Over the past year there has been extensive discussion and debate over “default fiduciary duties” in Delaware limited liability companies (LLCs). Much of this debate has been fueled by the differences in opinion between Vice Chancellor Laster and Chancellor Strine, on one hand, and the Delaware Supreme Court, on the other hand.
This debate was effectively put to bed a month ago once a very simple amendment to the Delaware Limited Liability Company Act was approved by the Delaware state legislature. No more debate, right?
Actually, this is where the hard part begins for legal practitioners and investors. There was always the ability to contract away fully fiduciary duties or retain them in the Delaware LLC context. For some reason, many in the legal community and those seeking to use LLCs for business enterprises viewed waiving fiduciary duties as a binary exercise. To waive or not to waive? This is not the question.
In many cases, while business partners may not want the full panoply of fiduciary duties, there is a desire for duties of loyalty (i.e., members and managers put the interests of the business above other competing interests), duties of candor (i.e., sharing in full detail information necessary to make an investment or voting decision) or duties of care (i.e., the people who are granted the authority to manage the operations of the business do so based upon a prudent businessperson standard). The assumption, as codified by the recent amendment, is that all of these duties and more are embedded on a default basis in the LLC relationship among members and their management team. Removing the protection in one fell swoop is not prudent. The better course of action is to thoughtfully identify those categories of protections that are not needed and expressly waive those and retain the others by default.
The Delaware Courts are unforgiving in the LLC and partnership contexts. These entities are “purely creatures of contract.” Therefore, to the extent that protection is not provided for or has otherwise been disclaimed, there is very little protection afforded to members outside of the express terms included in the LLC agreement. Therefore, the best advice is: Be cautious; disclaim fiduciary duties at your own peril.