Academic journal article Journal of Corporation Law

The Best of Both Worlds: Default Fiduciary Duties and Contractual Freedom in Alternative Business Entities

Academic journal article Journal of Corporation Law

The Best of Both Worlds: Default Fiduciary Duties and Contractual Freedom in Alternative Business Entities

Article excerpt

  I. INTRODUCTION  II. FIDUCIARY DUTIES IN LLCS: RESPONSIBILITY AND AGENCY PRINCIPLES      A. Fiduciary Duties: The Risk-Responsibility Connection and         Default Fiduciary Duties      B. Diverse Statutory Approaches to LLC Fiduciary Duties Outside of         Delaware      C. Need for Flexible Contractually Modifiable Terms      D. Developing LLC Case Law Outside Of Delaware Recognizes Both         Fiduciary Duties and the Important Role Of Contract         1. Broad-based recognition of the existence of fiduciary            duties in the LLC outside of Delaware         2. Complexity Is Inevitable And Courts Can Handle It III. THE FIDUCIARY DUTY DEBATE IN DELAWARE      A. The Delaware Supreme Court Acknowledges Default Fiduciary         Duties in Delaware LPs and LLCs      B. Rekindling of The Delaware Fiduciary Duty Debate  IV. ECONOMIC AND EMPIRICAL FACTORS      A. The Economic Perspective: Standard Terms, Actual Usage Of LLCS,         and the Kaldor-Hicks Notion of Efficiency      B. The Empirical Data         1. Fiduciary Duty Waivers in Publicly Traded Corporations:            Suggestions of little bargaining         2. Fiduciary Duty Waivers in Publicly Traded LLCS and LLPS:            Prevalence of Waivers with Mixed Picture On Negotiation         3. Unequal Bargaining Power in Some Contexts         4. Mixed Picture on Active Negotiation         5. Vulnerability of Going Private         6. Studies on Practitioner Experience Raise Questions About            Disparities in Negotiating Power      C. Investor Optimism: Does It Reduce The Likelihood that People         Will Contractually Self-Protect?   V. IMPLICATIONS & RECOMMENDATIONS: CONTRACTUAL FREEDOM TEMPERED BY      CONSTRAINTS      A. The Default Fiduciary Duty Question and Small Business      B. Empirical Data Reveals a Distinctly Pro-Management Orientation      C. The Implied Covenant of Good Faith and Fair Dealing Is Not a         Substitute for Fiduciary Duties      D. Offering the Best of Both Worlds: Contractual Freedom Subject         to Constraints Via the UPA or the RULLCA      E. Developing a Research Agenda     VI. CONCLUSION APPENDIX A: LLC STATUTES NATIONWIDE APPENDIX B: HIGHLIGHTS OF RULES PERMITTING SOME FORM OF CONTRACTUAL             ELIMINATION OF THE DUTY OF CARE AND LOYALTY APPENDIX C: PERCENTAGE OF TAX RETURNS REPORTING RECEIPTS UNDER             $1,000,000 AND RECEIPTS UNDER $100,000 

I. INTRODUCTION

Imagine that Thomas and Easton each owned 50% of T & E Boating, LLC, a limited liability company (LLC) that sold small boats on the shoreline of Connecticut. Although Thomas and Easton had intended to sign an LLC operating agreement, they never got around to it. The business was run quite informally, with Thomas as the manager and Easton involved in management matters only occasionally. over the next 20 years, the company acquired a small marina. Then, unbeknownst to Thomas, Easton was contacted by Christal & Krafters, Inc., which offered to buy the business for $8,000,000. Almost immediately thereafter, knowing that Thomas was planning to re-locate, Easton offered to buy out Thomas' LLC interest for $500,000. Two weeks after buying out Thomas, Easton sold the LLC to Christal and Krafters, Inc. for $8,000,000.

This tale is all too familiar. (1) What duty of disclosure, if any, should LLC members and investors owe, absent an LLC operating agreement? Should Thomas be able to sue Easton to effectively obtain 50% of the sales price received for the business? Should the parties have been allowed to enter into an operating agreement that eliminated all fiduciary duties? Presumably, in this context, such duties would include a duty to promote the best interests of the LLC, to be candid in disclosing material information such as an offer of purchase, an obligation not to compete, and an obligation to refrain from grossly negligent conduct or, put another way, a duty to exercise reasonable care subject to one's business judgment. …

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