of an LLC can be Managers, and often are -- where all the Members are also Managers by default and without a vote, the LLC is accordingly known as a "Member-Managed LLC". Where the Members are not also all Managers, but instead the Members elect the Managers (which can include Members as Managers), then the LLC is fittingly called a "Manager-Managed LLC".
Unlike corporations, whose Boards of Directors shield the Executive Officers to some degree from the whims of the shareholders, an LLC is designed to be much more personal since the LLC members elect the Managers directly.
However, with the benefits of close relations between Members and Managers comes disadvantages -- if a Manager who is also a Member is not performing satisfactorily, then the firing of that Manager can upset "the deal" and cause problems all around, if not ultimately the dissolution of the LLC.
Similarly, it is human nature that as folks go on in years, people change and these changes can adversely affect business relationships. What might have been a good idea for management in Year 1 might not be such a hot idea in Year 5.
Of course, the Members can always just vote out a Manager, but the personal nature of an LLC can mean that this causes undue difficulties. Okay -- well, not always. Many LLCs have two Members, each owning 50%. If they can't agree, then they get stuck in a deadlock and either nothing happens, thus allowing the problem to fester until it blows up into litigation which wrecks the deal, the LLCs and causes pain and losses to everybody except the lawyers who go to court to get it resolved.
So what to do?
Thus, back to my Steering Committee, which is usually comprised of a couple of trusted people that all the Members agree upon, who have but one power -- they can fire Managers.
As with Trust Protectors, the best practice is to not give the Steering Committee any fiduciary duties or expect it to take any active role, but instead it sits blissfully quiet and often ignorant of the operations of the LLC until somebody alerts them that there might be a problem. At that point, the Steering Committee then leaps into action and, if warranted, fires somebody.
Because the Members agreed up-front that the Steering Committee would have this power, their decision is much more likely to be respected and a solution that is good for the business is thereafter found, as opposed to continued fighting and possible litigation. This is not to say that some Members may not have their feathers ruffled a little bit, but it does allow the LLC itself to continue business as normal while the Members work out their differences without damaging the business.
Ideally, the Steering Committee works just like a Trust Protector -- the Steering Committee fires a Manager, and then the Operating Agreement is consulted to appoint a new Manager if at all.
The difference might come in the deadlock situation, where both Members are also Managers, where neither could live with the other being a Manager. In that case, the Steering Committee might be given the additional power to name a new and independent third-party Manager to run the business until the Members can either work out their differences, one can buy out the other, or they peaceably and in good order liquidate the LLC.
Planners will doubtless come up with their own variants on this theme; as far as I am aware, there is no standard template for such a Committee.
What I would not do is to borrow the nomenclature "Protector" for this office. As described in my previous article regarding Trust Protectors, that vehicle has often been distorted and even badly tortured by some state statutes to essentially make it into a Co-Trustee role, and you wouldn't want all that bad baggage to carry over to what you are doing with the LLC.
So, call the Committee whatever you want, Steering Committee, Company Conclave, Elders of ULLCA, whatever, but don't call it a "LLC Protector" or else some litigator might pick up on that term to everybody's misery.
Many simple LLCs will not need a Steering Committee. The vast majority of LLC Operating Agreements that I draft do not have them. However, in some cases the Steering Committee is a useful tool to have in your hip pocket.
For LLCs that will be attracting investors, for instance, having a Steering Committee comprised of reputable folks can add a degree of safety for investors that if the Managers start to go off-the-reservation, there is somebody they can go to and complain and who have the power to immediately remove the Managers if warranted.
Anyhow, the Steering Committee is an idea to think about; again, something to keep in your hip pocket for the right situation. And it's always nice to have a hip pocket full of ideas.
This article at http://onforb.es/17OLFrZ and http://goo.gl/NV9Eyx
