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ARTICLE Lending to Series Limited Liability Companies: Subscription Credit Facility Considerations Kristin Rylko, Haukur Gudmundsson, Vincent Zuffante1 Introduction Background As the private equity asset class continues to A Series LLC is generally created pursuant to expand2 and private equity fund managers the laws of the applicable jurisdiction of respond to demand by investors for ever- formation. A defining feature of a Series LLC is more bespoke products and tailored the ability to create an unlimited number of investments, there has been an increase in the segregated subunits or series (each, a “Series”) use of alternative fund structures to under the umbrella of a single “master” LLC accommodate such demand. In addition to (or LP), permitting each Series to have the proliferation of separate accounts, funds- separate members, managers, equity interests, of-one and co-investment structures, the use assets, liabilities and business objectives of vehicles that employ series, cell or other associated to it, with an internal liability shield asset and liability segregation technology has as among the Series that is intended to be increased, bringing with it opportunities and enforceable against creditors and other potential challenges when leverage at the counterparties. This is in contrast to a fund or individual series level is sought. traditional limited liability company, which may have different classes of members that The use of series in a limited liability company have different rights, assets or liabilities (a “Series LLC”)3 offers many potential benefits associated with such class, but such internal to a private equity fund (a “Fund”) manager organizational structure is not intended to and its investors; however, for lenders impact the obligations and liability of the interested in advancing credit to a Series LLC limited liability company as against creditors or a series thereof, it is important to and counterparties. understand how Series LLCs differ from traditional forms of limited liability entities. At its heart, the Series structure promises the This article discusses the nature and benefits ability to segregate the assets and liabilities of of Series Entities in the private equity context4, each Series, such that the liabilities and other as well as potential issues that lenders will contractual obligations of any given Series want to take into account when considering may be enforced only against the assets of advancing credit to a series under a Series that particular Series and not the assets of any Entities secured by investor capital other Series or the “master” entity itself, so commitments.5 long as the relevant statutory formation and procedural requirements are met.6 In this respect, a Series LLC with liability segregation promises owners the personal liability protection as against third parties of a limited may also reduce legal costs associated with liability company, while also permitting the creation and negotiation of multiple fund contractual flexibility to effectively create vehicles and Operating Agreements. Aside mini-LLCs under the Series LLC umbrella, from possible savings attributable to reduced whose activities are insulated from each other long-term formation and start-up costs, use of and the Series LLC itself. Thus, in the Fund Series Entities may result in minimized filing context, each Series can have different costs, State franchise fees and compliance investors, with different investment strategies costs as well as tax savings as compared to and commitment periods associated with it, as creating separate entities instead of Series of a if each Series was an individual stand-alone Series LLC. vehicle. While there are many potential benefits to a In the context of a Fund formed as a Series Series LLC organizational structure, there may LLC, each Series may be governed by a be risks in certain circumstances as well. There common master Fund-level limited liability remains uncertainty as to the State and federal company (an “Operating Agreement”), or by income tax treatment of Series Entities and both a Series-specific Operating Agreement the Series within a Series LLC, as well as their (or supplement or addendum) and a master treatment for employment tax purposes.8 In Fund-level Operating Agreement. Each such addition, as more fully described below, it is Operating Agreement may provide different not clear whether the separate liability operational, distribution, and membership protection of a Series will be upheld by the mechanics with respect to each Series, and courts of a State that has not enacted each Series may be administered by a legislation providing for Series provisions for separate manager, although the same State law liability purposes.9 Further, manager (or general partner) is often used for accountants, lawyers and other service all Series in a Series LLC. Funds may use Series providers may not have sufficient familiarity LLC technology to facilitate establishment of with the series structure to provide adequate different Investor commitment periods for advice on the unique issues that may arise in each Series and to house separate relation to a Series LLC. investments in individual Series, thereby permitting investors to commit capital to the Facility Structure and Loan Fund for particular periods or specified uses.7 Documentation; Special Other potential benefits to implementing a Series structure include reduced formation Considerations for Series Entities and administrative cost. In some States, use of The basic loan documentation for a Facility a Series LLC allows a Fund to avoid registering advanced to a Series under a Series LLC multiple entities with the State of borrower is similar to the loan documentation organization, maintaining multiple registered typically used for a Fund that does not have a agents and filing multiple sets of annual Series construct and will usually include the reports and tax returns. Further, rather than following: (a) a credit agreement that contains requiring a Fund sponsor to form a new entity all of the terms of the loan, borrowing each time new investor capital is raised, the mechanics, conditions precedent, Fund’s Operating Agreement may provide for representations, warranties and covenants, the creation of additional Series from time to events of default and miscellaneous provisions time. Funds that use a master Fund-level typically found in a commercial credit Operating Agreement to govern each Series agreement; (b) a promissory note; (c) a pledge 2 Mayer Brown | Lending to Series Limited Liability Companies: Subscription Credit Facility Considerations or security agreement pursuant to which the of the Fund manager to issue a Capital Call to, Lender is granted a security interest in the incur indebtedness on behalf of, or grant a Collateral; (d) account control agreement(s) security interest in the assets of, one Series to over the account(s) into which investors fund repay indebtedness incurred with respect to Capital Contributions in response to a Capital another Series. As such, the borrowing base Call to perfect the Lender’s security interest for a Facility involving a Series LLC would need therein and permit the Lender to block to be established on a Series-by-Series basis, withdrawals from such account(s); (e) Uniform with several liability among the Series. As Commercial Code financing statements filed in described above, however, there are Funds respect of Article 9 collateral against the that employ Series technology for reasons applicable debtors; and (f) other customary other than asset and liability segregation, in deliverables such as officer’s certificates which case, a joint and several Series- certifying as to the relevant organizational borrower structure may be permissible, which documents, resolutions and incumbency would impact how a Lender underwrites a signatures, opinion letters and other diligence Facility. deliverables, as appropriate. While the basic loan documents required under a Facility B. STATE LAW; RECOGNITION BY COURTS; BANKRUPTCY CONSIDERATIONS. made to a Series under a Series LLC are comparable to those under a Facility made to A Lender that is considering offering a Facility a traditional commingled Fund, there are a to a Series of a Series LLC will want to number of potential issues that should be understand whether the Fund’s State of considered during the underwriting and formation, as well as the governing law of the documentation process, as more fully Facility, recognizes a Series LLC structure. The described below. Series LLC was first recognized under Delaware law in 1996, and under current A. OPERATING AGREEMENT PROVISIONS. Delaware law, a Series is authorized, in its own As with any Fund finance product, the name, to enter into contracts, hold assets, Operating Agreement of a Series LLC will need grant liens and security interests in those to be scrutinized prior to execution of a assets, and sue and be sued.10 As of the date Facility to ensure that the Operating of publication of this article, however, only Agreement contains adequate Facility-related about a third of States recognize the Series provisions. In addition, because the assets and LLC, and among the States that do, there is no liabilities of a Series in a Series LLC are often uniformity in law.11 In order for the intended to be separate and distinct from segregation of assets and liabilities of a Series those of another Series and the Series LLC to be recognized, some States require specific itself, the Lender will need to confirm whether legal hurdles to be cleared during the the Operating Agreement adequately provides formation process, including the use of for such segregated liability. This is particularly specific language applicable to the Series in important in determining the borrower the Operating Agreement, and some States structure, understanding which Capital require certain procedures to be maintained Commitments are associated with (and thus during the life of the Fund, such as the available to) which Series, and assessing the maintenance of separate books and records potential impact on one Series of debt being with respect to each Series.

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