What Fiduciary Duties Should Apply to the LLC Manager after More Than a Decade of Experimentation?

Article excerpt

I. INTRODUCTION

II. ACADEMIC AND THEORETICAL APPROACHES TO THE STUDY OF FIDUCIARY
DUTIES

A. The Corporate Context of the Fiduciary Duty Debate

B. The Unincorporated Context of the Fiduciary Duty Debate

C. A Closer Look at the Schools of Thought

   1. The Contractarian School

   2. Traditionalists

   3. The Team Production Theory of the Corporation, Fiduciary Duties,
     and Social Norms

   4. Game Theory Applied to Fiduciary Duties

   5. The Empirical Study of Fiduciary Duties

   6. The Structural Model for Fiduciary Duty Terms

III. THE LLC STATUTES

IV. THE CASES: NO SHORTAGE OF FIDUCIARY DUTY VIOLATIONS

A. A Mandatory Core of Minimum Standards Emerges in Courts Outside of
   and Within Delaware

B. Traditional Broad Formulations of Fiduciary Duty Outside of
   Delaware

C. The Entire Fairness Test Within Delaware

D. The Importance of a Duty of Candor

E. Troubling Decisions Suggest the Importance of Turning to
   Contractually Oriented Limitations

   1. The Need to Distinguish the Right to Compete from the Duty of
     Candor

   2. Contractual Standards That Ensure the Enforcement of the Spirit
     of the Contract

   3. Recognition That the Right to Privately Order LLC Relationships
      is Not a License to Exploit, Steal, Self-Deal, or Deceive

   4. Good Faith as an Implied Covenant to Ensure the Enforcement of
     Reasonable Expectations

V. THE LEGISLATIVE PROPOSALS: A BALANCED APPROACH TO FIDUCIARY DUTIES

  A. The Policy Debate Unfolds as the Uniform Limited Liability Company
    Act is Revised

  B. The Mandatory Core Approach Recommended

  C. Theoretical Justification for the Mandatory Core Theory: Promoting
    and Reflecting Positive Social Norms

  D. Litigation Over the Last Decade Illustrates the Necessity of
    Mandatory Minimum Standards

  E. The Implied Covenant of Good Faith May Not Effectively Substitute
    the Fiduciary Duty of Loyalty

  F. A Balanced Statutory Framework in Light of Imperfections and
    Inequalities in the Contracting Process, and Courts that May Lack
    Business Expertise

  G. An Express Statutory Duty of Loyalty and Standard of Care is Needed
    to Guide Courts

  H. Leaving Room for Contractual Modification Demanded by the
    Marketplace

  I. Permitting a Right to Compete Without Eliminating the Duty of
    Candor or Eliminating Other Fiduciary Duties

VI. CONCLUSION

APPENDIX A

APPENDIX B

APPENDIX C

I. INTRODUCTION

The American limited liability company (LLC) is like an incorporated partnership. (1) The LLC allows private business owners to form a company that provides protection from personal liability for business debts, without incurring a second level of corporate federal income tax on the business entity's earnings. (2) It provides freedom from cumbersome corporate processes by offering unparalleled flexibility in management structure. (3) Although unburdened by an entity level corporate tax, the LLC can have centralized management similar to that of a corporation or create any number of alternative modes of management. (4)

Beginning with Wyoming in 1977, states across the country eagerly embraced the LLC concept. (5) Although in 1994 the National Conference of Commissioners on Uniform State Laws (NCCUSL) endorsed a uniform LLC statute called the Uniform Limited Liability Company Act (ULLCA), most states had just completed the process of adopting their own self-styled LLC statutes, (6) and few states wanted to quickly return to their legislative chambers to adopt a different LLC statute. Consequently, only a handful of states adopted ULLCA and the great majority of LLC statutes differ considerably from state to state. (7)

The variation among LLC statutes is particularly striking with regard to the standard of care applicable to LLC managers, (8) the duty of loyalty owed to the LLC, (9) and the extent to which remedies are available to address wrongful treatment when one LLC member or manager has mistreated another. …

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