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Enabling the Representative LLC Manager to "Represent," Part 2

01.13.15

The "default" fiduciary duties imposed by each of Delaware and Texas law on an LLC manager appear to pose an impediment to the designating LLC member's realizing the full benefit of having a representative manager on the LLC's board of managers.

As the result of a 2013 amendment to the Delaware Limited Liability Company Act, if the LLC is a Delaware LLC and its LLC Agreement does not address a manager's fiduciary duties to the LLC and its members, then a manager of the LLC has the same kinds of fiduciary duties to the LLC and its members generally as the director of a Delaware business corporation has to the corporation and its stockholders generally. Under recent Texas case law, it likewise appears that if the LLC is a Texas LLC and its LLC Agreement does not address a manager's fiduciary duties, then a manager of the LLC has the same kinds of fiduciary duties to the LLC and its members generally as the director of a Texas for-profit corporation has to the corporation and its shareholders generally. In each case, those fiduciary duties consist principally of the duty of due care and the duty of loyalty.

In the corporation context, Delaware courts have recognized the divided loyalties of a representative director to the corporation and to the particular stockholder or group of stockholders, such as holders of preferred stock, that have elected that representative director. The courts have almost always resolved that tension by giving precedence to the director's fiduciary duties over any obligation the director may have to any particular stockholder or group of stockholders, even when the director's allegiance to a particular stockholder or group of stockholders is evident. The Delaware courts have upheld the general rule that a director's primary concern must be to act in the best interests of the corporation and its stockholders as a whole. Accordingly, corporate directors have been held to breach their fiduciary duties by sharing a corporation's material confidential information with the particular stockholder or stockholders they represent or by voting or otherwise acting as a director in a way that would benefit the particular stockholder or stockholders they represent instead of the corporation and its stockholders generally. If this corporate approach were applied to an LLC and its managers, a representative manager might in effect be precluded from representing the interests of the designating member as intended by the designating member and undertaken by the representative manager.

Each of the Delaware Limited Liability Company Act and the LLC provisions of the Texas Business Organizations Code permit the LLC's members to agree to vary the duties of managers of the LLC, subject to certain restrictions. Consistent with the contractual basis or orientation of an LLC, each statute specifically allows the expansion, limitation, or elimination of a manager's fiduciary duties in the LLC Agreement. Under each of Delaware and Texas law, the flexibility of an LLC clearly offers the possibility of addressing the conflict between fiduciary duties and obligations to a particular constituency that the corporate form does not offer, or at least does not as clearly offer. If a designating member desires to provide that, in the event of a conflict in loyalties or duties, the duties to the LLC and its members generally will not preclude the representative manager from preferring and advancing the interests of the designating member, then the LLC Agreement could include provisions that facilitate the desired arrangement.

 

A number of those possible provisions will be described in the next two posts.

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