Bifurcating Management and Economics in LLCs

New York Real Estate Journal recently published an article authored by Co-Chair of Olshan’s Real Estate Law practice Thomas Kearns entitled “Bifurcating Management and Economics in LLCs” (subscription required). “Limited Liability Company (LLC) statutes are known to expressly permit business people to separate the right to manage a particular LLC from the right to receive the profits of the business,” Tom writes. “LLC managers may be appointed who have no or limited rights to receive the profits of the LLC.” However, will a court upend the careful plans of the business people and grant management rights to the majority profits holder in the name of equity? The recent Bich v Bich New York court opinion interpreting Delaware LLC law answered with a resounding "No." While the facts of the case seemed favorable to the holder of a 99% interest in profits, the court flatly refused to grant the 99% holder any management rights. “Management provisions in LLC agreements are often written to permit third party managers who hold no (or minority) economic interest to continue to manage the LLC no matter what happens to the economic interests in the LLC,” Tom explains. Examples include: where for IRS Section 1031 exchange purposes, parties use separate LLCs to purchase a replacement property as tenants in common with different economic interests among the TICs but where all of the LLC TICs grant management rights to one party; the express or implied promise to a younger partner to permit him or her to manage the LLC after the death of the older majority profits holder; and where the seller of a part of an assemblage of properties wants to keep ownership of a share of the new project but the overall project developer insists on full management rights. He concludes, “The Bich v Bich precedent should assist business people and courts in confirming that those arrangements are all acceptable even where full clarity may be lacking.”