In most private equity and other leveraged buyout transactions, the acquiring group will create a new legal entity (NewCo) to serve as the acquisition vehicle. NewCo will consolidate capital from the various debt and equity investors, acquire and manage the target business, and facilitate the distribution “waterfall” upon an exit.

In the last 15 years, the limited liability company has become increasingly popular as an investment vehicle for acquisition transactions. Certain types of investors (e.g., tax-exempt or non-U.S. persons) still prefer to own equity in C corporations. However, for many others, the LLC form is preferred. The LLC offers an appealing hybrid of the pass-through taxation and flexibility of partnerships and the limited liability of a corporation.

Despite the increasing prevalence of the LLC in leveraged buyout transactions, certain fundamental elements of the LLC structure are frequently mishandled. In particular, I have found that members' and managers' fiduciary duties are often erroneously or inadequately addressed. This article briefly summarizes this issue. Although each of the 50 states provides for its own state-specific form of LLC, this article focuses on limited liability companies formed under Delaware law. Due to its well-developed legal framework, experienced judiciary and discretion with respect to publicly available information, Delaware is the jurisdiction of choice for forming sophisticated investment entities.