Category: Fiduciary Duties

IMPLIED COVENANT

By , April 28, 2017 9:19 am

Lawyer shouldn’t draft operating agreements for multi-member LLCs unless they have a solid understanding of the implied contractual covenant of good faith and fair dealing. Below are a cite and the first paragraph of a good new article on the implied contractual covenant of good faith and fair dealing.

58 B.C. L. Rev. E-Supplement 1
Boston College Law Review E-Supplement
2017
Essay
LEAP OF FAITH: DETERMINING THE STANDARD OF FAITH NEEDED TO VIOLATE THE IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING FOR DELAWARE LIMITED LIABILITY COMPANIES
Pat Andriola
Copyright: 2016 by Pat Andriola. All rights reserved.

Abstract: Delaware courts have long respected the right to contract in Delaware, and possibly no entity is afforded more privileges to set the boundaries of its corporate form than the Delaware Limited Liability Company. Unlike nearly every other state, Delaware permits LLCs to abolish the duties of care and loyalty in their operating agreements, but forbids companies to eliminate liability for “any act or omission that constitutes a bad faith violation of the implied contractual covenant of good faith and fair dealing.” The problem with the phrase “bad faith violation” is that, when referencing a breach of the implied covenant of good faith and fair dealing, it implies that there exists a non-bad faith violation of the covenant. In determining whether or not “neutral faith” or “non-bad faith” violations of the implied covenant are permissible under Delaware LLC law, this essay argues that Delaware courts should look to the relatively short history of the covenant, the contractarian spirit of Delaware laws and courts, and section 18-1101 of the Delaware Limited Liability Company Act to hold that the implied covenant can only be violated in bad faith.

PROFESSIONAL ENTITY BREAKUPS

By , March 31, 2017 11:41 am

The question addressed in the case discussed by Peter Mahler in his most recent “Business Divorce” post is, in Peter’s own words (below in quotes):

“Does a shareholder have a fiduciary duty not to exercise a contractual right under the shareholders agreement to resign and demand a buy-out of his shares by the financially distressed corporation, particularly when the corporation’s default would trigger the other shareholders’ personal guarantees?”

The professional entity in Peter’s post is a corporation. However, the issues for that entity and its shareholders apply as much to professional LLCs and their members.

Here is the link to Peter’s post: http://www.nybusinessdivorce.com/2017/02/articles/professional-corporations/race-exit-professional-practice-falters/

FIDUCIARY DUTIES OF SHAREHOLDERS

By , March 2, 2017 11:46 am

A basic question under every LLC act is whether, under that act, the members as such have fiduciary duties (i) to the other members; (ii) to the LLC itself; or (iii) to both the other shareholders and the LLC.  The post under the link below discusses a case addressing only the fiduciary duties of corporate shareholders as shareholders.  However, some of the concepts in the case are also important for LLCs.

Here’s the post:  http://kentuckybusinessentitylaw.blogspot.com/2016/10/kentucky-court-of-appeals-holds-that.html

BUSINESS JUDGMENT RULE

By , February 13, 2017 10:43 am

The post under the link below discusses a very recent Delaware Court of Chancery decision about the business judgment rule.  LLC lawyers need to have a detailed understanding of this rule because, among other things, it should often be included with the duty of care provisions in operating agreements for multi-member LLCs.

Here’s the link:

https://delawarechancery.foxrothschild.com/mergers-and-acquisitions/business-judgment-rule-applied-when-disinterested-majority-approved-merger-in-fully-informed-and-uncoerced-vote/?utm_source=Fox+Rothschild+-+Delaware+Chancery+Law+Blog&utm_campaign=c105709976-RSS_EMAIL_CAMPAIGN&utm_medium=email&utm_term=0_86821ff155-c105709976-70733165

DELAWARE SUPREME COURT CASE ABOUT FIDUCIARY DUTIES

By , February 6, 2017 9:00 am

The post under the link below discusses a December 19, 2016 decision by the Delaware Supreme Court affirming the validity of Delaware limited partnership  agreement provisions waiving limited partners’ fiduciary rights.  The decision effectively applies also to all other Delaware “alternative entities,” including LLCs.   It’s often useful for LLC lawyers to provide for waivers of member fiduciary rights even in small family-owned LLCs.  Whether these waivers would be upheld under the LLC acts of non-Delaware states may be unclear.  Under the Delaware Limited Liability Company Act, it is now crystal-clear.

Here is the link:

http://www.lexology.com/library/detail.aspx?g=5da4687a-3fb7-4fc0-9630-0dee47bd4c7a&l=7TC5MFM

DELAWARE CASE CONCERNING THE FIDUCARY DUTY OF DISCLOSURE

By , January 17, 2017 1:28 pm

The duty of entity managers to disclose critical information to entity owners concerning their entities is a key component of the duty of loyalty under the law of Delaware and other states.  This duty is the central focus of the January 4, 2017 decision by the Delaware Chancery Court discussed in the post under the link below.  The entity owners in that case were corporate shareholders and the fiduciary breach in question involved a short-form merger.  However, the broad fiduciary principles in the case apply equally to LLC members and to non-merger matters.

Here’s the link:

https://delawarechancery.foxrothschild.com/mergers-and-acquisitions/chancery-dismisses-complaint-alleging-breach-of-duty-of-disclosure-regarding-short-form-merger/?utm_source=Fox+Rothschild+-+Delaware+Chancery+Law+Blog&utm_campaign=6a85ff6c81-RSS_EMAIL_CAMPAIGN&utm_medium=email&utm_term=0_86821ff155-6a85ff6c81-70733165

CHANGES IN FIDUCIARY PROVISIONS OF CALIFORNIA LLC ACT

By , January 13, 2017 1:32 pm

Under the link below is an excellent new post about recent changes in the fiduciary provisions of the California LLC Act.  The post will, of course, be of interest above all  to California LLC lawyers, but it will also be useful to non-California LLC lawyers about fiduciary issues critically important to LLC formations under all LLC acts.

Here’s the link:  http://www.lexology.com/library/detail.aspx?g=5b796059-e1b1-4f05-bf79-63cc92a89c5a&l=7T7RSDM

ARTICLE ON BUSINESS ORGANIZATION FIDUCIARY LAW

By , November 7, 2016 11:40 am

Bill Callison is a leading expert on LLC law and tax. Below is a link to an article he’s just published on U.S. business organization fiduciary law. Fiduciary issues are, of course, central to formations of multi-member LLCs (and even to formations of single-member LLCs that will have non-member managers). I haven’t read Bill’s article yet, but since he’s the author of it, I know it is excellent.

http://ssrn.com/abstract=2827771

LAW JOURNAL ARTICLE ABOUT LLCS AND FIDUCIARY DUTIES

By , October 26, 2016 2:38 pm

Below are the citation and the table of contents of a new law journal article about LLCs and fiduciary duties:

16 Nev. L.J. 1085
Nevada Law Journal
Summer 2016
Article
CONTRACTING OUT OF FIDUCIARY DUTIES IN LLCS: DELAWARE WILL LEAD, BUT WILL ANYONE FOLLOW?
Justin Pace
Copyright (c) 2016 Nevada Law Journal; H. Justin Pace

Table of Contents

Introduction 1086
I. Statutory Overview 1092
II. Case Law Analysis of the Delaware Approach 1095
A. Delaware Courts 1095
B. Case Law Tracking the Approach of Delaware Courts 1098
1. Georgia Case Law 1098
2. Kansas Case Law 1101
3. Louisiana Case Law 1102
4. Massachusetts Case Law 1103
5. Missouri Case Law 1104
6. North Carolina Case Law 1104
7. Nevada Case Law 1108
8. Texas Case Law 1109
C. Case Law Departing from the Approach of Delaware Courts 1109
1. New York Case Law 1110
2. California Case Law 1111
D. No Case Law Available 1112
E. Final Analysis 1113
III. Analysis of the Statutory Text 1114
A. Direct Approach 1114
B. Indirect Approach 1115
C. Direct Approach with No Mention of Elimination 1116
D. Direct Approach with Caveats 1118
E. Exculpatory Approach 1120
F. Final Analysis of the Statutory Text 1120
IV. Analysis of LP Case Law 1121
A. Delaware Case Law 1121
B. Maryland Case Law 1123
C. California Case Law 1124
D. Connecticut Case Law 1128
E. Massachusetts Case Law 1131
F. Final Analysis of LP Case Law 1133
V. Macro Implications 1133
A. Legislative Implications 1134
B. Judicial Implications 1135
VI. Micro Implications 1139
A. Litigation Consequences 139
B. Transaction Planning Considerations 1142
Conclusion 1143

HARMONIZED UNIFORM BUSINESS ORGANIZATIONS CODE

By , October 17, 2016 1:09 pm

The new law journal article cited and quoted below will be of particular interest to Idaho LLC lawyers, but also to lawyers in every state who are interested in LLC fiduciary law; in RULLCA; and in the Harmonized Uniform Business Organizations Code.

59-SEP Advocate (Idaho) 32
Advocate
September, 2016
FAMILIAR WATERS OR UNCHARTED TERRITORY? NAVIGATING THE REVISIONS TO THE DUTIES OF LLC MEMBERS AND MANAGERS UNDER THE HARMONIZED UNIFORM BUSINESS ORGANIZATIONS CODE
Kara M. Gleckler & David M. Gadd
Copyright © 2016 by The Idaho State Bar; Kara M. Gleckler, David M. Gadd

In May 2008, Idaho became the first state in the Union to adopt the Revised Uniform Limited Liability Company Act (RULLCA).1 A short seven years later, the state legislature adopted the Harmonized Uniform Business Organizations Code (the “New Act”),2 which went into effect on July 1, 2015. The stated purpose of the adoption of the New Act was to “harmonize Idaho’s unincorporated and incorporated entity statutes so they can be integrated into a single code of entity laws.”3 While the Legislature characterized the New Act as making only “technical revisions,”4 it does make some substantive, and potentially significant, revisions to the RULLCA. The corporate practitioner should become familiar with those important changes.

In this article, we identify and discuss the New Act’s provisions that address the duties owed by members and managers of a Limited Liability Company (LLC) to the LLC and its other members, including the fiduciary duty of loyalty, the contractual duty of good faith and fair dealing, and the duty of care. While the first two are largely unchanged by the New Act, the duty of care has undergone some noteworthy revisions. Savvy attorneys will familiarize themselves with these statutory, “default” duties and, when appropriate, craft an operating agreement that modifies them.