DELAWARE LLCS:
FIDUCIARY DUTY OPPORTUNITIES AND
PITFALLS
INDIANAPOLIS BAR ASSOCIATION
OCTOBER 17, 2012
Matthew S. Criscimagna
302-651-7593
criscimagna@rlf.com
www.rlf.com
Introduction
 Default Fiduciary Duties
 Modification of Fiduciary Duties
 Modification of Liability
 Considerations in Drafting LLC Agreements
 Case Law Developments
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Default Fiduciary Duties
 The Delaware Limited Liability Company Act (the
“LLC Act”) assumes that members and
managers of a Delaware limited liability company
(an “LLC”) have fiduciary duties, but does not
specify the nature of such duties.
 Delaware courts have historically imposed
fiduciary duties on those who act for the benefit
of another.
 Delaware courts have stated that members and
managers of an LLC have fiduciary duties.
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Default Fiduciary Duties
 Absent a provision in a limited liability company
agreement to the contrary, a manager or
controlling member of an LLC owes traditional
fiduciary duties of loyalty and care to the LLC
and its members.
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Default Fiduciary Duties
 The duty of care requires directors to inform
themselves “prior to making a business decision,
of all material information reasonably available to
them.”
 The duty of loyalty prohibits directors from using
their “position of trust and confidence to further
their private interests.” It requires that directors
be motivated by the best interests of the
corporation and its stockholders.
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Modification of Fiduciary Duties
 The LLC Act permits contractual modification of
fiduciary duties in a limited liability company
agreement.
 Duties (including fiduciary duties) may be
expanded, restricted or eliminated.
 May not eliminate the implied contractual
covenant of good faith and fair dealing.
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Modification of Fiduciary Duties
 6 Del. C. §18-1101(c) provides:
 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.
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Modification of Fiduciary Duties
 Modifying fiduciary duties must be done
expressly and unambiguously in the limited
liability company agreement.
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Modification of Fiduciary Duties
 Implied Contractual Covenant of Good Faith and
Fair Dealing
 Purpose - to enforce the reasonable expectations of
the parties to a contract when situations arise that are
not contemplated and provided for in the contract.
 Test - whether the parties would have agreed to
proscribe the act later complained of as a breach of
the implied contractual covenant had they thought to
negotiate with respect to that matter.
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Modification of Liability
 Default Rule – No liability for breach of fiduciary
duty for good faith reliance on the provisions of
the limited liability company agreement.
 The LLC Act permits limitation or elimination of
liability for breach of contract and breach of
duties (including fiduciary duties).
 May not limit or eliminate liability for bad faith
violation of the implied contractual covenant of
good faith and fair dealing.
Copyright © 2010 Richards, Layton & Finger, P.A. All rights reserved.
Modification of Liability
 6 Del. C. §18-1101(d) provides:
 Unless otherwise provided in a limited liability
company agreement, a member or manager or other
person shall not be liable 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 for breach of
fiduciary duty for the member’s or manager’s or
other person’s good faith reliance on the provisions
of the limited liability company agreement.
Copyright © 2010 Richards, Layton & Finger, P.A. All rights reserved.
Modification of Liability
 6 Del. C. §18-1101(e) provides:
 A limited liability company agreement may provide for
the limitation or elimination of any and all liabilities
for breach of contract and breach of duties
(including fiduciary duties) of a member, manager
or other person 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; provided, that a limited liability
company agreement may not limit or eliminate
liability for any act or omission that constitutes a bad
faith violation of the implied contractual covenant
of good faith and fair dealing.
Copyright © 2010 Richards, Layton & Finger, P.A. All rights reserved.
Considerations in Drafting LLC
Agreements
 Provisions regarding:
 Modification/elimination of fiduciary duties
 Limitation/elimination of liability
 Exculpation and indemnification
 Outside business (“corporate” opportunities)
 Affiliated transactions
 Conflicts of interest
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Considerations in Drafting LLC
Agreements
 “Sole Discretion”
 To the fullest extent permitted by law and notwithstanding any
other provision of this Agreement or in any agreement
contemplated herein or applicable provisions of law or equity or
otherwise, whenever in this Agreement the [Manager] is permitted
or required to make a decision (a) in its "sole discretion" or
"discretion" or under a grant of similar authority or latitude, the
[Manager] shall be entitled to consider only such interests and
factors as it desires, including its own interests, and shall have no
duty or obligation to give any consideration to any interest of or
factors affecting the Company, any Member or any other Person,
or (b) in its "good faith" or under another express standard, the
[Manager] shall act under such express standard and shall not be
subject to any other or different standard.
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Considerations in Drafting LLC
Agreements
 Elimination of Fiduciary Duties
 To the fullest extent permitted by law, the [Manager]
shall owe no fiduciary duties to the Company or the
Members; provided that the [Manager] shall act in
accordance with the implied contractual covenant of
good faith and fair dealing.
 The [Manager] shall owe no fiduciary duties to the
Company or the Members; provided that the
[Manager] shall act in accordance with the implied
contractual covenant of good faith and fair dealing.
 To the fullest extent permitted by law, the [Manager]
shall owe no fiduciary duties to the Company or the
Members.
Copyright © 2010 Richards, Layton & Finger, P.A. All rights reserved.
Considerations in Drafting LLC
Agreements
 Limitation/Elimination of Liability
 To the extent that, at law or in equity, the [Manager]
has duties (including fiduciary duties) and liabilities
relating thereto to the Company or to a Member, the
[Manager] acting under this Agreement shall not be
liable to the Company or to any such Member for its
good faith reliance on the provisions of this
Agreement.
Copyright © 2010 Richards, Layton & Finger, P.A. All rights reserved.
Considerations in Drafting LLC
Agreements
 Outside Business (“corporate” opportunity)
 Any Member and any Affiliate of any Member may engage in or possess
an interest in other profit-seeking or business ventures of any kind,
nature or description, independently or with others, similar or dissimilar
to the business of the Company, whether now existing or hereafter
acquired or initiated, whether or not such ventures are competitive with
the Company, and the doctrine of corporate opportunity, or any
analogous doctrine, shall not apply to any Member. No Member who
acquires knowledge of a potential transaction, agreement, arrangement
or other matter that may be an opportunity for the Company shall have
any duty to communicate or offer such opportunity to the Company, and
such Member shall not be liable to the Company or to the other
Members for breach of any fiduciary or other duty existing at law, in
equity or otherwise by reason of the fact that such Member pursues or
acquires for, or directs such opportunity to another Person or does not
communicate such opportunity or information to the Company. Neither
the Company nor any Member shall have any rights or obligations by
virtue of this Agreement or the relationship created hereby in or to such
independent ventures or the income or profits or losses derived
therefrom, and the pursuit of such ventures, even if competitive with the
activities of the Company, shall not be deemed wrongful, improper or the
breach of any duty to the Company or any Member existing at law, in
equity or otherwise.
Copyright © 2010 Richards, Layton & Finger, P.A. All rights reserved.
Considerations in Drafting LLC
Agreements
 Conflicts
 Unless otherwise expressly provided herein, (i) whenever a
conflict of interest exists or arises between the [Manager] or any
of its Affiliates, on the one hand, and the Company, or any
Member on the other hand, or (ii) whenever this Agreement or
any other agreement contemplated herein or therein provides that
the [Manager] shall act in a manner which is, or provides terms
which are, fair and reasonable to the Company, or any Member,
the [Manager] shall resolve such conflict of interest, take such
action or provide such terms, considering in each case the
relative interest of each party (including its own interest) to such
conflict, agreement, transaction or situation and the benefits and
burdens relating to such interests, any customary or accepted
industry practices, and any applicable generally accepted
accounting practices or principles. In the absence of bad faith by
the [Manager], the resolution, action or terms so made, taken or
provided by the [Manager] shall not constitute a breach of this
Agreement or any other agreement contemplated herein or of any
duty or obligation of the [Manager] at law or in equity or
otherwise.
Copyright © 2010 Richards, Layton & Finger, P.A. All rights reserved.
Considerations in Drafting LLC
Agreements
 Elimination or modification of fiduciary duties
must be express and unambiguous
– For better or worse, there may always be some
inherent bias towards fiduciary analysis
Copyright © 2010 Richards, Layton & Finger, P.A. All rights reserved.
Case Law Developments
 Nemec v. Shrader, 991 A.2d 1120 (Del. Supr. 2010) and other
implied contractual covenant cases
 CML V, LLC v. Bax, 6 A.3d 238 (Del. Ch. 2010)
 William Penn Partnership v. Saliba, 13 A.3d 749 (Del. 2011)
 Kuroda v. SPJS Holdings, L.L.C., 2010 WL 925853 (Del. Ch. Mar. 16,
2010)
 Auriga Capital Corp. v. Gatz Properties, 40 A.3d 839 (Del. Ch. 2012)
 Hite Hedge LP v. El Paso Corp., C.A. No. 7117-VCG (Oct. 9, 2010)
Copyright © 2010 Richards, Layton & Finger, P.A. All rights reserved.
Matthew S. Criscimagna
 MATTHEW S. CRISCIMAGNA is a director in the firm’s Business
Department. He is a transactional attorney with a practice focused on
rendering advice as to matters of Delaware law relating to alternative
entities, including Delaware general partnerships, limited liability
partnerships, limited partnerships and limited liability companies.
 Handling a wide variety of transactions involving Delaware
alternative entities, Mr. Criscimagna has been involved in formation,
operation and governance matters, structured finance transactions,
investment fund transactions, joint venture transactions, mergers,
acquisitions, conversions and domestications. His practice also
involves analyzing fiduciary duty and contractual interpretation issues
with respect to Delaware alternative entities.
 Mr. Criscimagna is a member of the Delaware State Bar Association
and the American Bar Association. He received a JD from the
University of Missouri-Columbia, Order of the Coif, and a BA, magna
cum laude, from Salisbury University.
Copyright © 2010 Richards, Layton & Finger, P.A. All rights reserved.