1. Original Waiver Language
2. Relevant Case Law
3. Amendments to the LLC Act

Delaware LLC Act fiduciary duties were originally not specifically stated in the text of the law, so Delaware limited liability company managers were not bound to the same fiduciary care and loyalty as Delaware corporate officers and directors. However, an August 2018 amendment to the LLC Act confirmed that managers, including managing members, must uphold fiduciary duty by default unless the LLC operating agreement clear establishes otherwise by eliminating these duties.

Original Waiver Language

The relevant text of the state LLC Act reads: "To the extent that, at law or in equity, a member or manager or other person has duties (including fiduciary duties) to a limited liability company or to another member or manager or to another person that is a party to or is otherwise bound by a limited liability company agreement, the member's or manager's or other person's duties may be expanded or restricted or eliminated by provisions in the limited liability company agreement . . . ." 6 Del. C. § 18-1101(c)."

The act also indicates that managers may not be held liable for breaches of fiduciary and other duties provided that this is stated in the LLC agreement. Some attorneys and legal scholars note that fiduciary duties must legally exist if this language eliminates the duty. Others feel that fiduciary duties exist only if explicitly stated in the agreement.

Relevant Case Law

In general, the Delaware court system has favored business interests over investor interests, particularly when it comes to those who are particularly sophisticated and invest in alternative entities. They are thus exchanging limited fiduciary care for the prospect of high financial returns.

However, an investor who feels that he or she was not treated with fiduciary care can sue for breach of contract if the LLC's operating agreement did not expressly limit or eliminate fiduciary duty on behalf of the managers. In this case, the investor must prove that the company acted against the implied covenant of good faith and fair dealing by avoiding these duties, which are considered default by the court.

The Delaware Court of Chancery extensively addressed this issue in the 2012 case of Capital Corporation v. Gatz Properties LLC. The court found that LLC managers are bound by fiduciary duties unless these are restricted or eliminated explicitly in the agreement. However, this decision was overturned on appeal.

The Supreme Court reviewed the decision of Chancellor Leo E. Strine Jr. and found that if a manager is prohibited from entering agreements with affiliates on less favorable terms than could be obtained from third parties, this constitutes contractual fiduciary duties. Moreover, the court said that no "magic words" are needed to establish fiduciary duties in the LLC agreement and that it should be considered part of the standard for ethical conduct.

Amendments to the LLC Act

The Delaware LLC Act was amended to reflect this Supreme Court decision. Although the court failed to weigh in on whether fiduciary duties apply by default in the case of Auriga Capital Corporation v. Gatz Properties, it encouraged the state bar attorneys and general assembly to work together to resolve the statutory ambiguity.

The amendment to Section 18-1104 of the act added the following text:

  • “In any case not provided for in this chapter, the rules of law and equity, including the rules of law and equity relating to fiduciary duties and the law merchant, shall govern.”
  • Commentary with the amendments clarified that the LLC agreement can waive fiduciary duties of members with an express statement to that effect.

This means that an LLC can manage fiduciary duty with provisions in the operating agreement that restrict, limit, or expand these duties within the boundaries of fair dealing and good faith. This allows each LLC to define its own fiduciary relationships.

Sample language that can be used to eliminate fiduciary duties in the operating agreement is provided by Bloomberg:

"Any standard of care and duty imposed by this Agreement or under the Delaware Act or any applicable law… shall be modified waived or limited, to the extent permitted by law, as required to permit [GP] to act under this Agreement … so long as such action is reasonably believed by [GP] to be in, or not inconsistent with, the best interests of [LP]."

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