Duties in Georgia and Delaware LLCs Presented by: Charles R. Beaudrot, Jr. Morris, Manning & Martin, LLP 3343 Peachtree Road, NE Atlanta, GA 30326 cbeaudrot@mmmlaw.com Phone: 404-504-7753
DUTIES IN GEORGIA AND DELAWARE LLCS 2
Under O.C.G.A. 14-11-304(a) unless the articles of organization or a written operating agreement vests management of the limited liability company in a manager or managers, management of the business and affairs of the limited liability company is vested in the members. The members thus have the authority to manage the affairs of the limited liability company and to make all decisions. 3
Under O.C.G.A. 14-11-304(b) if the articles of organization or a written operating agreement vests management of the limited liability company in one or more managers, then the managers shall have the authority to manage the business and affairs of the limited liability company as is provided in the articles of organization or a written operating agreement. 4
Under O.C.G.A. 14-11-301 for member managed LLCs, every member is an agent of the limited liability company for the purpose of its business and affairs, and the act or any member for apparently carrying on in the usual way the business and affairs of the limited liability company binds the limited liability company, unless the member so acting has, in fact, no authority to act for the limited liability company in the particular matter, and the person with whom the member is dealing has knowledge of the fact that the member has no such authority. 5
Similarly, if the articles of organization provide that management of the limited liability company is vested in a manager or managers: No member, acting solely in the capacity as a member, is an agent of the limited liability company; and Every manager is an agent of the limited liability company for the purpose of its business and affairs. 6
An act of a manager or a member that is not apparently for the carrying on in the usual way the business or affairs of the limited liability company does not bind the limited liability company unless authorized in accordance with the company s written operating agreement. 7
O.C.G.A. 14-11-305(1) provides: In managing the business or affairs of a limited liability company: (1) A member or manager shall act in a manner he or she believes in good faith to be in the best interests of the limited liability company and with the care an ordinarily prudent person in a like position would exercise under similar circumstances. 8
The section goes on to add: A member or manager is not liable to the limited liability company, its members, or its managers for any action taken in managing the business or affairs of the limited liability company if he or she performs the duties of his or her office in compliance with this Code section. 9
Under O.C.G.A. 14-11-305(2) and (3), a member or manager is entitled to rely on information, opinions, and reports so long as the member or manager believes such reliance is justified and does have knowledge making such reliance unjustified. 10
O.C.G.A. 14-11-305 goes on to provide [italics added]: (4) To the extent that, pursuant to paragraph (1) of this Code section or otherwise at law or in equity, a member or manager has duties (including fiduciary duties) and liabilities relating thereto to a limited liability company or to another member or manager: (A) The member s or manager s duties and liability may be expanded, restricted, or eliminated by provisions in the articles of organization or a written operating agreement; provided, however, that no such provision shall eliminate or limit the liability of a member or manager: 11
and continues: (i) For intentional misconduct or a knowing violation of law; or (ii) For any transaction for which the person received a personal benefit in violation or breach of any provision of a written operating agreement; and (B) The member or manager shall have no liability to the limited liability company or to any other member or manager for his or her good faith reliance on the provisions of a written operating agreement, including, without limitation, provisions thereof that relate to the scope of duties (including fiduciary duties) of members and managers. 12
Under the Georgia Limited Liability Company Act, nonmanaging members in manager-managed LLCs do not owe duties to the LLC or to the other members. ULQ, LLC v. Meder, 293 Ga. App. 176, 185 (2008) ( Because the plain language of O.C.G.A. 14-11-305 provides that nonmanaging members in manager-managed LLCs owe no duties to the LLC or other members, we hold that nonmanaging members owe no fiduciary duties to the LLC or the other members ). 13
Where a member is not a manager, O.C.G.A. 14-11-305 expressly provides that that member shall have no duties to the limited liability company or to the other members solely by reason of action in his or her capacity as a member. Ibid. 14
Although O.C.G.A. 14-11-305 does not impose a fiduciary standard, but rather a prudent person standard, some courts have read the standard as creating fiduciary duties and have blithely analogized the duties of managers to those of directors in corporations. 15
Argentum Int l, LLC v. Woods, 280 Ga. App. 440 447 (2006) [ Here [defendant] was a member of the Board of Managers and, as such, owed a fiduciary duty to those Plaintiffs who held equity interests. ] 16
The same fiduciary duties apply to members who manage the LLC. Internal Med. Alliance, LLC v. Budell, 290 Ga. App. 231 (2008). 17
But these duties can be modified subject to the limitations of O.C.G.A. 14-11-305(4)(A). Ledford v. Smith, 274 Ga. App. 714 (2005); Stoker v. Bellemeade, LLC, 272 Ga. App. 817 (2005). 18
This can include permitting managers or members to compete or to fail to disclose extrinsic information germane to their strategies with respect to a buyout provision in a Put-Call situation. Ledford v. Smith, supra. 19
Fortunately, at least one bankruptcy court which has considered the issue has held, at least for bankruptcy purposes, that the duties of members of an LLC did not make them fiduciaries for purposes of making debts of the LLCs non-dischargeable. In re Wheelus, 2008 Bankr. LEXIS 348 (Bankr. M.D. Ga. 2008). 20
Indeed the discussion of the issue of duties in Georgia LLCs in this decision is refreshing for its clarity and precision, aptly pointing out the Georgia standard is not a traditional fiduciary standard, but rather a variation of the business judgment rule. 21
But, even if modified by other provisions, an LLC Operating Agreement is a contract. And all contracts contain an implied duty of good faith in the exercise of discretion by a manager or member, at least where the agreement is not explicitly clear that the control person is relieved of that duty. ULQ, LLC v. Meder, 293 Ga. App. 176 (2008). [Termination of an officer triggering a buy-out right may not have been made in good faith and therefore was issue for jury.] 22
And the LLC duties and standards are not the same as for partnership. James E. Warren, M.D., P.C. v. Weber & Warren Anesthesia Servs., 272 Ga. App. 232 (2005). [Trial court was justified in refusing to give an instruction that resignation could be wrongful where contemplated by the operating agreement and the statute.] 23
Notwithstanding these cases, given the proclivity of our courts to apply corporate law concepts to LLCs, do we need to worry about the impact of Marshall v. W. E. Marshall Co., 189 Ga. App. 510 (1988) which imposes duties on a majority shareholder? 24
DEFAULT FIDUCIARY DUTIES IN DELAWARE Duty of Care A duty to act and make decisions in an informed and deliberate manner, availing oneself of all reasonably available material information 25
DEFAULT FIDUCIARY DUTIES IN DELAWARE Duty of Loyalty Requires decisions to be made based on the best interests of the entity and its equityholders, and not for personal or other reasons 26
DEFAULT FIDUCIARY DUTIES IN DELAWARE Duty of Disclosure Requires fiduciary to speak honestly anytime communicating with equityholders. Requires fiduciary to disclose all material information reasonably available when seeking equityholder action 27
DEFAULT FIDUCIARY DUTIES IN DELAWARE Unless a limited liability company agreement expands, restricts or eliminates the fiduciary duties owed by a manager, a manager is subject to the fiduciary duties of loyalty and care. Auriga Capital Corporation v. Gatz Properties, LLC, C.A., 4390-CS (Del. Ch. Jan. 27, 2012). 28
CONTRACTUAL FLEXIBILITY IN DELAWARE Ability to Modify Fiduciary Duties: 6 Del. C. 18-1101(c) provides: 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 an other 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; provided, that the limited liability company agreement may not eliminate the implied contractual covenant of good faith and fair dealing. 29
IMPLIED CONTRACTUAL COVENANT OF GOOD FAITH AND FAIR DEALING IN DELAWARE Purpose to enforce the reasonable expectations of the parties to a contract when situations arise that are not contemplated and provided for in the contract 30
IMPLIED CONTRACTUAL COVENANT OF GOOD FAITH AND FAIR DEALING IN DELAWARE The test: It is [clear] [more likely than not] that the parties would have agreed to proscribe the act later complained of as a breach of the implied contract covenant had they thought to negotiate with respect to that matter It requires a court to extrapolate the spirit of a contract and determine what the parties would have agreed to had they foreseen the dispute 31
IMPLIED CONTRACTUAL COVENANT OF GOOD FAITH AND FAIR DEALING IN DELAWARE Doctrine is narrowly construed and applied to ensure that the parties reasonable expectations are fulfilled. 32
IMPLIED CONTRACTUAL COVENANT OF GOOD FAITH AND FAIR DEALING IN DELAWARE The implied covenant has no application when the contract s express terms cover the situation. 33
CASE LAW DEVELOPMENTS IN DELAWARE Delaware courts have struggled with the tension between application of corporate fiduciary principles as gap-fillers and the statutory policy in favor of freedom of contract. 34
CASE LAW DEVELOPMENTS IN DELAWARE Courts have long history and vast precedent defining fiduciary principles. Courts have less experience with and traditionally have been hesitant to expand the implied covenant. Relationships in LLC context often look like traditional corporate relationships by analogy. 35
CASE LAW DEVELOPMENTS IN DELAWARE As more cases are decided involving LPs/LLCs that have modified or eliminated fiduciary duties, the scope and application of the implied covenant is becoming more well defined. 36
AVOIDING POTENTIAL PITFALLS UNDER DELAWARE LAW Elimination or modification of fiduciary duties must be express and unambiguous. 37
AVOIDING POTENTIAL PITFALLS UNDER DELAWARE LAW For better or worse, there may always be some inherent bias towards fiduciary analysis. 38
AVOIDING POTENTIAL PITFALLS UNDER DELAWARE LAW Managers and advisors must take care in importing fiduciary cleansing mechanisms applicable in the corporate context, to avoid voluntarily assumed fiduciary duties. E.g., fairness opinions, special committees, majority of minority votes. 39
Thank You For Joining Us for an MMM Lunch n Learn Charles R. Beaudrot, Jr., Partner Tax and Real Estate Capital Markets Practices cbeaudrot@mmmlaw.com Direct: (404) 504-7753 Morris, Manning & Martin, LLP