What is the Practical Importance of Default Rules Under Delaware LLC and LP Law?

Abstract

In his article “Freedom of Contract and Default Contractual Duties in Delaware Limited Partnerships and Limited Liability Companies,” the Chief Justice of the Delaware Supreme Court, Myron Steele, makes the provocative assertion that fiduciary duties should not apply, even as a default, under Delaware alternative entity law. With this assertion, the Chief Justice has renewed the debate over fiduciary duties, albeit in a new context. Rather than debating whether fiduciary duties should be subject to contractual limitations, distinguished academics and practitioners now debate whether fiduciary duties should even apply as a legal default under unincorporated alternative entity law.

In this essay, however, I argue that this new debate, although interesting as a theoretical matter, has limited practical importance. Sophisticated parties can and will contract to avoid undesirable default rules. And LLCs and LPs with passive investors have contractually created an almost de facto rule eliminating fiduciary duties. Thus, even if one believes Chief Justice Steele’s thesis is problematic, the problem it creates affects only a small portion of Delaware’s alternative entity universe.

Keywords: Delaware, LLCs, LPs, limited liability companies, limited partnership, fiduciary duties

JEL Classification: K20