Academic journal article Journal of Corporation Law

LLCs and the Private Ordering of Dispute Resolution

Academic journal article Journal of Corporation Law

LLCs and the Private Ordering of Dispute Resolution

Article excerpt

I. INTRODUCTION II. THE SPREAD OF DISPUTE RESOLUTION PROVISIONS TO BUSINESS ENTITIES III. METHODOLOGY IV. EMPIRICAL RESULTS: DISPUTE RESOLUTION PROVISIONS IN LLC OPERATING    AGREEMENTS    A. Choice of Law  801    B. Choice of Forum: Exclusive Forum and Mandatory Arbitration       1. Exclusive Forum Clauses       2. Mandatory Arbitration    C. Service of Process    D. Books and Records    E. Procedural Rules       1. Fee-Shifting and Other Cost Allocation       2. Jury Waivers    F. Summary    G. Relationship to Exculpation and Waiver V. IMPLICATIONS VI. CONCLUSION 


An emerging question in U.S. business law is the extent to which the organizational documents of a business entity may set the rules for resolving internal disputes. Contracting about dispute resolution is a routine aspect of commercial contracting. The parties may select where disputes are resolved or specify particular aspects of dispute resolution, such as access to a jury or allocation of costs. Until recently, however, private ordering of litigation procedures within business entities was often overlooked. This changed when companies began to adopt provisions in corporate charters and bylaws that limited shareholder litigation by restricting the courts in which parties could litigate or by requiring unsuccessful plaintiffs to pay the other side's costs.

On the one hand, terms that eliminate traditional dispute resolution procedures have the benefit of reducing litigation expenses and streamlining dispute resolution, potentially making the firm more valuable. on the other hand, terms that restrict the ways in which owners can hold managers accountable could open the door to greater management agency costs that devalue the firm. The controversial use of these terms in corporations ultimately prompted a legislative response by Delaware that restricted the use of fee-shifting and mandatory arbitration clauses in Delaware stock corporations--the need to constrain agency costs and protect shareholders' access to the courts apparently outweighed the potential efficiencies that these terms promised.

Missing from this discussion is the extent to which non-corporate business entities set ex-ante rules for resolving disputes among their entity's constituents. Non-corporate entities bridge the two chapters in the story of the spread of provisions that alter the dispute resolution process, as they involve both explicit contracting and the use of a business form. This Article begins to map this uncharted area with an empirical study of the practice of limited liability companies (LLCs).

LLCs are a ubiquitous and growing form of business organization, with more than two million LLCs in the United States. (1) Despite the prevalence of LLCs, the terms under which they operate are largely unknown and understudied, in part because the operating agreements of privately owned LLCs are not filed or otherwise broadly available. This Article addresses this problem by using an original data set of privately owned LLC governing documents developed by one of the authors. (2) Within this body of privately owned LLC operating agreements, this Article identifies and charts terms that set the rules for resolving disputes among the LLC's constituents: members, managers, and the entity itself. In doing so, it provides a baseline for the study of dispute resolution in LLCs and the use of arbitration in this context, as well as illustrating with concrete examples the range of litigation provisions that could be used within corporations and other business entities.

The Article begins in Part II with a brief overview of the emerging use of provisions to govern disputes within business entities, particularly stock corporations. Part III details the methodology and the development of the data set. Part IV reports the results, and Part V offers implications from the analysis for the study of LLCs, corporations, and business organizations more broadly. …

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