The 'Puts' of the Company's Contract: Unlocking Unpreventable Problems of Private Ordering in Limited Liability Companies

Lecia Vicente
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Lecia Vicente: University of IL

Working Papers from University of Illinois at Urbana-Champaign, College of Business

Abstract: This essay applies principles of process analysis to the study of bottlenecks in the limited liability company, as a result of bargaining failures or problems of private ordering in these companies. This essay focuses on governing the operating agreement or the company's contract of private limited liability companies (LLCs) to overcome bargaining failures deriving from changes in the ownership structure of these companies after membership interests are sold without the consent of the company's other members. The main premise on which the governance of the company's contract relies on boils down to one fundamental assertion. The sale of legal products ought to equal a minimum of supply and demand. In other words, from the normative viewpoint, the coordination of the supply and demand sides of legal provisions ought to be the perspective from which legal design both at the legislative and market levels is understood. Thus, managing bargaining problems in the LLC whenever there is an un-consented transfer of membership rights provides the context of this essay. The coordination of supply and demand of legal products provides the perspective. In this light, the main goal of this essay is to provide contractual mechanisms that allow the right legal products and resources to be at the right place at the right time so as to maximize these companies' profitability and their shareholders' wealth. The products are corporate default rules. Resources include people (members, managers or directors, officers), information, money, or a combination of all these elements. This essay focuses on the contractual features of the LLC and their members' freedom of contract. There is a puzzling side to the freedom of contract that the members of these companies enjoy. They are free to set the regulatory framework of the company. However, more often than not, members of these business organizations have not been able to surmount bargaining failures that come as a result of lack of commitment and social expertise on their side, particularly when mutual dependence among members and the managing board is very strong and the level of relational embeddedness is very high.

Date: 2015
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