In recent years, limited liability companies and limited partnerships have become the preferred form of entity for new businesses. In Delaware, for example, there are now more LLCs and LLPs formed each year than Delaware corporations. There are various reasons for this development, particularly the flexibility of management these alternative entities permit.
That is all fine when the entity has a single owner or a close-knit group of owners. But the story is very different when there are outside equity investors involved. Then the lack of a uniform governance structure in these alternative entities may cause problems. It is apparently for just that reason that few alternative entities have been used as a vehicle to issue publicly traded securities, such as limited partnerships or membership interests. Instead, entities formed as LLCs or LLPs frequently convert to the corporate form just before they go public.
The Delaware Court of Chancery's Sept. 30 decision in Brinckerhoff v. Enbridge Energy Co. illustrates the uncertainty involved in an alternative entity investment.
He goes on to analyze the case and the problems it presents in considerable detail. It'll be interesting to see what Larry Ribstein thinks.
Update: Larry responds here.