New Legislation Removes LLC Agreements from the Statute of Frauds
One of the hallmarks of the Delaware Limited Liability Company Act (the "Delaware LLC Act") is its flexibility. Indeed, the Delaware LLC Act seeks “to give maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements.” To that end, the Delaware LLC Act expressly permits “written, oral or implied” LLC agreements, and generally allows parties to enforce unwritten, unsigned LLC agreements.
In October 2009, however, the Delaware Supreme Court was called upon in the case of Olson v. Halvorsen to review of the application of the statute of frauds to LLC agreements. Construing the Delaware LLC Act and the statute of frauds together, and finding that the General Assembly did not clearly intend the Delaware LLC Act to render the statute of frauds inapplicable, the Delaware Supreme Court held that the statute of frauds does, in fact, apply to LLC Agreements. As a result, according to the Delaware Supreme Court, the statute of frauds prevents enforcement of oral LLC agreements that require more than one year to complete.
It appears that this outcome is not the one intended by the Delaware legislature in drafting the Delaware LLC Act. In light of the Olson decision, on June 10, 2010, the Governor signed House Bill No. 372, which (in part) amends Section 18-101(7) of the Delaware LLC Act to provide “[a] limited liability company agreement is not subject to any statute of frauds…” (emphasis added).
Furthermore, although the Olson decision related solely to limited liability companies, the legislature made similar amendments to the Delaware Partnership Act and the Delaware Limited Partnership Act, clarifying that the operating agreements of such entities are likewise exempt from any statute of frauds.
These amendments will go into effect on August 2, 2010.
