Uniform Protected Series Act
Caution State Law Variances!
SECTION 304. MANAGEMENT.
(a) A protected series may have more than one protected-series manager.
Reporter's Comment to Subsection (a) – If a protected series is managed by its associated members, each associated member fits the definition of "protected-series manager". See Section 102(9) (defining the term).
JayNote: When it comes to management issues, it may be easier to think of a protected series as sort of a Mini-Me of an ordinary LLC. Thus, subsection (a) provides that a protected series can have multiple managers, just like an ordinary LLC. Also, just like an ordinary LLC, there is no statutory qualifications for who may act as the manager, i.e., the manager need not be an associated member of the protected series, or even a member of the series organization. To the contrary, a manager of a protected series can be a total outsider to the protected series and the series organization. This would be the case where, for instance, the series LLC is used as the framework for a hedge fund family, the protected series are individual hedge funds, and the managers of the protected series are non-investor outside financial advisors.
(b) If a protected series has no associated members, the series limited liability company is the protected-series manager.
Reporter's Comment to Subsection (b) – Subject to the operating agreement, this provision applies not only when a protected series is established but also at any other time.
EXAMPLE: When established, Protected Series 1 of XYZ, LLC ("PS-1") has four associated members. The operating agreement is silent on how PS-1 is to be managed, and the relevant limited liability company act provides for member management as the default rule. Accordingly, PS-1 is member-managed and remains so as long as PS-1 has any associated members. For various reasons, all four associated members eventually cease to be associated. Under this subsection, XYZ, LLC becomes the protected-series manager. If later a member becomes an associated member, Subsection (b) no longer applies.
JayNote: Subsection (b) provides that the series organization is the default manager of a protected series.
(c) Section 108 applies to determine any duties of a protected-series manager of a protected series of a series limited liability company to:
(1) the protected series;
(2) any associated member of the protected series; and
(3) any protected-series transferee of the protected series.
Reporter's Comment to Subsection (c) – "Duties" includes all duties, including fiduciary duties. The reference to "any duties to … any associated member of the protected series, or any protected-series transferee of the protected series" does not imply that such duties necessarily exist. The use of "[a]ny" is significant. Moreover, the reference does not override the distinction between direct and derivative claims. See subsection (f).
JayNote: Extrapolation provision to ULLCA § 108.
(d) Solely by reason of being or acting as a protected-series manager of a protected series of a series limited liability company, a person owes no duty to:
(1) the company;
(2) another protected series of the company; or
(3) another person in that person's capacity as:
(A) a member of the company which is not an associated member of the protected series;
(B) a protected-series transferee or protected-series manager of another protected series; or
(C) a transferee of the company.
Reporter's Comment to Subsection (d) – The phrase "in that capacity" is crucially important. A person who is series manager of two protected series of a series limited liability company, or a manager of the company and a series manager of one of the protected series of the company is acting as an agent for two different principals. Absent an agreement with both principals after full disclosure, the agent is in a double bind:
The mere existence of a dual agency violates the duty of undivided loyalty. Moreover, the dual agent risks specific conflicts of duty as to a myriad of individual issues. The fact that these individual conflicts may be irreconcilable does not justify the agent ignoring one duty or the other. Rather, if any such specific conflict materializes, the agent is destined to be liable to one principal, the other, or both.
Daniel S. Kleinberger, AGENCY, PARTNERSHIP AND LLCS: EXAMPLES AND EXPLANATIONS (5th ed.; Wolters Kluwer; 2017) § 4.1.1-C-4 (No Acting for Others with Conflicting Interests).
The following example shows one method of addressing the inevitable conflict when one person is protected-series manager for more than one protected series of a series limited liability company.
EXAMPLE: A-Z LLC ("A-Z") has five protected series – A-Z LLC – Protected Series 1, A-Z LLC Protected Series 2, etc. Per the operating agreement, A-Z is the protected-series manager of each of the protected series. To alleviate the "dual agent" problem, the operating agreement provides:
If this agreement, or [the applicable limited liability company act] requires or authorizes A-Z to make a decision that has the potential to benefit one protected series of A-Z to the prejudice of another protected series of A-Z, or to benefit A-Z to the detriment of a protected series of A-Z, A-Z is not liable for damages under this agreement or [the limited liability company act], whether the claim is in law or equity, if A-Z acts in the matter with due care and makes the decision with:
(1) the honest belief that the decision serves the best interests of A-Z or one or more protected series of A-Z; and
(2) the reasonable belief that the decision breaches no right under this agreement or [the limited liability company act] (as permissibly varied by this agreement) of:
(ii) a protected series of A-Z; or
(iii) a member of A-Z, whether in the capacity of a member of A-Z or an associated member of a protected series of A-Z.
JayNote: At first glance, subsection (d) appears to be a broad exculpation of the duties of a series manager which might be owed to the series organization or other protected series, but a closer examination (and the Reporter's Comment) reveals that it is anything but that. The phrase beginning subsection (d), "Solely by reason of being or acting", implies that other circumstances may exist to impose such broader duties upon a manager of a protected series. For example, if a protected series is in severe financial distress, it could very well be the duty of the manager to notify the series organization if the latter could potentially be drawn into a bankruptcy of the protected series.
(e) An associated member of a protected series of a series limited liability company has the same rights as any other member of the company to vote on or consent to an amendment to the company's operating agreement or any other matter being decided by the members, whether or not the amendment or matter affects the interests of the protected series or the associated member.
Reporter's Comment to Subsection (e) – A default rule, this provision precludes any claim to the protected-series equivalent of "class voting."
JayNote: In line with the tranche characterization of a protected series, subsection (e) says that an associated member of a protected series has basically the voting same rights as any other member of the series organization.
But, and it is a really huge but, this is one of those provisions that can be "toggled off" in the Operating Agreement, such that an Associated Member in a protected series can be given either less or more rights in the series organization than ordinary members of the series organization. In other words, depending on how the Operating Agreement is drafted, not all the members in the series organization barnyard may end up being equal in terms of voting rights.
(f) [Cite the derivative claim provisions of this state's limited liability company act] apply to a protected series in accordance with Section 108.
Reporter's Comment to Subsection (f) – A state that has enacted Uniform Limited Liability Company Act (2006) (Last Amended 2013) would cite Sections 801 to 806.
JayNote: Extrapolation provision. If you are having to actually analyze subsection (f) and the potential integration of derivative claim provisions in relation to a series LLC, it is strongly suggested that you have at the ready a half bottle of aspirin and a full bottle of Scotch.
[(g) An associated member of a protected series is an agent for the protected series with power to bind the protected series to the same extent that a member of a limited liability company is an agent for the company with power to bind the company under [cite the statutory apparent authority provision of this state's limited liability company act].]
Reporter's Comment to Subsection (g) – See the Legislative Note to this section. For a discussion of statutory apparent authority versus common law actual and apparent authority, see Uniform Limited Liability Company Act (2006) (Last Amended 2013), Section 301(a), cmt.
Reporter's Comment to Section 304 - This act approaches management rights and duties in a protected series in three ways:
Legislative Note: Uniform Limited Liability Company Act (2006), Section 301 eliminated the concept of "statutory apparent authority", and the 2013 amendments took the same approach. For an enacting state whose limited liability company act retains statutory apparent authority, subsection (g) provides an associated member the same statutory apparent authority to bind a protected series that the limited liability company act provides for a member to bind a limited liability company. A state that enacts subsection (g) also should include the subsection (g) in Section 107(a), which lists provisions of this act whose effects the operating agreement may not vary.
JayNote: Subsection (g) is in brackets, meaning that it is an optional provision for a state to adopt or reject. Basically, subsection (g) says that if state law allows a member of an ordinary LLC to bind that LLC, then by extrapolation a member of a protected series would have the same powers.
But note that many LLCs are often "member managed" and have no appointed manager. To do the same with a protected series seems foolhardy, and may not even be in those member's best interests since the power to manage likely evidences the existence of broader, and probably fiduciary, duties to the series organization and other protected series, i.e., a really bad idea.
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