August 16, 2012 Articles

Fiduciary Duties in the Alternative Entity Context

Although the same fiduciary duties apply to Delaware LPs and LLCs as apply to Delaware corporations, there are distinctions that can lead to different results

by Srinivas M. Raju and Jillian G. Remming

Delaware limited partnerships (LPs) and limited liability companies (LLCs), sometimes referred to collectively as alternative entities, are not the same as corporations, although there are many similarities. Just as in corporations, fiduciary duties apply by default to those who manage Delaware LPs and LLCs. Both the Delaware Limited Liability Company Act and the Delaware Revised Uniform Limited Partnership Act (DRULPA), however, reflect a strong policy favoring broad freedom of contract in connection with almost all aspects of the formation, operation, and termination of Delaware LPs and LLCs, including relationships among the partners or members. Consistent with the policy favoring freedom of contract, a limited partnership agreement or a limited liability company agreement can modify and even eliminate such fiduciary duties, subject to the implied contractual covenant of good faith and fair dealing. To the extent that these fiduciary duties are modified by contract, Delaware courts will enforce the terms of the limited partnership agreement or limited liability company agreement. This can lead to results that are far different from cases decided in the corporate context.

DRULPA and the LLC Act Permit the Modification of Fiduciary Duties
DRULPA section 17-1101(d), in pertinent part, provides as follows:

To the extent that, at law or in equity, a partner or other person has duties (including fiduciary duties) to a limited partnership or to another partner . . . the partner's or other person's duties may be expanded or restricted or eliminated by provisions in the partnership agreement; provided that the partnership agreement may not eliminate the implied contractual covenant of good faith and fair dealing.

The LLC Act contains virtually identical language at section 18-1101(c). The decisions of the Delaware courts, in applying this language, demonstrate that only when the terms of the LP or LLC agreement clearly, expressly, and unambiguously conflict with the applications of traditional fiduciary principles will the default fiduciary duties be deemed to have been effectively modified. Furthermore, these decisions recognize that the implied contractual covenant cannot be eliminated.

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