The Governance of Publicly Traded Limited Liability Companies

Abstract

The limited liability company is not only a widespread business form for non-listed firms but also is used by listed companies. There were twenty publicly traded Delaware LLCs in September 2013. Given the policy of the Delaware legislators and courts to give maximum effect to the principle of freedom of contract in LLCs, the use of this business form by publicly traded companies can jeopardize traditional corporate governance mechanisms used in listed corporations and create risks for investors in stock markets. The author analyzed the governance agreements and structures of twenty publicly traded LLCs to establish the demand for contractual freedom in LLC governance and examine the practice of investor rights in listed LLCs. The study shows that the founders of publicly traded LLCs extensively relied on the default statutory rules to strengthen their decision-making rights, entrench control, and limit the role of fiduciary duties of care and loyalty. But they included provisions in the operating agreements that could balance the rights of controlling and minority members. The study also found that other factors - such as ownership structure, dividend policies, board composition and board practices, market forces, and the standardization of the governance structures of listed LLCs - can be substitutes for legal rights. As predicted in theory, publicly traded LLCs used different combinations of contractual rights and the mentioned non-legal factors to make their IPOs attractive for investors.

Keywords: limited liability companies, non-corporate business associations, contract design, investor protection, IPO, corporate governance, financial contracting, partnership taxation

JEL Classification: K220