Challenging Traditional Thought: No Default Fiduciary Duties in Delaware Limited Liability Companies after Auriga
35 Pages Posted: 8 Dec 2011 Last revised: 3 Mar 2013
Date Written: December 6, 2011
We agree with Chief Justice Myron T. Steele in his article, Freedom of Contract and Default Contractual Duties in Delaware Limited Partnerships and Limited Liability Companies, that the proper default rule for Delaware limited liability companies (“LLCs”) formed under the Delaware Limited Liability Company Act (“DLLCA” or “Act”) is the contractual duty of good faith and fair dealing. In this article we invite each reader to set aside bias, pre-conceived legal opinions, and rote legal training and to listen. Hearing each legal argument and searching for – not assuming – the most appropriate answer to the question of default duties is our quest. To provide context, this article begins by examining Chief Justice Steele’s position on default fiduciary duties. Next, this article analyzes the DLLCA, discussing its objective to give maximum effect to the principle of freedom of contract and its lack of linkage to the common law of fiduciary duties. This article also posits that, after a reasoned statutory construction of §18-1101, no default fiduciary duties obviously existed in the DLLCA at the time of its enactment or now. Lastly, this article asserts that fiduciary duties are unnecessary in the LLC business form, concluding that contract law is principled upon free bargaining, negotiation of unequal terms in light of market conditions and bartering in self-interest by all parties. In addition contract law offers ample policing tools to account for unsophisticated, unrepresented, and ignorant parties.
Keywords: limited liability companies, Delaware, LLCs, freedom of contract, good faith, alternative entities
JEL Classification: K22
Suggested Citation: Suggested Citation