LLCs and the Private Ordering of Dispute Resolution

Abstract

An emerging question in U.S. business law is how the organizational documents of a business entity set the rules for resolving internal disputes. This practice is routine in commercial contracts, which may specify where or how disputes must be resolved. Recent use of litigation provisions in corporation charters and bylaws have sparked controversy, ultimately leading to legislative action to preserve shareholder suits from contractual waiver. Yet despite accounting for the majority of business organizations and sharing features with corporations, non-corporate business entities and their internal dispute resolution process have been largely ignored. How do these non-corporate entities set ex ante rules for resolving disputes among their constituents? This paper begins to map this uncharted area with an empirical study of the practice of limited liability companies (LLCs). We find widespread use of contract to alter the default dispute resolution practices. This study helps not only to inform the evolving statutory and judicial framework for LLC regulation, but also to predict how corporations may respond in the future to recent judicial and legislative changes.

Keywords: LLCs, operating agreements, litigation, fee shifting, dispute resolution, arbitration, forum

JEL Classification: K22, K41