Delaware amends its LLC Act: managers and controllers owe fiduciary duties unless LLC agreement provides otherwise

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Effective August 1, 2013, the Delaware General Assembly has amended Section 18-1104 of the Delaware Limited Liability Company Act to provide that, unless the limited liability company agreement says otherwise, the managers and controlling members of a limited liability company owe fiduciary duties of care and loyalty to the limited liability company and its members.  

 

The amendment was prompted by the Delaware Supreme Court’s decision last November in Gatz Properties, LLC v. Auriga Capital Corp.,1 which disregarded as “improvident and unnecessary” dictum the Chancery Court’s ruling below that “the Delaware Limited Liability Company Act imposes ‘default’ fiduciary duties upon LLC managers and controllers unless the parties to the LLC Agreement contract that such duties shall not apply.”

 

The Delaware Supreme Court in Auriga “decline[d] to express any view regarding whether default fiduciary duties apply as a matter of statutory construction” and “suggest[ed] that the ‘organs of the Bar’ (to use the trial court’s phrase) may be well advised to consider urging the General Assembly to resolve any statutory ambiguity on this issue.”

 

The amendment to the one sentence of Section 18-1104 was to add the following underlined words:  “In any case not provided for in this chapter, the rules of law and equity, including the rules of law and equity relating to fiduciary duties and the law merchant, shall govern.”

 

The General Assembly’s synopsis of the amendment explains as follows:  “Section 8 amends Section 18-1104 to confirm that in some circumstances fiduciary duties not explicitly provided for in the limited liability company agreement apply.  For example, a manager of a manager-managed limited liability company would ordinarily have fiduciary duties even in the absence of a provision in the limited liability company agreement establishing such duties.  Section 18-1101(c) continues to provide that such duties may be expanded, restricted or eliminated by the limited liability company agreement.”

 

As noted in the General Assembly’s synopsis, Section 18-1101(c) of the Act remains the same, so parties remain free in their limited liability company agreements to expand, restrict or eliminate fiduciary duties (subject to the implied covenant of good faith and fair dealing):  “(c) To the extent that, at law or in equity, a member or manager or other person has duties (including fiduciary duties) to a limited liability company or to another member or manager or to another person that is a party to or is otherwise bound by a limited liability company agreement, the member's or manager's or other person's duties may be expanded or restricted or eliminated by provisions in the limited liability company agreement; provided, that the limited liability company agreement may not eliminate the implied contractual covenant of good faith and fair dealing.”

 

For more information about this amendment, Delaware fiduciary duty law, or Delaware limited liability companies, please contact:

 

Bruce Falby

John L. Reed

Joseph Philip Forte

 

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1 DLA Piper (John L. Reed, R. Craig Martin and Scott B. Czerwonka) represented the prevailing plaintiff in the Auriga case.