John Cunningham – Dec. 9, 2011
In the second and third sentences of footnote 71 of the Chief Justice Steele’s article, the Chief Justice states that:
In this article, I focus only on sophisticated parties entering into a Delaware LLC. I do not imply that this analysis would apply to all members, specifically passive investors, who are not involved in the formation of the LLC . . . .
These sentences are absolutely fundamental in understanding the Chief Justice’s article. I’m not sure why the Chief Justice chose to relegate them to footnote 71, one of the very last footnotes in the article.
In their comment, Bill Callison and Alan Vestal make reference to the above sentences and aptly comment on them. I suspect that the Chief Justice would also be willing to apply the sentences to most or all member-managed multi-member LLCs and perhaps also to single-member LLCs that have non-member managers.
In other words, it seems clear that the Chief Justice meant the article to apply to what, in practice, is only a minute percentage of actual Delaware LLCs. (But personally, for the reasons set forth in the Callison/Vestal and Kleinberger comments and for other reasons, I believe the thesis of the article is invalid even as applied to these “sophisticated” LLCs.)
A personal plug: If readers want to obtain a comprehensive overview of the Delaware common law default fiduciary duties that apply to Delaware LLCs, they might want to visit their local law library and look at Chapter 14A of Drafting Delaware LLC Agreements, the Wolters Kluwer formbook and practice manual that Vern Proctor and I have written. (I should note that Vern is a member of the Delaware bar. I am not.)
Finally, Lou Hering is obviously right, in his excellent comment, that to the extent that default common law fiduciary rules are inconsistent with the practical operation of the non-fiduciary terms of a Delaware LLC agreement, these rules should not apply in construing the agreement.