Recently I’ve been exploring the gray areas of categories-of-contract-language analysis. (For example, go here for my trial balloon regarding “language of intention.”) Well, it’s time to consider another such issue.
In my seminars and my course at Penn Law, we consider a series of “before” and “after” examples designed to highlight categories-of-contract-language issues. Here’s one of those examples, drawn from a limited-liability-company operating agreement:
The business and affairs of the Company will be managed by a single manager.
What category of contract language is that? Or rather, what should it be? And what should the verb be?
It could be language of obligation. To make that clear, I’d change the passive voice to active voice and use shall instead of will. [Updated Dec. 23, 10:00 a.m. EST: But that wouldn’t make sense, even if the manager is party to the contract, as it’s phrased in terms of a generic manager, rather than a particular manager.]
It could be language of policy, which is used to state the ground rules of the contract, as opposed to provisions relating to actions, whether by a party or someone else. (Here’s one example of language of policy: This agreement is governed by New York law. Here’s another: This agreement terminates on August 23, 2012.)
But language of policy, using will, doesn’t fit either. Simply stating that a manager will manage the LLC doesn’t make it so. Instead, that’s a circumstance that will or won’t happen, depending on actions taken by those involved.
So I offered the following language of obligation as an alternative:
The Members shall appoint a single manager to manage the Company.
The language-of-performance equivalent would be the following:
The Members hereby appoint John Doe to manage the Company.
My language-of-obligation version prompted a response by Michael Ray Smith, a solo practitioner based in Fishers, Indiana, with whom I shared my “before” and “after” examples. (Michael is an adjunct professor at the Indiana University Robert H. McKinney School of Law, where he teaches the course “Basic Contract Drafting.”) Here’s what Michael had to say:
While one could certainly replace the original sentence with the revised sentence, they do not really serve identical purposes. Assuming the sentence is from the operating agreement of a limited liability company, the original sentence is a declaration of the status of the LLC as a manager-managed LLC rather than a member-managed LLC. That serves a different purpose than the language obligating the members to appoint a manager. In the revised sentence, the status of the LLC as a manager-managed company is merely implied, not declared outright. My LLC operating agreements contain both provisions, and I do not think they are redundant. The declaration that the company is manager-managed as different from the obligation to appoint a manager. Moreover, the two provisions appear in different parts of the contract. The declaration that the company is manager-managed appears very early. The procedures for appointing the manager appear considerably later.
When in doubt, consult the statutes. The Delaware Limited Liability Act says “A person may be named or designated as a manager of the limited liability company as provided in § 18-101(10) of this title.” And here’s what § 18-101(10) says:
“Manager” means a person who is named as a manager of a limited liability company in, or designated as a manager of a limited liability company pursuant to, a limited liability company agreement or similar instrument under which the limited liability company is formed.
So nothing in the statute requires “a declaration of the status of the LLC as a manager-managed LLC rather than a member-managed LLC.” Instead, you just appoint a manager. So for purposes of a Delaware limited liability company, my language of obligation and my language of performance both work, and I don’t have to worry about what category of contract language I’d use to declare management status.
But that’s Delaware; other states might adopt a different approach. In particular, Michael pointed out that the Indiana statute says that if you want your limited liability company to be member managed, you have to include in the articles of organization a statement to that effect. If I were being a categories-of-contract-language purist, I’d accomplish that with the following language of policy:
The Company is a manager-managed limited liability company.
The fill-in form offered by the Indiana secretary of state’s office uses instead “The Limited Liability Company will be managed by a manager or managers.” (Note the suboptimal X or Xs structure.) And that brings us back to my starting point.
[The following paragraph was in the original version of my post, but I’ve deleted it, because I decided that my language-of-policy version isn’t clunky, darn it!
I’m not going to insist that my language-of-policy version is superior. In fact, it’s clunky. But I think that even in this case, categories-of-contract-language analysis has served a purpose. It suggests that using language of obligation or language of performance to address appointment of one or managers is the simplest and clearest way to go about it. If a statute requires you to do otherwise, necessarily you’re going to have to make the best of a less-than-ideal job.]