Presenting a live 90-minute webinar with interactive Q&A Structuring LLC Operating Agreements: Crafting Fiduciary Duty, Indemnification and Exculpation Provisions TUES DAY, JULY 22, 2014 1pm East ern | 12pm Cent ral | 11am Mount ain | 10am Pacific Today’s faculty features: Benyamin S . Ross, Gibson Dunn & Crutcher , Los Angeles tubenberg, Director, Richards Layton & Finger , Wilmington, Del. Melissa K. S 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 to Minimize Business Disputes July 22, 2014 Benyamin S. Ross Melissa K. Stubenberg bross@gibsondunn.com stubenberg@rlf.com
<Presentation Title/Client Name> Who Owes Fiduciary Duties? Non-Managing Members Statutory Fiduciary Duties (weighted by LLC formations 2004-2007) 10% 29% 7% 10% 13% 31% Delaware - No Provision Florida - Members Owe Duties Even If Manager-Managed New York - May Transact Business with LLC RULLCA - No Member Duties if Manager-Managed ULLCA - Combination of New York & RULLCA Other Sources: Chrisman, LLCS are the New King of the Hill , 468-76. Ribstein and Keatinge on LLCs , 583-585. 6
<Presentation Title/Client Name> Who Owes Fiduciary Duties? (Delaware vs. California) Delaware California Recent Amendment to Section 18-1104 of the LLC In a restatement, the California Revised Amendments Act to address default fiduciary duties, Uniform Limited Liability Company Act became effective on August 1, 2013. (popularly known as RULLCA) will take effect on January 1, 2014. Default "In any case not provided for in this chapter, Member-Managed (17704.09) Fiduciary the rules of law and equity, including the Members are subject to specifically defined Duties rules of law and equity relating to fiduciary duties of loyalty and care, and an obligation of duties and the law of merchant shall govern." good faith and fair dealing. (18-1104) Manager-Managed (17704.09) Managers are subject to the defined duties of loyalty and care, and an obligation of good faith and fair dealing. Members are only subject to an obligation of good faith and fair dealing. 7
<Presentation Title/Client Name> Who Owes Fiduciary Duties? (Delaware) • Controlling Members • In Kelly v. Blum , a controlling member initiated and completed a freeze-out merger, at the expense of minority owners of the LLC; the court held that such controlling member in fact owed fiduciary duties absent a clear waiver (which was absent). 2010 WL 629850 (Del. Ch., February 24, 2010) • Controlling Affiliates of Entity Managers of LLCs • USA Cafes and its progeny suggests there is a limited context in which fiduciary duties extend to the person who controls the general partner of a partnership or the manager of an LLC. • Bay Ctr Apartments held that a complaint stated a breach of fiduciary duty claim against the owner of an entity that managed the LLC where the complaint alleged that the owner had used his control to stave off personal liability under a guarantee). Bay Center Apartments Owner, LLC v. Emery Bay PKl, LLC , 2009 WL 1124451 (Del. Ch., April 20, 2009) • Feeley , on the other hand, held that an individual who managed an entity controller could be held liable only for breaches of duty of loyalty, but not breaches of duty of care. Feeley v. NHAOCG, LLC , 62 A.3d 649, 670-71 (Del. Ch. 2013) 8
<Presentation Title/Client Name> Duty of Care Statutory Duty of Care (weighted by LLC formations 2004-2007) • Delaware – silent. Delaware - Generally Silent • ULLCA – liable only for gross ULLCA - Liable for Bad Faith, etc negligence, bad faith, recklessness or RULLCA - Prudent Person equivalent conduct. Other 7% • RULLCA – prudent person in similar 26% circumstances. • Applicable? 28% 39% Sources: Chrisman, LLCS are the New King of the Hill , 468-76. Ribstein and Keatinge on LLCs , 574-576. 9
<Presentation Title/Client Name> Waiver of Fiduciary Duties Statutory Limitations on Waiver of Fiduciary Duties Freedom of Contract (weighted by LLC formations 2004-2007) • Most states permit the (near) Delaware - No Limitation on Waiver complete waiver and elimination of Silent New York - Some Limitations fiduciary duties. RULLCA - Manifestly Reasonable and Approved Other 8% 18% 41% 19% 14% Sources: Chrisman, LLCS are the New King of the Hill , 468-76. Ribstein and Keatinge on LLCs , 580-582. 10
<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 unreasonable. or manager or to another person • specify member percentages to authorize actions that that is a party to or is otherwise otherwise would violate the duty of loyalty, after full bound by a limited liability disclosure to all members of all material facts . company agreement, the Duty of Care ( § 17701.10(c)(15)) member's or manager's or other • reasonably reduce the duty of care . person's duties may be Informed Consent ( § 17701.10(e) + legislative proposal ) expanded or restricted or Fiduciary duties of a manager (in a manager-managed LLC) [or of a eliminated by provisions in the member (in a member-managed LLC)] may only be modified (not limited liability company eliminated) in a written operating agreement with the informed agreement " ( § 18-1101(c)) consent of the members. 11
<Presentation Title/Client Name> Waiver of the Implied Covenant of Good Faith and Fair Dealing (Delaware vs. California) Delaware California Elimination or "…a limited liability company agreement “An operating agreement shall not… Modification? may not limit or eliminate liability for any eliminate the contractual obligation of good act or omission that constitutes a bad faith faith and fair dealing…, [ but the operating violation of the implied contractual covenant agreement may prescribe the standards by of good faith and fair dealing." (18-1101(e)) which the performance of the obligation is to be measured, if the standards are not manifestly unreasonable [as determined at the time the standards are prescribed] ] ." (17701.10(c)(5) + [(c)(16)] + legislative proposal ) 12
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