Corporate Governance

The Race to the Bottom, Delaware, and LLCs: Waiver of Fiduciary Duties

By J Robert Brown Jr.

In the realm of limited liability companies, Delaware allows the parties to waive all fiduciary duties by those managing the LLC (members if it is member managed; managers if it is manager managed) except the duty of good faith and fair dealing.  See 6 Del. C. § 18-1101(c). 

It is an extreme position.  Operating agreements can entirely eliminate the duty of care and the duty of loyalty.  While most states allow for some reduction in these duties, only a few states have followed Delaware's lead and permitted complete waiver.  See  Nev. Rev. State. Ann. 86.286; C.R.S. 7-80-108(2)(d).

In other words, operating agreements can almost entirely eliminate recourse for mismanagement and self dealing.  That the agreement is a matter of contract does not prevent the uniformed or the inattentive from investing in an LLC that eliminates most protections for investors.  Whatever the policy reasons behind the authority, it certainly has the collateral benefit of making Delaware a favorable jurisdiction for LLC formation. 

The authority has generated a growing body of case law.  Courts have had to decide whether waiver has in fact occurred and the extent of any waiver.  One of those cases is discussed in the next post. 

Full post as published by The Race to the Bottom on September 29, 2010 (boomark / email).