Proposed Legislation Addresses Delaware’s LLC Default Fiduciary Duty Debate

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On March 20, 2013, legislation proposing to amend the Delaware Limited Liability Company Act, 6 Del. C. §§ 18-101, et. seq. (DLLCA) was submitted to the Corporation Law Section of the Delaware State Bar Association. If the proposed legislation is enacted, the amendments, in addition to implementing certain technical changes, would confirm that LLC managers owe fiduciary duties where the LLC agreement is silent.

In our February 25, 2013 Corporate and Securities Alert, “Private Equity Fund Considerations in Light of Delaware's LLC Debate,” we outlined the Delaware debate over whether the DLLCA imposes default fiduciary duties for LLC managers and predicted that, given the attention the issue had been given, the Delaware General Assembly may provide a resolution to this debate.

To recap, the DLLCA, prior to these proposed amendments, did not expressly provide for fiduciary duties for LLC managers where the LLC Agreement does not explicitly provide for managers to have fiduciary duties. The Delaware Supreme Court also had never ruled whether LLC managers owe fiduciary duties absent an express imposition in an LLC agreement. Although the Supreme Court had never formally ruled on the issue, Chief Justice Myron T. Steele, in his article “Judicial Scrutiny of Fiduciary Duties in Delaware Limited Partnerships and Limited Liability Companies,” 32 Del. J. Corp. L. 1 (2007), argued that LLC managers do not owe traditional fiduciary duties, unless the LLC agreement so specifies. He based his conclusion on three main justifications: (1) freedom of contract; (2) the fact that LLCs did not exist at common law; and (3) the DLLCA’s silence on the issue.

By contrast, the Court of Chancery, in two separate 2012 opinions, held that LLC managers do owe fiduciary duties to LLC members, unless waived, restricted, or eliminated by the LLC agreement. The Court of Chancery based its holdings on (1) the DLLCA’s mandate that rules of law and equity shall govern where the DLLCA is silent, (2) the definition of fiduciary and the role of an LLC manager, and (3) the history of the DLLCA.

The 2013 proposed amendments to the DLLCA effectively resolve this debate if they are ultimately adopted by the legislature and signed into law by the governor, becoming effective on August 1, 2013. The proposed amendments specifically provide that a manager of a manager-managed LLC owes fiduciary duties even in the absence of a LLC agreement provision establishing those duties. It is important to note, however, that LLC managers may still utilize the contractual freedom provided by Section 18-1101 and eliminate, restrict, or modify the fiduciary duties in the LLC agreement. It is important to note, however, that drafters of LLC agreements may still utilize the contractual freedom provided by Section 18-1101 to eliminate, restrict, or modify LLC managers’ fiduciary duties in the LLC agreement.

Topics:  Fiduciary Duty, LLC, Proposed Legislation

Published In: Business Organization Updates, General Business Updates, Elections & Politics Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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