Overt disclosure requirement for eliminating the duty of loyalty
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Authors
Fershee, Joshua P.
Issue Date
2019
Type
Journal Article
Language
Keywords
Alternative Title
Abstract
This essay focuses on the concept of eliminating the fiduciary duty in an LLC, as permitted by Delaware law, and what that could mean for future parties. When parties A and B get together to create an LLC, it is okay if they negotiate to eliminate their fiduciary agreements as to one another. They are negotiating for what they want; they are entering into that entity and operating agreement together of their own free will. Although there may be differences in bargaining power—one may be wealthier than the other or have different kinds of power dynamics—they are entering into this agreement fully aware of what the obligations are and what the options are for somebody in creating this entity.
However, there is a concern with eliminating fiduciary obligations down the road. That is, how do we make sure that if people are going to disclaim the fiduciary duty of loyalty, particularly, what happens if this change is made after formation? In such a case, traditional partnership law says there are certain kinds of decisions, at least absent an agreement to the contrary, that must to go to the entire group of entity participants. That is, a majority vote is not sufficient; there is essentially a minority veto.
This essay supports the freedom of contract that the elimination of fiduciary duties provides, but also acknowledges the risks such eliminations can provide. Thus, the essay argues that Delaware (and other states allowing reduction or elimination of the duty of loyalty) should require an express statement about LLC fiduciary duties (when modified from the default) and an express statement of how those duties can be modified, whether expanding, restricting, or eliminating the duties. To protect against the predatory modification of fiduciary duties, states should include a statutory requirement that changes to fiduciary duties must be express as should the rules for modifying such duties. This essay also provides sample statutory language to that end.
However, there is a concern with eliminating fiduciary obligations down the road. That is, how do we make sure that if people are going to disclaim the fiduciary duty of loyalty, particularly, what happens if this change is made after formation? In such a case, traditional partnership law says there are certain kinds of decisions, at least absent an agreement to the contrary, that must to go to the entire group of entity participants. That is, a majority vote is not sufficient; there is essentially a minority veto.
This essay supports the freedom of contract that the elimination of fiduciary duties provides, but also acknowledges the risks such eliminations can provide. Thus, the essay argues that Delaware (and other states allowing reduction or elimination of the duty of loyalty) should require an express statement about LLC fiduciary duties (when modified from the default) and an express statement of how those duties can be modified, whether expanding, restricting, or eliminating the duties. To protect against the predatory modification of fiduciary duties, states should include a statutory requirement that changes to fiduciary duties must be express as should the rules for modifying such duties. This essay also provides sample statutory language to that end.
Description
Citation
Joshua Fershée, An Overt Disclosure Requirement for Eliminating the Duty of Loyalty, 20 Transactions: Tenn. J. Bus. L. 979 (2019).