The Delaware Court of Chancery has found that a limited liability company's operating agreement did not eliminate the fiduciary duties that a controlling unitholder owes to minority unitholders and did not provide a standard to resolve conflicts between unitholders. The court held that the merger transaction should be reviewed under the entire fairness standard and denied the controlling unitholder's motion to dismiss the claims.
Minority unitholders of a publicly held limited liability company brought suit against the controlling unitholder of a limited liability company, alleging breach of fiduciary duties in connection with a merger transaction that resulted in the limited liability company becoming a wholly-owned subsidiary of the controlling unitholder. The minority unitholders alleged that the terms of the merger were unfair, that there was a conflict of interest between the controlling and minority unitholders, and that the merger should be reviewed under the entire fairness standard.
In its ruling, the Court explained that parties may "contractually expand, restrict, modify, or fully eliminate the fiduciary duties owed by the company or its members, subject to certain limitations." However, "in the absence of explicit provisions in a limited liability company agreement . . . the traditional fiduciary duties owed by corporate directors and controlling shareholders apply in the limited liability company context." Thus, unless the operating agreement of a limited liability company expressly provides otherwise, the traditional fiduciary duties applicable to directors and controlling shareholders in the corporate setting will also apply to the controlling unitholder of a limited liability company.
In re Atlas Energy Resources, LLC, Unitholder Litigation, C.A. No. 4589-VCN (Del. Ch. Oct. 28, 2010).