The governance of publicly traded limited liability companies

The limited liability company is not only a widespread business form for non-listed firms but also is used by listed companies. There were 20 publicly traded Delaware LLCs in September 2013. Given the policy of the Delaware legislators and courts to give a 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 20 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 and entrench their control rights, but they included provisions in the operating agreements which 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 practices, market forces and the standardization of the governance structures of listed LLCs can be substitutes for legal rights. As predicted in the theory, publicly traded LLCs used different combinations of contractual rights and of the mentioned factors to make their IPOs attractive for investors.