Category: Fiduciary Duties

LLC FIDUCIARY LAW

By , August 9, 2018 4:51 pm

Published in the Marquette Law Review is a lengthy, scholarly but also practical article about LLC fiduciary law under the Wisconsin LLC Act.  It will, of course, be of particular relevance to Wisconsin lawyer, but also to LLC lawyers nationally.  Below are the title, table of contents and first paragraph of the article.

101 Marq. L. Rev. 863
Marquette Law Review
Spring, 2018
Comment
Collin D. Brunk
Copyright © 2018 by the Marquette Law Review; Collin D. Brunk
POLISHING UP WISCONSIN’S FIDUCIARY DUTIES IN LLC LAW TO ATTRACT NEW SUITORS

I. INTRODUCTION
II. EXPLORING THE HISTORY OF LLCS AND FIDUCIARY DUTIES
A. Formation and Structures of LLCs
B. Overview of Fiduciary Duties
III. APPLICABLE LLC METHODS
A. Revised Uniform Limited Liability Company Act
B. Delaware LLC Method
1. Delaware’s contractual waiver of duties
2. Delaware’s ambiguous default duties
C. Wisconsin’s Adoption of LLCs
1. Waiver of fiduciary duties
2. Default common law fiduciary duties in Wisconsin
IV. INCREASING THE ATTRACTIVENESS OF WISCONSIN LLCS
V. CONCLUSION

INTRODUCTION

Should individuals be allowed to waive fiduciary duties in a limited liability company (LLC)? Why do these fiduciary duties matter? These questions pervade scholar’s discussions when looking to improve a state’s LLC provisions. Many states permit the contractual alteration and elimination of fiduciary duties in an LLC through waiver. However, many states fail to provide clear default fiduciary duties owed by members or managers of the LLC, nor do they provide a clear upholding of waived duties. Without a clearly articulated waiver policy and list of default duties, members and potential investors may experience higher transaction costs upon LLC formation and shy away from forming an LLC in that state. Allowing such issues to persist directly contradicts the policy behind LLC formation. As one scholar stated, “[T]he overall social policy goal of business entity governance [is] to foster investor confidence while keeping transaction costs at a minimum.” Thus, a state’s LLC statute and related provisions should reflect this sentiment.

Since Wisconsin’s adoption of the LLC in 1994 little discussion has occurred regarding the default fiduciary duties members owe to the LLC and each other. Such lack of discussion leaves Wisconsin courts, attorneys, members of the LLC, and third parties to guess at the baseline fiduciary duties owed by members and managers. This topic must be tackled because the Wisconsin LLC statute ambiguously lists the default duties. The ambiguity in the current statute and lack of discussion leaves scholars debating whether common law fiduciary duties are owed if not contractually altered in the operating agreement.

Wisconsin courts waver on their implementation of the “common law” fiduciary duties to members of an LLC, creating great uncertainty for members, managers, and investors in LLCs. The only certainty that parties in Wisconsin rely on is that fiduciary duties may be altered or waived by the contractual language of the operating agreement. However, this waiver of fiduciary duties has not yet been upheld by Wisconsin courts, creating many issues as parties are uncertain if their waiver will be enforced.

Part II of this Comment examines the national rise of LLCs. Additionally, it explores the purpose of fiduciary duties as well as why they apply to certain individuals. This discussion puts into perspective the need to revise Wisconsin’s current LLC Act or enact a new LLC statute. Part III looks at the two most popular LLC regulatory methods, the Revised Uniform Limited Liability Company Act (RULLCA) and the Delaware method. Critiquing and examining these methods allows one to find the best practices to apply in Wisconsin. In addition, this part examines Wisconsin’s current LLC Act and the surrounding provisions, noting significant gaps in the current provisions. Part IV provides how Wisconsin can fill the gaps in its LLC provisions by enacting a new LLC statute that explicitly creates the default fiduciary duties of loyalty and care, but allows for the contractual waiver of these duties. The benefits derived from enacting this statute will increase investment in LLCs or promote additional LLC formations by fostering member and investor confidence.

LAW JOURNAL ARTICLE ABOUT FIDUCIARY DUTIES UNDER THE FLORIDA LLC ACT

By , November 2, 2017 2:03 pm

Below are the citation to and the first couple of paragraphs of a law journal article about fiduciary duties under the Florida LLC Act.  The author, Louis Conti, has been a leading LLC lawyer and scholar for many years.

91-OCT Fla. B.J. 32
Florida Bar Journal
September/October, 2017
Column
Business Law
Louis T. M. Conti
Copyright © 2017 by The Florida Bar; Louis T. M. Conti

UN-CABINED FIDUCIARY DUTIES IN FLORIDA LLCS: THE COMMON LAW AND EQUITY OPENS THE DOOR TO EXPANDED LIABILITY AND THE MANIFESTLY UNREASONABLE STANDARD

Limited liability companies (LLCs) have become the predominant form of business entity for private companies in America. The question generally is not whether to use an LLC for most privately held businesses, but rather where to form the entity. The jurisdiction of formation choice is narrowed to either the “home state” where the principal office and activities of the business will be based, or Delaware, the most generally accepted foreign forum. Evaluating the jurisdiction of formation turns on several key concepts that are beyond the scope of this article, but the most important factors are the state LLC statute’s fiduciary duty provisions and caselaw addressing fiduciary duties.

This article describes the fiduciary duty law that applies to Florida LLCs, with a special focus on consequences of the “un-cabining of fiduciary duties” occasioned by the Florida Revised LLC Act, as amended in 2015.

IMPLIED COVENANT

By , April 28, 2017 2:17 pm

Lawyer shouldn’t draft operating agreements for multi-member LLCs unless they have a solid understanding of the implied contractual covenant of good faith and fair dealing. Below are a cite and the first paragraph of a good new article on the implied contractual covenant of good faith and fair dealing.

58 B.C. L. Rev. E-Supplement 1
Boston College Law Review E-Supplement
2017
Essay
LEAP OF FAITH: DETERMINING THE STANDARD OF FAITH NEEDED TO VIOLATE THE IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING FOR DELAWARE LIMITED LIABILITY COMPANIES
Pat Andriola
Copyright: 2016 by Pat Andriola. All rights reserved.

Abstract: Delaware courts have long respected the right to contract in Delaware, and possibly no entity is afforded more privileges to set the boundaries of its corporate form than the Delaware Limited Liability Company. Unlike nearly every other state, Delaware permits LLCs to abolish the duties of care and loyalty in their operating agreements, but forbids companies to eliminate liability for “any act or omission that constitutes a bad faith violation of the implied contractual covenant of good faith and fair dealing.” The problem with the phrase “bad faith violation” is that, when referencing a breach of the implied covenant of good faith and fair dealing, it implies that there exists a non-bad faith violation of the covenant. In determining whether or not “neutral faith” or “non-bad faith” violations of the implied covenant are permissible under Delaware LLC law, this essay argues that Delaware courts should look to the relatively short history of the covenant, the contractarian spirit of Delaware laws and courts, and section 18-1101 of the Delaware Limited Liability Company Act to hold that the implied covenant can only be violated in bad faith.

PROFESSIONAL ENTITY BREAKUPS

By , March 31, 2017 4:39 pm

The question addressed in the case discussed by Peter Mahler in his most recent “Business Divorce” post is, in Peter’s own words (below in quotes):

“Does a shareholder have a fiduciary duty not to exercise a contractual right under the shareholders agreement to resign and demand a buy-out of his shares by the financially distressed corporation, particularly when the corporation’s default would trigger the other shareholders’ personal guarantees?”

The professional entity in Peter’s post is a corporation. However, the issues for that entity and its shareholders apply as much to professional LLCs and their members.

Here is the link to Peter’s post: http://www.nybusinessdivorce.com/2017/02/articles/professional-corporations/race-exit-professional-practice-falters/

FIDUCIARY DUTIES OF SHAREHOLDERS

By , March 2, 2017 4:44 pm

A basic question under every LLC act is whether, under that act, the members as such have fiduciary duties (i) to the other members; (ii) to the LLC itself; or (iii) to both the other shareholders and the LLC.  The post under the link below discusses a case addressing only the fiduciary duties of corporate shareholders as shareholders.  However, some of the concepts in the case are also important for LLCs.

Here’s the post:  http://kentuckybusinessentitylaw.blogspot.com/2016/10/kentucky-court-of-appeals-holds-that.html

BUSINESS JUDGMENT RULE

By , February 13, 2017 3:41 pm

The post under the link below discusses a very recent Delaware Court of Chancery decision about the business judgment rule.  LLC lawyers need to have a detailed understanding of this rule because, among other things, it should often be included with the duty of care provisions in operating agreements for multi-member LLCs.

Here’s the link:

https://delawarechancery.foxrothschild.com/mergers-and-acquisitions/business-judgment-rule-applied-when-disinterested-majority-approved-merger-in-fully-informed-and-uncoerced-vote/?utm_source=Fox+Rothschild+-+Delaware+Chancery+Law+Blog&utm_campaign=c105709976-RSS_EMAIL_CAMPAIGN&utm_medium=email&utm_term=0_86821ff155-c105709976-70733165

DELAWARE SUPREME COURT CASE ABOUT FIDUCIARY DUTIES

By , February 6, 2017 1:58 pm

The post under the link below discusses a December 19, 2016 decision by the Delaware Supreme Court affirming the validity of Delaware limited partnership  agreement provisions waiving limited partners’ fiduciary rights.  The decision effectively applies also to all other Delaware “alternative entities,” including LLCs.   It’s often useful for LLC lawyers to provide for waivers of member fiduciary rights even in small family-owned LLCs.  Whether these waivers would be upheld under the LLC acts of non-Delaware states may be unclear.  Under the Delaware Limited Liability Company Act, it is now crystal-clear.

Here is the link:

http://www.lexology.com/library/detail.aspx?g=5da4687a-3fb7-4fc0-9630-0dee47bd4c7a&l=7TC5MFM

DELAWARE CASE REGARDING THE FIDUCIARY DUTY OF DISCLOSURE

By , January 17, 2017 6:26 pm

The duty of entity managers to disclose critical information to entity owners concerning their entities is a key component of the duty of loyalty under the law of Delaware and other states.  This duty is the central focus of the January 4, 2017 decision by the Delaware Chancery Court discussed in the post under the link below.  The entity owners in that case were corporate shareholders and the fiduciary breach in question involved a short-form merger.  However, the broad fiduciary principles in the case apply equally to LLC members and to non-merger matters.

Here’s the link:

https://delawarechancery.foxrothschild.com/mergers-and-acquisitions/chancery-dismisses-complaint-alleging-breach-of-duty-of-disclosure-regarding-short-form-merger/?utm_source=Fox+Rothschild+-+Delaware+Chancery+Law+Blog&utm_campaign=6a85ff6c81-RSS_EMAIL_CAMPAIGN&utm_medium=email&utm_term=0_86821ff155-6a85ff6c81-70733165

CHANGES IN FIDUCIARY PROVISIONS OF CALIFORNIA LLC ACT

By , January 13, 2017 6:30 pm

Under the link below is an excellent new post about recent changes in the fiduciary provisions of the California LLC Act.  The post will, of course, be of interest above all  to California LLC lawyers, but it will also be useful to non-California LLC lawyers about fiduciary issues critically important to LLC formations under all LLC acts.

Here’s the link:  http://www.lexology.com/library/detail.aspx?g=5b796059-e1b1-4f05-bf79-63cc92a89c5a&l=7T7RSDM

ARTICLE ON BUSINESS ORGANIZATION FIDUCIARY LAW

By , November 7, 2016 4:37 pm

Bill Callison is a leading expert on LLC law and tax.  Below is a link to an article he’s just published on U.S. business organization fiduciary law.   Fiduciary issues are, of course, central to formations of multi-member LLCs (and even to formations of single-member LLCs that will have non-member managers).  I haven’t read Bill’s article yet, but since he’s the author of it, I know it is excellent.

http://ssrn.com/abstract=2827771