Law in the Marketplace: Ronald Reagan and New Hampshire LLCs

For the Monitor
Published: 5/14/2021 2:02:53 PM

New Hampshire’s LLC act was radically amended in 2013. I chaired the revision. It’s not an exaggeration to say that by far the main source of the text of the New Hampshire Act was the Delaware Limited Liability Company Act. The main difference between the two acts is that the Delaware Act is written in legalese, while the New Hampshire Act is written in English. You don’t have to be a lawyer to understand the New Hampshire Act; to understand the Delaware Act, you do have to be a lawyer.

But although our committee wrote our revision in English, we copied from the Delaware Act (and translated into English) every provision we thought might be useful in New Hampshire (with the exception, as New Hampshire LLC lawyers will know, of the Delaware Act’s “protected series” provisions). This means dozens of statutory provisions. But above all, we copied the core Delaware Act provision. That provision reads as follows:

It is the policy of this [Act] to give maximum effect to the principle of freedom of contract and to the enforceability of [operating] agreements.

And the Delaware legislature meant it. For example, what is arguably the second most important provision in the Delaware Act flows directly from the first: It provides that in their operating agreement, the members of multi-member LLCs may completely eliminate the two classic fiduciary duties — the duties of care and of loyalty. Needless to say, while this provision confers vast freedom of contract on LLC founders, it can also readily serve as the basis for serious misconduct by LLC managers and majority members against minority members. And adversely affected minority members may well have no legal defense.

Why does the Delaware Act contain these provisions? I can’t speak for the other members of our drafting committee, but in my view, the person to thank is Ronald Reagan. As you may recall, Reagan, who was president from 1981 to 1989, was the first major political figure in the 20th century to proclaim that the federal government is not the solution; it’s the problem. Indeed, by far his most famous statement, which he made on August 12, 1986, was this: “The nine most terrifying words in the English language are: I’m from the Government and I’m here to help.”

The Delaware legislature enacted the Delaware Act in 1993, and the committee that drafted the act undoubtedly began its work as early as 1992. The purpose of the Delaware Act — which I’m certain Reagan would have heartily approved — is to completely prohibit the law, the government (whether federal or state) and even the courts from restricting the terms of deals among LLC members. As its text makes clear, the mortal enemy of the Delaware Act is governmental paternalism — which Reagan loathed. And one could argue, only a little unfairly, that the core philosophy of the Delaware Act is “might is right.”

Is absolute freedom of contract such a great thing for New Hampshire businesses? Should our committee have included the above Delaware Act provisions in the New Hampshire LLC Act? What if a provision of a New Hampshire LLC operating agreement resulting from fraud, coercion, or other serious misconduct by one or more members seriously injures other members?

Will New Hampshire override the provision and protect adversely affected minority members despite Ronald Reagan? Maybe. But the misconduct better be gross.

(John Cunningham is a Concord, NH lawyer of counsel to McLane Middleton, P.A. His practice is focused on LLC formations, general business and tax law, advising clients under IRC section 199A, and estate planning. His telephone number is (603) 856-7172, his e-mail address is lawjmc@comcast.net, and the link to his website is www.llc199A.com.)




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