Fiduciary Duties II: Modification, Elimination and the Implied Covenant

Scope of the chapter. Chapter 21 describes the fiduciary duties that managers and controlling members owe when the operating agreement is silent. This chapter examines what the agreement may do to those duties and what remains when it has done its work. Chapter 3 introduced the subject in the course of a general discussion of freedom of contract: it identified four techniques by which an agreement reduces fiduciary exposure, summarized the mandatory rules of the Delaware act and the uniform act, and described the implied covenant as the floor of every Delaware agreement (see supra ¶¶ 320–350). The present chapter assumes that introduction. It examines the statutory texts of the principal non-uniform states, the drafting language courts have construed, the leading decisions in full, the implied covenant as a working doctrine, the boundary between exculpation and bad faith, and the experience of the uniform-act states.

Why the decisions come from partnerships. Most of the leading Delaware decisions on the modification of fiduciary duties concern publicly traded limited partnerships. The reason is practical. Master limited partnerships raise capital from public investors, are controlled by a sponsor that stands on both sides of many transactions, and are governed by long agreements that eliminate default duties and substitute contractual standards, approval procedures and conclusive presumptions. Disputes over affiliate transactions in that setting reached the Delaware Supreme Court repeatedly between 2010 and 2022. The limited partnership act and the LLC act contain parallel provisions on the modification of duties, and the Delaware courts treat decisions under one as authority under the other. Del. Code Ann. tit. 6, §§ 17-1101(d)–(f), 18-1101(c)–(e); see supra ¶ 280.03. A practitioner drafting an LLC agreement for a sponsor-controlled fund, joint venture or holding company should therefore read the partnership decisions as direct guidance.

Organization. The chapter proceeds in nine parts:

1. the statutory texts compared (¶ 2210);
2. elimination clauses and their construction (¶ 2220);
3. contractual standards of conduct, including good faith and sole discretion (¶ 2230);
4. safe harbors, conclusive presumptions and conflicts committees (¶ 2240);
5. the implied covenant in depth (¶ 2250);
6. bad faith and the boundary of exculpation (¶ 2260);
7. the uniform-act states (¶ 2270);
8. the clause types and their treatment (¶ 2280); and
9. drafting (¶ 2290).