Corporate Governance

Related Westpac LLC v. JER Snowmass LLC: Implicit Waiver of Fiduciary Duties (Discouraging Investment into Delaware LLCs)

By J Robert Brown Jr.

On the one hand, Westpac stands for the proposition that freedom of contract will ultimately prevail.  Parties can waive fiduciary duties if they so decide.

This case, however, does not really stand for that proposition.  It is in fact a provision that makes investments into LLCs more uncertain and difficult and, as a result, discourages capital formation.  By allowing waiver of fiduciary duties (save the duty of good faith and fair dealing), investors are subject to a rule of "let the buyer beware."  Nonetheless, to the extent that investors were inattentive and agreed to invest notwithstanding, as well as an absence of meaningful fiduciary duties, the argument exists that they bear some of the fault. 

In this case, however, the court did not deal with an explicit waiver of fiduciary duties but found an implicit one.  The specifics of the operating agreement (concerning capital calls) implicitly eliminated fiduciary obligations relative to those actions.  Investors, therefore, must take into account the possibility that courts in Delaware will imply a waiver of fiduciary duty implicitly whenever behavior is explicitly addressed in the operating agreement.

In other jurisdicitions where complete waiver of fiduciary duties is not permitted, investors will not incur the same risk.  The moral of this case is that investors should not only bargain for favorable provisions but also should bargain for formation in other jurisdictions to escape a court system that renders fiduciary obligations uncertain. 

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