Delaware provides for innovative operating agreement arrangements by including mandatory provisions which validate such plans in an efficient way.
One mandatory provision gives members the right to seek third-party resolution of disputes regarding manager election and removal issues, giving promoters of high-stakes private equity deals at least some pause.
Fiduciary Duty of Care
Corporate directors owe fiduciary duties of loyalty and care towards both the corporation and its stockholders that cannot be waived through contract. Under the LLC Act, however, parties can eliminate or modify these default fiduciary obligations through operating agreements.
MKE Holdings illustrates the necessity of thorough planning and consideration when creating LLC agreements. While it may be tempting to limit or waive obligations of care, doing so could have serious legal repercussions.
As a result, Delaware courts will apply a duty of care standard when reviewing allegations of management misconduct. As such, it is vital that any profit participation, salary increases, bonuses or transactions imposing default fiduciary duties be specifically approved or waived by members or partners (if applicable) prior to taking place; failing which, they could seek declaratory judgment before court of chancery.
Duty of Loyalty
In the Auriga case, the Court determined that LLC managers owe traditional fiduciary duties of loyalty and care to members, which they could be held liable for breaching. However, according to Delaware LLC Act provisions they could limit these responsibilities through including specific language in their operating agreement.
Due to this flexibility, LLCs are increasingly popular among businesses and investors looking to strike a balance between profit and social responsibility. Furthermore, Delaware’s relatively lax LLC requirements make the entity attractive for startups or smaller businesses that aren’t ready for full corporate governance yet.
Recent amendments to the LLC act include provisions regarding Series LLCs, which enable business owners to separate assets into distinct “series” in order to insulate them from each other’s debts and liabilities. Furthermore, public benefit LLCs were introduced – these for-profit companies were created explicitly with social or environmental goals in mind.
Duty of Disinterestedness
As one of the nation’s premier business jurisdictions, Delaware has had a profound influence on corporate law nationwide. However, Delaware’s LLC Act offers even greater flexibility for members and managers in terms of limiting potential liabilities.
The LLC Act permits companies to expand, restrict and/or eliminate fiduciary duties through written governing agreements; however, such amendments cannot negate an implied contractual covenant of good faith and fair dealing.
Investment firms frequently implement a conflict of interest policy and procedure within the LLC’s governing document that is reviewed by outside counsel, to limit scope of conflicts transactions or obtain committee approval using subjective good faith standards and conclusive presumptions.
Another option available to a portfolio company is including contractual standards that mirror, in some ways, the common law duty of loyalty. These must be carefully drafted for effective implementation.
Duty of Prudence
The Delaware LLC Act (SS 18-221) details the duties and responsibilities of members and managers, while also permitting an LLLC to set contractual standards that track or even exceed Delaware’s common law fiduciary duties. Although contractual standards cannot replace common law duty obligations, parties are free to stipulate them within their governing documents.
Statutory provisions permit DLLCs to indemnify their stockholders, directors and officers against claims arising out of its operations – offering investors valuable protection compared to indemnification provisions offered to stockholders of corporations.
The Delaware Limited Liability Company Act allows companies to ratify or waive their fiduciary duties, and the Court of Chancery has determined that managers must abide by this requirement. However, simply sanctioning or providing processes for conflicts committee approval do not qualify as valid disclaimers of fiduciary duties under this law.
