Del. Chancery Court Hints that Persons Other than “Managers” May Owe Fiduciary Duties to an LLC
In CMS Investment Holdings, LLC v. Castle, 2015 WL 3894021 (Del., June 23, 2015), the Delaware Court of Chancery hinted that persons other than LLC Managers may, in the future, be found to owe fiduciary duties to an LLC.
The plaintiff, a Class A unit holder of the LLC in question, alleged in its Complaint that the defendants “purposefully engineered the dissolution of [the LLC] in order to disloyally purchase its only valuable assets out of receivership,” and that the defendants engaged in a series of actions that “culminated in the reallocation [to themselves] of economic and voting power over the LLC,” as a result of which the Class A unit holders were squeezed out for less than fair value.
Some of the defendants were Managers of the LLC; some were members of a so‑called Operating Board of the LLC; some were members of the LLC but were neither Managers nor members of the Operating Board; and some were not members of the LLC or Managers or members of the Operating Board at all, but had only a contractual relationship with the LLC.
In denying the Motions to Dismiss of all but two of the ten defendants, the Court eschewed the idea that defendants who were not members of the Board of Managers did not owe fiduciary duties to the LLC. The Court acknowledged that while Managers and Managing Members of an LLC owe default fiduciary duties to an LLC, persons vested with the discretionary power to manage the LLC’s business, even by contract, might also have fiduciary duties, even if they are not named as “Manager” or “Managing Member.” For example, the Court pointed out that, with respect to one defendant who was not a Managing Member, the factual allegations of the Complaint were sufficient to suggest the defendant was “vested with discretionary power to manage the business or the LLC” and that liability might therefore exist.
The opinion confirms that draftspersons who are tasked with exculpating persons from fiduciary duties to an LLC or even modifying those duties may not be able to rely on titles alone or even membership in a specific class to delineate the persons to be exculpated or whose duties are to be modified. For example, to make sure its reach is broad enough, an exculpatory provision may (to paraphrase Vice Chancellor Parsons) have to cover all persons with discretionary power to manage the LLC’s business, regardless of title. At the same time, care must be taken that the provision is not too broad in its coverage. Absent careful drafting, a court may be required to impute duties to persons who expected to be exculpated or expected to have their duties modified.
Members of Saul Ewing’s Corporate Governance Practice have extensive experience in limited liability company and corporate governance matters. For more information on this development, please contact the authors or the attorney at the firm with whom you are regularly in contact.