Our LLC Act was modelled closely on Delaware’s popular limited liability statute and includes many of the same features that have made LLCs a prevalent, and comfortable, corporate vehicle in the United States.
Much ink has already been spilt highlighting the flexibility accorded to LLCs in Bermuda but this article focuses on certain features of LLCs that have taken centre stage in highlighting that flexibility in our recent experience.
While the LLC Act does contain basic provisions regarding how an LLC is formed and managed, it is also highly deferential to the desires and intentions of the LLC’s members as expressed in the governing LLC agreement. In this way, LLCs are similar to limited partnerships — with the added benefit of limited liability for all of the members and separate legal personality for the LLC itself.
Unlike limited partnerships, LLCs are not required to have the equivalent of a general partner. In contrast to a limited partnership’s management, which is vested in the general partner(s), or a company’s management, which is vested in its board of directors, the default position under the LLC Act is that the power to manage an LLC’s business is vested in its members in proportion to their interests in the LLC.
If members don’t want to partake in management or desire a more traditional corporate structure, the LLC agreement can accommodate that. An agreement can provide for a slate of “managers” or, if the members wanted they could even call them “directors”, to be appointed by the members — none of which need to be members themselves. It can also provide for the usual officers to carry on the day-to-day operations of the LLC’s business.
Once the members of an LLC have determined the management structure of the LLC they can also determine the scope of the duties and powers afforded to such managers and officers.
Unlike the Companies Act, the LLC Act allows for a manager’s duties, including fiduciary duties, to be expanded, constrained or eliminated (with the exception of permitting fraud or dishonesty). This creates the flexibility to allow a manager to act with a view to the best interests of its appointing member, rather than in the best interests of the LLC as a whole.
This is not possible in the context of a company where directors must act in the best interest of the company and not favour the interests of one member/shareholder over another.
An LLC agreement may also delineate the powers of the LLC’s managers — including incorporating member protections and consents directly into the constitutional documents of the LLC, rather than, as is often seen regarding a company, in a shareholders agreement.
In contrast to a company limited by shares, the default under the LLC Act is that an LLC’s members hold interests in the LLC corresponding to the value of the capital that they’ve contributed.
That said, you won’t be surprised to hear that an LLC’s capital structure can be tailored to reflect its members’ wishes.
Sometimes the question is asked as to whether the members can hold “shares” or “units” in the LLC. The LLC agreement can provide for that. We have seen situations where an LLC’s members needed it to issue shares at a set issue price — the flexibility of the LLC Act allowed that LLC’s capital structure to be tailored to its members’ needs.
A bespoke capital and management structure could include features from both limited partnerships and companies — including delineating how and when securities are issued and for what issue price; how and when votes occur, including who gets to vote and on which matters; how profits and losses are allocated; how distributions are determined; and how and when fees and expenses are paid or allocated.
Although an LLC agreement could recreate the capital structure of a company limited by shares, such a structure would not be subject to all of the same statutory requirements regarding distributions and dividends that companies are subject to under the Companies Act.
The LLC Act doesn’t recognise the concepts of “share capital”, “share premium” or “dividends”, all terms exclusive to companies.
As such, the LLC Act doesn’t include different procedures for reducing capital, distributing share premium, or paying dividends. Instead, it has one solvency focused test that must be met in order to make distributions to an LLC’s members: an LLC’s manager(s) must not have reasonable grounds to believe that the LLC would be unable to pay its liabilities as they become due following the distribution.
We anticipate that Bermudian LLCs will feature in more transactions as the market continues to grow more accustomed to their use and features.
And, as more LLCs are formed in Bermuda, we expect that their flexibility and bespoke nature will be utilised to full effect.