LLC Provisions Regarding Directors and Managers: Recent Delaware Decisions and Key Practice Points for Counsel

Description

The number of LLCs and other pass-through entities formed in Delaware are increasing. To maximize the benefit from the advantages of LLC structure after recent Delaware court decisions, counsel must ensure that LLC agreements precisely address (or eliminate) the obligations and duties of LLC directors and managers.

Recent Delaware court rulings put LLC directors and managers on notice of the consequences of actions that do not comply with the terms and provisions of the company’s operating agreement. These cases focused on issues such as a lack of safe harbor protections in conflicting transactions (and/or the failure to satisfy such safe harbors), ambiguity of contract provisions, language suggestive of fiduciary duties beyond what is stated within the LLC agreement, the implied covenant of good faith and fair dealing, and other matters that contrast between LLC and corporate law.

In the corporate context, directors’ fiduciary duties of care and loyalty to the corporation and its shareholders cannot be disclaimed by agreement. State law may have the same standards for LLC directors and managers as a default rule, but such duties may be, and typically are, modified or eliminated by the terms of the LLC agreement, so as to limit management’s duties to those specified in the agreement or those that courts may reasonably infer under the implied covenant of good faith and fair dealing. Counsel must know the recent Delaware court decisions to identify considerations for negotiating and drafting LLC agreements.

Listen as our panel discusses recent Delaware court decisions regarding LLC agreements, critical issues regarding directors and managers, and key points and best practices in drafting provisions to avoid breach claims in light of recent cases.