Client Alerts

Managers and Managing Members of Delaware LLCs May Face Default Fiduciary Duty Risks

Client Alerts | September 2, 2013 | Securities and Corporate Finance

Delaware amended Section 18-1104 of its Limited Liability Company Act (the “LLCA”) such that the managers and managing members of a limited liability company automatically owe fiduciary duties to the limited liability company and its members, unless the operating agreement expressly states otherwise. This change creates an impetus for managers and controlling members to check their limited liability company operating agreements promptly to ensure they contain appropriately protective language.

In , 2012 Del. Lexis 577 (Del. Nov. 7, 2012), the Delaware Supreme Court hinted at an “ambiguity” about whether the LLCA provided for default fiduciary duties when a limited liability company agreement was otherwise silent regarding the existence of fiduciary duties. The Delaware Supreme Court was responding to the “improvident and unnecessary” dictum in the Chancery Court’s opinion in Auriga that affirmatively stated that the LLCA in fact provided for default fiduciary duties on managers and controlling members unless the limited liability company agreement stated otherwise. Delaware’s Supreme Court then went one step further and suggested that the appropriate Delaware organizations (read: the Delaware State Bar Association and the Delaware General Assembly) might be “well advised” to resolve the matter finally.

Reacting to the Delaware Supreme Court’s suggestion, the Delaware State Bar Association proposed and, on June 30, 2013 the Delaware General Assembly adopted, an amendment to Section 18-1104 of the LLCA clarifying that the LLCA does in fact impose default fiduciary duties on managers and controlling members, unless the limited liability agreement contract provides otherwise. The full text of new Section 18-1104 of the LLCA is as follows (note that the amendment adds the underlined language):

“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 states that:

[The amendment] 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.

Notably, the amendment to Section 18-1104 applies to all limited liability company agreements, not just those created on or after August 1, 2013. Consequently, parties with existing limited liability company agreements that do not expressly address the fiduciary duties of the managers or controlling members should consider expressly opting out of the default fiduciary duties now clearly provided for in the LLCA.