Under Delaware law, the members of a limited liability company may eliminate or modify the common-law fiduciary duties of loyalty and care in their operating agreement. When they do so, Delaware courts will analyze any alleged management misconduct under the standard of conduct to which the parties agreed. In MKE Holdings v. Schwartz, C.A. No. 2018-0729-SG (Del. Ch. Sept. 26, 2019), the Delaware Court of Chancery found the managers’ contractual duty to be a narrow one: act with a good-faith belief that their conduct was in or not opposed to the LLC’s best interests. It then dismissed a complaint alleging breach of duty by the managers for the plaintiffs’ failure to allege facts making it reasonably conceivable that the defendants breached the contractual standard. The case reflects the Court of Chancery’s application of contract principles to assess whether the defendants may have breached the duties to which parties in an LLC have agreed.

Court Finds Parties Eliminated Common-Law Fiduciary Duties

In MKE Holdings, the plaintiffs brought derivative claims against the managers of a Delaware LLC, alleging that they had violated the LLC’s operating agreement and their fiduciary duties by making acquisitions that would benefit them personally, as well as by compensating themselves excessively. The defendants sought dismissal on the ground that their conduct did not violate the operating agreement. In construing the LLC’s operating agreement, the Court of Chancery determined that the parties had eliminated the common-law duties of care and loyalty, and explicitly permitted the managers to engage in self-interested transactions, as long as the transactions were done in good faith (i.e., not in bad faith).

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