Research Handbooks in Corporate Law and Governance series
Edited by Robert W. Hillman and Mark J. Loewenstein
One frequently cited distinction between alternative entities—such as limited liability companies (LLC) and limited partnerships (LP)—and their corporate counterparts is the greater contractual freedom accorded alternative entities. Eschewing the supposedly rigid mandatory default rules that characterize American corporate law statutes, the statutes that authorize alternative entities declare as public policy the goal of granting the broadest contractual freedom possible, and permit the parties to the governing instrument to waive any of the statutory or common law default principles of law and to shape their own relationships. Consistent with this vision, discussions of alternative entities tend to conjure up images of bargaining similar to what occurs between sophisticated parties bargaining over a commercial agreement, such as a joint venture or licensing agreement, with the parties tailoring a contract to the unique features of their relationship. As judges who collectively have over 20 years of experience deciding disputes involving alternative entities, we use this chapter to surface some questions regarding the extent to which this common understanding of alternative entities is sound. In particular, we question whether this understanding diverges from reality in precisely the context in which it is most important: namely, when alternative entities are used as vehicles to raise capital, either directly from ordinary investors or from accredited investors such as pension funds, universities, or foundations.