Contracting Out of Fiduciary Duties in LLCs : Delaware Will Lead, But Will Anyone Follow?

LLCs statutes ostensibly offer businesspersons far greater ability to contract out of fiduciary duties than the partnership statutes that once would have covered similar businesses. Ribstein and Keatinge on Limited Liability Companies identifies five approaches to contracting out of fiduciary duties. Of these, the approach taken in the Delaware statute is by far the most popular, rivaled only by the approach of the ULLCA. Sixteen other states have adopted the Delaware approach. These include both major LLC states such as Nevada and Delaware and major commercial states such as California and Texas. The Delaware approach allows for complete freedom of contract in contracting out of fiduciary duties (outside of the implied duties of good faith and fair dealing inherent in all contracts). While it is unsurprising that many states would look to Delaware for business association law given the leading role it has traditionally played, it is surprising that they would adopt such a permissive approach to this issue. This paper shows that several courts outside of Delaware have been hostile to waivers of fiduciary duties in LLC operating agreements, permissive LLC statutes notwithstanding. This paper also shows, perhaps more problematically, that courts in only some of the states that follow Delaware’s approach have addressed the issue. This paper addresses arguments against enforcing waivers, including arguments rooted in cognitive limitations, and identifies statutory, not common, law as the better path to providing for waiver