In the case of Auriga Capital Corporation v. Gatz Properties, LLC, C.A. No. 4390-CS (Del. Ch. Jan. 27, 2012), the Court of Chancery reinforced the notion that a majority and managing member of a limited liability company can be held liable for breach of fiduciary duty in connection with the member’s management and eventual purchase of the company.
This opinion demonstrates that that the Court interprets the Delaware Limited Liability Company Act, 6 Del. C. § 18-101, et seq. (the “DLLC Act”) to impose default fiduciary obligations similar to those in the corporate context, in the absence of a clear expression otherwise in the LLC agreement.
Specifically in this case, Chancellor Strine rejected the assertion that traditional fiduciary duties of loyalty and care do not apply in the context of alternative entities, holding that the DLLC Act specifically states that the rules of equity shall govern unless displaced by statute or contract, and “[i]t seems obvious that . . . a manager of an LLC would qualify as a fiduciary of that LLC and its members.” Moreover, though an LLC can contractually eliminate certain fiduciary duties through its operating agreement pursuant to § 18-1101(c) of the DLLC Act (except the implied contractual covenant of good faith and fair dealing), the elimination of those duties must be clear. Without explicit and unequivocal language, Delaware courts will apply default fiduciary duties.
Auriga makes clear that the Court of Chancery will consider LLC managers as fiduciaries in the same vein as corporate directors absent clear contractual language to the contrary. Additionally, it serves as a reminder that controlling shareholders must proceed cautiously when considering a buyout of their minority investors, because the Court will analyze the course of conduct leading to the sale in order to determine whether the price paid was entirely fair.