In a recent article co-authored by Delaware Supreme Court Chief Justice Leo Strine, Jr., and Vice Chancellor J. Travis Laster, entitled The Siren Song of Contractual Freedom, these jurists of import opine on the contractual freedom accorded to Delaware alternative entities – which include limited liability companies (“LLCs”), limited partnerships (“LPs”), and general partnerships (“GPs”), and the potential resulting consequences.
This article is an important read for any individual or entity owning shares in a Delaware alternative entity. Chief Justice Strine and Vice Chancellor Laster note that expansive contractual provisions afforded in an alternative entity setting have led to very complex operating or shareholder agreements, which have a preclusive effect upon raising capital because such lengthy agreements can be difficult for investors to interpret. As the article explains, “when investors try to evaluate contract terms, the expansive contractual freedom authorized by the alternative entity statutes hampers rather than helps.” (emphasis added).
In this vein, members or partners in Delaware alternative entities should consider the effect of the provisions of any operating or shareholder agreement entered into upon the company’s ability to raise capital through outside investors.