Waiver of Fiduciary Duties Delaware Corporation
A waiver of fiduciary duties Delaware corporation is better known as a corporate opportunity waiver.3 min read
2. Are LLCs Exempt From Fiduciary Duties?
3. More on Auriga Capital Corporation v. Gatz Properties LLC
4. The Court's Decision
5. A Possible Appeal
6. How to Prepare Your LLC for an Appeal
A waiver of fiduciary duties Delaware corporation is better known as a corporate opportunity waiver. It allows corporate fiduciaries to invest in new opportunities without first offering them to the company. All the company has to do is include Section 122(17) of the Delaware General Corporation Law in its certificate of incorporation. This ruling was decided in 2000 and goes against the traditional regulations surrounding corporations.
What Are Corporate Opportunities?
Delaware courts have used many factors in the past to determine what qualifies as a corporate opportunity. Some of these factors include:
- If the corporation has enough capital to take advantage of the opportunity.
- Whether the opportunity is in the same line of business the corporation operates in.
- Whether the fiduciary would have a conflict of interest if they took the opportunity.
Are LLCs Exempt From Fiduciary Duties?
Of course, this rule only applies to corporations. If you manage a limited liability company (LLC), a waiver of fiduciary duties is not legally permissible because of a ruling by the Delaware Court of Chancery in the case Auriga Capital Corporation v. Gatz Properties LLC. This case challenged whether a Delaware LLC was obligated to provide fiduciary duties to the members of the company, and the court decided that the LLC was liable for fiduciary duties.
More on Auriga Capital Corporation v. Gatz Properties LLC
This case involved an unsuccessful golf course opportunity. The LLC had leased land for the golf course from a family friend. To pay for it, they got funding from outside investors and gave them a minority piece of the company.
American Golf Corporation then leased the land from the LLC. In the lease, they included a clause that would allow them to terminate the lease early if they wished. Ultimately, they took advantage of this option at the beginning of 2010, as they weren't making money.
This wasn't good news for the LLC, which was sold at auction to recoup funds and then purchased by the LLC's manager for a low price. This meant none of the investors saw a return of their investment.
Naturally, the investors found this practice shady, so they filed a lawsuit against the LLC manager, claiming he intentionally mismanaged the company. Their main argument was that the manager had refused another offer for the LLC from a third party that could have given the investors back all their money. The investors alleged the manager breached his fiduciary duties.
The Court's Decision
The manager tried to defend himself by saying there was no explicit language defining whether the LLC owed fiduciary duties to the members of the company. Additionally, he argued that both the Delaware Limited Liability Company Act and the Delaware General Corporation Law do not mention that traditional fiduciary care duties automatically apply to the manager of an LLC.
After reviewing the case, the court quickly decided that these duties are absolute and that the manager was in the wrong.
A Possible Appeal
While most in the legal field weren't surprised at the case's outcome, there was some disagreement about the result. For example, Myron Steele, the Chief Justice of the Supreme Court of Delaware, noted that, in his opinion, “[c]ourts should not imply traditional fiduciary duties when LLC agreements are silent.”
His reasoning came from the fact that LLCs aren't based on common law and are instead based on contracts. In Delaware's LLC Act, it states in section 18-1101(b) that LLCs have freedom of contract, meaning an LLC has some protection through the covenant of good faith and fair dealing.
Therefore, he believed that "courts should assume the parties did not want [fiduciary duties] to apply at all." If several other justices agree with his view, then the Delaware Supreme Court can overturn the ruling on this case and set a precedent that makes fiduciary duties optional for an LLC.
How to Prepare Your LLC for an Appeal
If you're in the process of creating or currently operate an LLC, there are a few things you might want to consider if this case ends up being appealed. Try to use clear and unambiguous language when talking about fiduciary duties in your operating agreement.
If you need help with a waiver of fiduciary duties Delaware corporation, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.