Current Month (October 2026)
Delaware Court of Chancery Finds LLC Board Did Not Breach Operating Agreement by Not Paying Tax Distributions
By Tarik J. Haskins, Morris Nichols Arsht & Tunnell LLP
Takeaways:
- A minority member should expressly address mandatory tax distributions in an LLC agreement.
- A conclusive presumption is a powerful tool in an LLC agreement to protect a controlling person’s decision-making.
Bajaj v. OSP Razor Holdings LLC, No. 2025-0976, 2026 WL 2069831 (Del. Ch. July 17, 2026), is a good reminder that attorneys representing minority members should seek mandatory tax distributions in an LLC agreement. Addressing mandatory tax distributions is particularly important in a rollover transaction if minority members are not similarly situated to the majority member and the majority member would not owe taxes on phantom income (i.e., taxable income allocated to a member even if the member has not received cash distributions).
In Bajaj, the plaintiff sold his company to a private equity sponsor and received equity in the buyer entity (“Company”). Under the Company’s LLC agreement, tax distributions were not mandatory but would be made if the board of directors (“Board”) determined in good faith that there was sufficient cash available to make tax distributions. Further, the Company’s LLC agreement included a provision that the Board shall be conclusively presumed to be acting in good faith if a majority of the directors “subjectively believe” the action “is in or not opposed to the best interests of the Company.” During the years 2022 through 2025, the Company did not pay any tax distributions. The plaintiff commenced an action against the Company seeking specific performance of the Company’s obligations to pay tax distributions for years 2022 through 2025. The plaintiff alleged that the Board withheld tax distributions in bad faith to force a buyout of the plaintiff’s interests in the Company.
In its opinion, the Court of Chancery noted that the plaintiff had a high bar to overcome and would have to show that a majority of the board subjectively believed that its determination was not in and was opposed to the best interests of the Company. Following trial, the court found that the plaintiff did not prove that the Board acted in bad faith by not paying tax distributions and therefore the Company did not breach the LLC agreement. This case is a reminder, particularly if a minority member might incur phantom tax income, to negotiate for mandatory tax distributions. Further, it shows the powerful effect of including a conclusive presumption in a limited liability company agreement to protect decision-making by the controlling persons. As the Court noted, the conclusive presumption presents a high bar for a plaintiff to overcome in challenging decisions by a controlling person if its decision-making is subject to a highly deferential contractual definition of good faith.
The CTA’s Rise from Its August Tomb
By William E. H. Quick, Outside Inside Counsel, LLC
Hearken back to August 2026, when the Financial Crimes Enforcement Network (“FinCEN”) issued a final rule (“Final Rule”) making “permanent” the interim final rule (“Interim Rule”) published on March 26, 2025, on the beneficial ownership information (“BOI”) reporting exemptions under the Corporate Transparency Act (“CTA”).
On October 27, 2026, a coalition of attorneys general from twenty states[1] and D.C. (collectively, the “Coalition”) filed a lawsuit asking the U.S. Ninth Circuit District Court for the District of Oregon to prevent the executive branch from gutting a law that would help police and prosecutors catch money launderers, fraudsters, and tax cheats. (See State of Oregon v. Bessent, No. 6:26-cv-02359 (D. Or. filed Oct. 27, 2026)).
The CTA requires certain businesses to report their direct and indirect individual owners and control persons to the federal government. Under the CTA, certain state and local law enforcement agencies may, in turn, access this disclosed information for their own law enforcement purposes. This law enforcement access forms the crux of the Coalition’s claims.
Under the Final Rule, U.S. domestic reporting companies are exempt from BOI reporting requirements and, therefore, are no longer required to file BOI reports under the CTA. For non-U.S. reporting companies, no reporting of BOI for U.S. person beneficial owners or applicants is required. Further, U.S. persons with an existing FinCEN ID are no longer required to update or correct their information on file with FinCEN, and FinCEN announced that it will delete the information already in its database. This Final Rule exempts over 99 percent of previously reporting businesses from the law—“effectively repealing the Act,” the Coalition argues.
The Coalition’s pleadings state that having “incurred costs to promote the effective implementation of the [CTA], the [Final Rule has] now deprived [the Coalition] of access to information they are statutorily entitled to receive,” and it “harm[s] [the Coalition] by denying them access to beneficial ownership information that would have been contained in FinCEN’s database, which the [CTA] entitles [the Coalition] to receive.” Further, “FinCEN is currently refusing States any access to beneficial ownership data, including the data not scheduled to be purged by the [Final Rule].”
The Coalition argues that, among other things, FinCEN’s implementation of the Final Rule: (1) violates the CTA and the Administrative Procedure Act; (2) skipped required legal steps before changing the prior rule; (3) acts arbitrarily, capriciously and without a reasonable explanation; and (4) fails to properly include the concurrence of the secretary of Homeland Security and the U.S. attorney general, as required by the CTA, before creating a new exemption.
If the Coalition prevails, the Court has been asked to declare unlawful and vacate the Interim Rule and the Final Rule, and to prevent the impending destruction of the BOI that Congress directed FinCEN to collect and preserve.
The CTA’s hibernation under the Final Rule has proved short-lived, and the volatility of the Act’s interpretation, implementation, and enforcement remain its only mooring.
[1] Oregon, Illinois, Arizona, California, Colorado, Delaware, District of Columbia, Maine, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, New Mexico, New York, North Carolina, Rhode Island, Virginia, Washington, and Wisconsin.
