Practical Implications of Delaware Kerflufle on Fiduciary Duty

[Note: as of August 1, 2013, the Delaware statute has been amended to provide for default fidicuary duty.  Care should still be taken, however, since the terms of the LLC Agreement will control over the default duties.]

The Delaware LLC Law mentions fiduciary duty in just one place. Section 18-1101(c) states: "(c)  To the extent that, at law or in equity, a member or manager ... has duties (including fiduciary duties) to ... to another member or manager ..., the member's or manager's ... duties may be expanded or restricted or eliminated by provisions in the limited liability company agreement; provided, that ... agreement may not eliminate the implied contractual covenant of good faith and fair dealing."

You would think that since the Delaware legislature in specifically mentioning fiduciary duties after the clause "to the extent that" believed that some fiduciary duties between managers and members do exist "at law or in equity".

Believe it or not, the recent kerfuffle in Delaware court decisions has left unanswered the question of whether such "default" duties exist under Delaware LLC laws.  The issue has become more newsworthy because of the back and forth between Chancellor Leo Strine and the Delaware Supreme Court in Auriga Capital Corp. v. Gatz Properties, LLC where the Supreme Court recently chastised Strine for his “improvident and unnecessary” holding based on alleged default fiduciary duties because the matter could have been decided on the text of the LLC agreement in question.

So Delaware, famous for keeping its business statutes up to date to fix problems found by judges, now has a huge hole in its law. Forgetting the mumbo jumbo for a minute, what are the practical implications for businesses?  Here are a few:

  1. Remember that whatever your LLC agreement says governs.  So if a member may enter into competing deals, so be it.  If the managing member can't engage in affiliated transactions, that rule governs.

  2. Whether or not default fiduciary duties apply, Delaware law requires good faith and fair dealing so that any lack of fiduciary duty may have limited import in any particular circumstances despite what the academics say in long law review articles.  Most inequitable conduct will still be inequitable no matter the end result of the Delaware dispute. 

  3. Non-managing members with leverage should consider the inclusion of a provision that the managing member will treat them with fiduciary duties similar to the fiduciary duties owed to shareholders by the board of directors of Delaware corporations.  

  4. Managing members should continue to consider a broad written waiver of fiduciary duties as permitted under Delaware law (and not permitted under New York LLC law).

  5. A non-managing member bringing a claim should continue to include a breach of fiduciary duty cause of action in order to preserve the claim if Strine's view ultimately prevails.  A managing member should act as if default fiduciary duties exist to aid in the defense of any claim if the Supreme Court ultimately holds that default duties exist.

In the meantime keep in touch with a lawyer who follows this issue on a regular basis since it will undoubtedly be resolved over the next year or two.

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