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Author Archive: Andy Brownstein

Duties of Loyalty for Corporate Board Members versus LLC Managers

Limited Liability Companies (LLC’s) are functional and flexible forms of ownership for operating companies as well as investment vehicles. As common as LLC’s are today, we ought to remember that relative to other forms of legal entities, LLC’s are still very new. It was only as recently as 1996 that all fifty states had enacted limited liability company statutes, so in many states these forms of ownership are less than 30 years old. For instance, the Virginia Limited Liability Company Act (VLLCA) was only originally passed in 1991, making it only 29 years old. Thus, the body of law governing LLC’s is much less robust than that of corporations or partnerships.

Twice in the last few months, we have been asked by clients to look into issues regarding the duties of managers of a Virginia LLC, and it’s illustrative of a key difference of the two entity structures, and the much smaller body of case law regarding limited liability companies versus corporations. The key statutory provision outlining the duty a director owes a corporation is Virginia Stock Corporation Act (VSCA) Section 13.1-690, which states that “A director shall discharge his duties as a director, including his duties as a member of a committee, in accordance with his good faith business judgment of the best interests of the corporation.” The key statutory provision outlining the duty a manager owes a limited liability company is VSCA Section 13.1-1024.1, which states that “A manager shall discharge his or its duties as a manager in accordance with the manager’s good faith business judgment of the best interests of the limited liability company.”

They seem almost identical, right? Perhaps, but a body of case law in Virginia has confirmed that corporate directors have a common law duty of care and a duty of loyalty to the corporation underpinning Section 13.1-690 (See Willard v. Moneta Bldg. Supply, 515 S.E.2d 277 (Va. 1999), Feddeman & Co. v. Langan Associates, 260 Va. 35, 530 S.E.2d 668 (2000), Simmons v. Miller, 261 Va. 561, 544 S.E.2d 666, (2001)). In contrast, there is no case law in Virginia establishing a common law duty of loyalty by managers to the LLC. To the contrary, limited case law applying Virginia law indicates that managers affirmatively do not have a duty of loyalty to their LLC. (See In re Virginia Broadband, LLC, 2014 BL 313170 (Bankr. W.D. Va. 2014)).

The VSCA also contains Section 13.1-691, titled “Director conflict of interests”. Section 13.1-691 defines certain transactions that would cause a conflict of interest with a director, and creates something akin to a safe harbor for a corporation’s board of directors engaging in such a transaction if certain information is disclosed and certain procedures are followed. While this statute does govern specific acts of potential self-dealing, the duty of loyalty of a director to their corporation is more generally governed by Section 13.1-690 and the common law described above. Stated differently, while Section 13.1-691 only covers transactions between a director and their corporation, the general duty of loyalty underpinning Section 13.1-690 covers a far broader set of possible actions by a director. (See Goolsby & Haas on Virginia Corporations, 6th Ed., Section 9.8, p. 247).

Despite this seemingly large gap of protection for limited liability companies, all is not lost. Another major difference between corporations and limited liability companies is the flexibility, as mentioned at the top of this post, that LLC members may contract, via an operating agreement, for a set of governance provisions customized to their specific needs, as long as those contracted provisions do not violate the Virginia Limited Liability Company Act. The members could agree that managers have a duty of loyalty to the LLC, and they could also define its parameters. They could choose to limit the duty of loyalty to the equivalent of Section 13.1-691 of the VSCA, or they could state that managers are subject to the same standards applicable to directors of a corporation.

It is very important to note that these comments are only applicable to Virginia LLC’s and the law applicable in other jurisdictions may be quite different. For instance, in Delaware, by far the most popular jurisdiction for forming LLC’s, the default rule is the complete opposite. In the absence of a provision in the operating agreement to the contrary, managers and controlling members of an LLC owe a duty of care and a duty of loyalty to the LLC. (Delaware Limited Liability Company Act, Sections 18-1104 and 18-1101(c)).

The examples described in this post is just one of a number of important considerations when forming a limited liability company. Do not rely on a form downloaded from the internet. The corporate attorneys at GreeneHurlocker commonly assist clients with the formation of corporations, limited liability companies and partnerships, so please contact me or one of the other members of our corporate team to discuss these issues if you are considering forming a new company.

C-PACE Expansion On Governor Northam’s Desk

Lost in the excitement and debate about the Virginia Clean Energy Act (we talked about it here), a number of other clean energy and energy efficiency bills have been winding their way through the General Assembly. One bill in particular that has flown under the radar is House Bill 654, which amends the Virginia C-PACE enabling legislation to empower the Department of Mines, Minerals and Energy to develop and administer a statewide program for C-PACE. HB 654 has now passed both the House and Senate and awaits signature by the Governor.

C-PACE, which stands for Commercial Property Assessed Clean Energy, is an innovative lending program now active in over 20 states including parts of Virginia, which provides long-term financing for renewable energy, energy efficiency, and resiliency upgrades for commercial buildings. C-PACE loans are repaid via a special assessment on the property tax bills and can often finance 100% of eligible improvements. For a summary of C-PACE, where its available, and how it works, check out https://pacenation.org/ and https://virginiapace.com/.

C-PACE has been enabled in Virginia since 2009, but because the financing mechanism involves special assessments on property, to date, each local jurisdiction is required to pass enabling ordinances to enable the assessment changes, and then implement the necessary changes to their property tax systems. Currently, eight Virginia jurisdictions have passed enabling legislation and are in various stages of implementation, including some of the largest in the Commonwealth, including Fairfax, Loudon, Richmond, Petersburg and Fredericksburg. (See chart below, courtesy of our friends at the Virginia Pace Authority.)

The change provided by HB 654 will create a state wide program that any jurisdiction can opt into. This will streamline the process, provide a more centralized mechanism for promoting the program, and allow smaller jurisdictions, who may not feel that they have the resources to implement and manage such a program, to avail themselves of the same benefits that larger jurisdictions have gleaned from C-PACE.

Once passed, the Department of Mines, Minerals and Energy will engage a private entity through a competitive selection process to run the program. This is an exciting development for energy efficiency efforts in the Commonwealth, and we are hopeful this legislation will become law. Check back here for more developments on C-PACE and if you are interested in learning more about how you can take advantage of C-PACE where currently available, contact Andy Brownstein or any of our Virginia energy lawyers.

 

Locality Status (as of Dec. 17, 2019) Program Details
Arlington County Active Launched in Jan. 2018, Arlington C-PACE is the first active program in the state. Sustainable Real Estate Solutions is the program administrator.
City of Fredericksburg Active Fredericksburg enabling ordinance passed Dec. 2018. City intends to self-administer program initially, and staff considers the program to be active.
Loudoun County Active Loudoun County and program administrator Virginia PACE Authority (“VPA”) launched program in November, 2019 late 2019.
Fairfax County Active January 2020 Fairfax County selected VPA as its program administrator in November, 2019. Program launch anticipated in early 2020.
City of Petersburg Active January 2020 Ordinance passed on July 3, 2019. City rode Loudoun County’s contract with VPA in August.
City of Richmond Ordinance enacted City Council passed ordinance on November 12, 2019. Program to be launched by mid-2020 per ordinance requirement.
City of Alexandria Ordinance in development Funding to support ordinance/program development approved April, 2019. launch of program anticipated in mid-2020. Anticipated public comment on ordinance in January 2020.
Town of Dumfries Ordinance enacted City Council passed ordinance on December 3, 2019. No further info is available regarding if they are issuing an RFP or riding a contract with another locality.
City of Lynchburg Ordinance enacted City Council passed ordinance on December 10, 2019. No further info is available regarding if they are issuing an RFP or riding a contract with another locality.

 

Richmond’s Commercial Real Estate Market Still Robust

GreeneHurlocker’s commercial real estate attorneys, Andy Brownstein and Jared Burden, along with more than 200 real estate industry colleagues, attended the Greater Richmond Association for Commercial Real Estate (GRACRE)’s 2020 Real Estate Market Review on February 18, 2020. What’s the verdict on the health of the local commercial real estate market in the Richmond MSA? Good, with few reservations.

Among the six speakers we heard plenty of optimism about the area’s ability to absorb more commercial real estate space, including apartments, office, industrial and hospitality. However, a consistent them was that is both finite demand, given the middle-market nature of Richmond’s business environment, and finite supply, given the lead time (up to 36 months) in developing commercial property. As a result, given shifting interests rates and other financing considerations, projects will have to be carefully planned and developed.

News coverage in the Richmond Times-Dispatch of the event is here.

Richmond’s rise in the Metropolitan Statistical Area ranking (now 45th) due to its population growth (1.3 million), of which 54% are of prime working age, along with relatively constant rates of space absorption, suggests commercial development has not reached saturation. Even older office developments, such as Innsbrook, are getting seeing good demand rents due to redevelopment and improvement of old commercial stock.

If there was one property class that is especially hot, it would be multifamily. Eric Phipps of SNP Properties cited properties in Scott’s Addition and Manchester as continuing to be in very high demand. He also suggested that the West Broad Street corridor and Jackson Ward to be ripe for future commercial development, and that Richmond could consistently absorb 1,500-2,000 a year for the next few years.

Nick Patel of Kalyan Hospitality discounted the potential for multiple casinos to be developed in Virginia in the short term, even if the proposed development in Richmond goes forward, but said he felt up to 1,000 additional rooms could be built in the greater Richmond market. He did not believe the downtown hospitality market would not see any luxury hotel development until average room rates approached $200, up from approximately $150 today.

While retail is still a challenging asset class, there are a number of exciting projects underway in the Richmond area, including the redevelopment of Regency Square and Virginia Center Commons, Carytown Exchange and the Sauer Center, showing that there is still an appetite for retail development under the right circumstances. Nikki Jassey provided a window into the shifts created by the rise of Amazon and different approaches taken by retail tenants and developers.

Finally, there remains a strong demand for industrial properties, especially along the interchanges of Interstates 295 and 64 and Interstates 295 and 95. We have benefited from strong local transportation infrastructure as well as the growth of data center demand without the downsides of locating in Northern Virginia.

It sure was good to run into a number of our friends and colleagues in the real estate business and hear some promising news about the future at GRACRE. If you would like to know more about what we learned, or discuss commercial real estate opportunities in Richmond or other parts of Virginia, contact Andy (804.864.1100)  or Jared (703.258.2678) or any of GreeneHurlocker’s Virginia real estate attorneys.

GRACRE Market Review

The Greater Richmond Association for Commercial Real Estate will hold its February Market Review tomorrow, and my partner Jared Burden and I will be there at the Westin Hotel on West Broad in the Reynolds Crossing development tomorrow afternoon starting at 3:30 p.m..

These annual market reviews bring together brokers, agents, commercial landlords and developers to discuss market conditions, possible opportunities and new ventures. If you’re attending, be sure to find us and say hello. We’d like to tell you more about our commercial real estate and mergers and acquisitions practices across Virginia and beyond. If we miss you, just contact me or any of our Virginia real estate lawyers.