2016 • Volume 40 • Number 3

Modifying Fiduciary Duties in Delaware: Observing Ten Years of Decisional Law

By: Brent J. Horton

In 2004, Delaware amended its laws to allow limited partnerships and limited liability companies (uncorporations) to eliminate or modify fiduciary duties in their uncorporation agreements. Looking to Delaware, the Author surveys thirty-six written fiduciary duty cases penned in the ten years immediately following the amendments to conduct a systematic content analysis; that is to say, the Author systematically read the thirty-six cases, recorded patterns, and drew inferences therefrom. The goal was to answer the following question: for those cases that elude settlement and are complicated enough to require the judge to issue a written decision, did the modification or elimination of fiduciary duties in the uncorporation agreement help protect management from a claim of breach of fiduciary duty?

The Author observes that a management’s chance of success in such litigation (e.g., prevailing via motion to dismiss or motion for summary judgment) is not unrelated to how the uncorporation agreement in question modifies fiduciary duties. An uncorporation agreement that takes an ad-hoc approach to modification will often be self defeating, creating an interpretive Gordian knot unsuitable for dismissal. On the other hand, if the modification is structured to provide for special approval pursuant to a good faith standard, it is more likely that the court will dismiss the action.

Second, the Author surveys the same thirty-six cases to see what happens when plaintiffs buttress their fiduciary duty claims with a claim for breach of the implied covenant of good faith. The Author observes that despite the Court of Chancery’s recurring admonition that the implied covenant is not a replacement for fiduciary duties, the implied covenant remains a potent attack where the uncorporation agreement partially modifies fiduciary duties, leaving discretionary gaps.

Finally, this Article provides some observations about the tactics of those uncorporations that successfully modify fiduciary duties to protect management—at least as those tactics are revealed in written decisions. One commonality is that their contractual modifications are not overly creative. No drafter of an uncorporation agreement—no matter how skilled—is capable of foreseeing how one creative provision will be interpreted in light of other provisions in the same agreement. Successful uncorporations seem to realize this, and appear to be coalescing around a standardized approach: approval by a special committee, coupled with a good faith standard.