Presenting a live 90-minute webinar with interactive Q&A Structuring LLC Operating Agreements: Crafting Fiduciary Duty, Indemnification and Exculpation Provisions THURSDAY, FEBRUARY 2, 2017 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Benyamin S. Ross, Partner, Gibson Dunn & Crutcher , Los Angeles Melissa K. Stubenberg, Director, Richards Layton & Finger , Wilmington, Del. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Structuring LLC Operating Agreements Crafting Provisions on Fiduciary Duties, Indemnification and Exculpation Provisions February 2, 2017 Benyamin S. Ross Melissa K. Stubenberg bross@gibsondunn.com stubenberg@rlf.com
<Presentation Title/Client Name> Jurisdiction • Where is the Business Located – Not always best to same jurisdiction as where the business is located • Favorable Laws – Related to type of industry LLC will operate – Access to sophisticated courts and other support systems – Tax/regulatory issues – Will the laws let you draft to reflect the deal of the parties? 6
<Presentation Title/Client Name> Delaware • Often the jurisdiction of choice because of the flexibility of is statute and sophistication of its courts • Delaware LLCs are “primarily creatures of contract.” – TravelCenters of Am. LLC v. Brog , C.A. No. 3751-CC (Del. Ch. Dec. 5, 2008) • It is the limited liability company agreement that “defines the scope, structure and personality of limited liability companies.” – Fisk Ventures, LLC v. Segal , C.A. No. 3017-CC (Del. Ch. May 7, 2008) • 18- 1101(b) of the Delaware LLC Act: “It is the policy of this chapter to give the maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements.” • 18- 1101(i) of the Delaware LLC Act: “A limited liability company agreement that provides for the application of Delaware law shall be governed by and construed under the laws of the State of Delaware in accordance with its terms.” • 18-101(7) of the Delaware LLC Act: A manager, member, assignee and the LLC itself are bound by the LLC agreement whether or not such manager, member, assignee or LLC executes the LLC agreement 7
<Presentation Title/Client Name> Drafting 101 • Delaware follows object theory of contract interpretation: "Delaware courts adhere to the 'objective' theory of contracts, i.e. , a contract's 'construction should be that which would be understood by an objective reasonable third party.'" • Clear Meaning Rule – If a Delaware court concludes that the contract clearly and unambiguously reflects the parties' intent, such court's interpretation of the contract must be confined to the document's "four corners." – "A contract is not rendered ambiguous simply because the parties do not agree upon its proper construction. Rather, a contract is ambiguous only when the provisions in controversy are reasonably or fairly susceptible of different interpretations or may have two or more different meanings." 8
<Presentation Title/Client Name> Drafting 101 • Parol Evidence Rule – Only when the intent of the parties cannot be derived from the plain meaning of the contract may a Delaware court use extrinsic evidence • Sussex Equip. Co. v. Burke Equip. Co ., 860 A.2d 812, 812 (Del. 2004). – If language susceptible to more than one reasonable interpretation, court will consider extrinsic evidence in an attempt to determine whether the parties agreed on a single objectively reasonable meaning – "[S]pecific language in a contract controls over general language." • Katell v. Morgan Stanley Group, Inc. , 1993 WL 205033, at *4 (Del. Ch. June 8, 1993) 9
<Presentation Title/Client Name> Waiver of Fiduciary Duties (Delaware vs. California) Delaware California Elimination or " To the extent that , at law or Operating agreement: • “ Shall not… [except as set forth below] eliminate the duty of Modification? in equity, a member or loyalty, the duty of care, or any other fiduciary duty." manager or other person has ( § 17701.10(c)(4)) duties (including fiduciary • But an operating agreement may duties) to a limited liability Duty of Loyalty ( § 17701.10(c)(14)) company or to another member • Identify types or categories of activities that do not violate the duty of loyalty, if not manifestly or manager or to another person unreasonable. that is a party to or is otherwise • Specify member percentages to authorize actions that bound by a limited liability otherwise would violate the duty of loyalty, after full company agreement, the disclosure to all members of all material facts . member's or manager's or other Duty of Care ( § 17701.10(c)(15)) • person's duties may be Reasonably reduce the duty of care . expanded or restricted or Informed Consent ( § 17701.10(e) Fiduciary duties of a manager (in a eliminated by provisions in the manager-managed LLC) or of a member (in a member-managed limited liability company LLC) may only be modified [not eliminated] in a written operating agreement " ( § 18-1101(c)) agreement with the informed consent of the members. 10
<Presentation Title/Client Name> Fiduciary Duties • Why modify? – Avoid uncertainty and inefficiency • Existence of inherent conflicts with control persons • Allocation of opportunities – Avoid divided loyalties – Requirements of third parties – Other effects • Burden of proof shift 11
<Presentation Title/Client Name> Fiduciary Duties/Implied Covenant • Cannot eliminate the implied covenant of good faith and fair dealing • Implied covenant is the floor of an agreement and often misunderstood – Does not offer much protection – The purpose of the covenant is to enforce the reasonable expectations of parties to a contract where situations arise that are not expressly contemplated and provided for in the language of the contract itself • The Courts have described the covenant as a "limited and extraordinary remedy that addresses only events that could not reasonably have been anticipated at the time the parties contracted," which is meant to "protect[] a party from arbitrary conduct that was objectively unanticipated by the terms of the contract and that frustrates the fruits of the bargain that the asserting party reasonably expected." – In re Atlas Energy Res., LLC , 2010 WL 4273122, at *13 (Del. Ch. Oct. 28, 2010) 12
<Presentation Title/Client Name> Fiduciary Duties/Implied Covenant • The test for determining whether the covenant has been breached requires the court to extrapolate the "spirit" of the contract from its express terms, and to determine whether it is clear that the parties would have agreed to proscribe the act complained of as a breach of the covenant that they thought to negotiate with respect to that matter 13
<Presentation Title/Client Name> Fiduciary Duties/Implied Covenant • Different from the fiduciary duty of good faith – see ASB Allegiance Real Estate Fund v. Scion Breckenridge Managing Member, LLC , 50 A.3d 434, 440-42 (Del. Ch. 2012) • Fiduciary/Contractual Duty –“[L]iablity depends on the parties’ relationship when the alleged breach occurred, not on the relationship as it existed in the past.” • Implied Covenant – “Looks to the past.” The court asks, “what the parties would have agreed had they considered the issue in their original bargaining positions at the time of contracting ?” • Different from contractual good faith. See Gerber v. Enterprise Products Holdings, LLC, 67 A.3d 400 (Del. June 10, 2013) 14
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