Provisions in an LLC Agreement, of course, will normally be the result of negotiations between or among the LLC’s members.  A designating member should anticipate that other members will desire some balance between a manager’s conduct for the benefit of the LLC and its members as a whole and the manager’s conduct for the sole or primary benefit of the designating member.

Nevertheless, it is worth asking:  What provisions might be proposed to facilitate the desired arrangement to achieve, to the greatest extent, the principal purposes of the designating member and provide the greatest protection to the representative manager?  It appears that those possible provisions include the following:

  • Disclosure of the desired relationship between the designating member and the representative manager, and express consent to that relationship by all of the other LLC’s members – The key to a court’s recognition of the arrangement as fair or proper, even though it involves a departure from standards otherwise imposed by law, is that the arrangement is an essential part of the contractual relationship of the LLC’s members, expressly consented to by them.
  • An express statement that the provisions supersede, or take precedence over, any fiduciary duties or relationship imposed on the designated or representative manager by law – Courts applying Delaware law have stated that, to be effective, any departure from the “default” fiduciary duties must be “clear” or “explicit” and “unambiguous.”  The provisions in the LLC Agreement should include statements to the effect that (a) the representative manager does not have, or is not subject to, the fiduciary duties imposed by law and (b) those fiduciary duties are replaced by the standard of conduct or the duties imposed only by the LLC Agreement (to include the rights briefly described in the succeeding post).  Also, the provisions in the LLC Agreement regarding the standard of care for, and the limitations on liability of, managers should correspond to or be consistent with the contractual duties that are imposed on the representative manager.