Duties in Georgia and Delaware LLCs Presented by:

Duties in Georgia
and Delaware LLCs
Presented by:
Charles R. Beaudrot, Jr.
Morris, Manning & Martin,
LLP
3343 Peachtree Road, NE
Atlanta, GA 30326
cbeaudrot@mmmlaw.com
Phone: 404-504-7753
DUTIES IN GEORGIA AND DELAWARE LLCS
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DUTIES IN GEORGIA LLCS
Under O.C.G.A. § 14-11-304(a) unless the articles of
organization or a written operating agreement vests
management of the limited liability company in a manager or
managers, management of the business and affairs of the
limited liability company is vested in the members. The
members thus have the authority to manage the affairs of the
limited liability company and to make all decisions.
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DUTIES IN GEORGIA LLCS
Under O.C.G.A. § 14-11-304(b) if the articles of organization
or a written operating agreement vests management of the
limited liability company in one or more managers, then the
managers shall have the authority to manage the business
and affairs of the limited liability company as is provided in
the articles of organization or a written operating agreement.
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DUTIES IN GEORGIA LLCS
Under O.C.G.A. § 14-11-301 for member managed LLCs, every
member is an agent of the limited liability company for the
purpose of its business and affairs, and the act or any member
for apparently carrying on in the usual way the business and
affairs of the limited liability company binds the limited liability
company, unless the member so acting has, in fact, no authority
to act for the limited liability company in the particular matter,
and the person with whom the member is dealing has
knowledge of the fact that the member has no such authority.
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DUTIES IN GEORGIA LLCS
Similarly, if the articles of organization provide that
management of the limited liability company is vested in a
manager or managers:
No member, acting solely in the capacity as a member, is an
agent of the limited liability company; and
Every manager is an agent of the limited liability company for
the purpose of its business and affairs.
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DUTIES IN GEORGIA LLCS
An act of a manager or a member that is not apparently for the
carrying on in the usual way the business or affairs of the
limited liability company does not bind the limited liability
company unless authorized in accordance with the
company’s written operating agreement.
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DUTIES IN GEORGIA LLCS
O.C.G.A. § 14-11-305(1) provides:
“In managing the business or affairs of a limited liability
company:
(1) A member or manager shall act in a manner he or she
believes in good faith to be in the best interests of the limited
liability company and with the care an ordinarily prudent
person in a like position would exercise under similar
circumstances.”
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DUTIES IN GEORGIA LLCS
The section goes on to add:
“A member or manager is not liable to the limited liability
company, its members, or its managers for any action taken
in managing the business or affairs of the limited liability
company if he or she performs the duties of his or her office
in compliance with this Code section.…”
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DUTIES IN GEORGIA LLCS
Under O.C.G.A. § 14-11-305(2) and (3), a member or
manager is entitled to rely on information, opinions, and
reports so long as the member or manager believes such
reliance is justified and does have knowledge making such
reliance unjustified.
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DUTIES IN GEORGIA LLCS
O.C.G.A. § 14-11-305 goes on to provide [italics added]:
“(4) To the extent that, pursuant to paragraph (1) of this
Code section or otherwise at law or in equity, a member or
manager has duties (including fiduciary duties) and liabilities
relating thereto to a limited liability company or to another
member or manager:
(A) The member’s or manager’s duties and liability
may be expanded, restricted, or eliminated by provisions in
the articles of organization or a written operating agreement;
provided, however, that no such provision shall eliminate or
limit the liability of a member or manager:
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DUTIES IN GEORGIA LLCS
and continues:
“(i) For intentional misconduct or a knowing violation of law; or
(ii) For any transaction for which the person received a
personal benefit in violation or breach of any provision of a written
operating agreement; and
(B) The member or manager shall have no liability to the limited
liability company or to any other member or manager for his or her
good faith reliance on the provisions of a written operating agreement,
including, without limitation, provisions thereof that relate to the scope
of duties (including fiduciary duties) of members and managers.”
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DUTIES IN GEORGIA LLCS
Under the Georgia Limited Liability Company Act, nonmanaging members in manager-managed LLCs do not owe
duties to the LLC or to the other members. ULQ, LLC v.
Meder, 293 Ga. App. 176, 185 (2008) (“Because the plain
language of O.C.G.A. § 14-11-305 provides that nonmanaging members in manager-managed LLCs owe no
duties to the LLC or other members, we hold that nonmanaging members owe no fiduciary duties to the LLC or
the other members”).
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DUTIES IN GEORGIA LLCS
Where a member is not a manager, O.C.G.A. § 14-11-305
“expressly provides that that member shall have no duties to
the limited liability company or to the other members solely
by reason of action in his or her capacity as a member.” Ibid.
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DUTIES IN GEORGIA LLCS
Although O.C.G.A. § 14-11-305 does not impose a fiduciary
standard, but rather a prudent person standard, some courts
have read the standard as creating fiduciary duties and have
blithely analogized the duties of managers to those of
directors in corporations.
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DUTIES IN GEORGIA LLCS
Argentum Int’l, LLC v. Woods, 280 Ga. App. 440 447 (2006)
[“Here [defendant] was a member of the Board of
Managers…and, as such, owed a fiduciary duty to those
Plaintiffs who held equity interests.”]
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DUTIES IN GEORGIA LLCS
The same “fiduciary duties” apply to members who manage
the LLC. Internal Med. Alliance, LLC v. Budell, 290 Ga. App.
231 (2008).
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DUTIES IN GEORGIA LLCS
But these duties can be modified subject to the limitations of
O.C.G.A. § 14-11-305(4)(A). Ledford v. Smith, 274 Ga. App.
714 (2005); Stoker v. Bellemeade, LLC, 272 Ga. App. 817
(2005).
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DUTIES IN GEORGIA LLCS
This can include permitting managers or members to compete
or to fail to disclose extrinsic information germane to their
strategies with respect to a buyout provision in a Put-Call
situation. Ledford v. Smith, supra.
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DUTIES IN GEORGIA LLCS
Fortunately, at least one bankruptcy court which has
considered the issue has held, at least for bankruptcy
purposes, that the duties of members of an LLC did not
make them “fiduciaries” for purposes of making debts of the
LLCs non-dischargeable. In re Wheelus, 2008 Bankr. LEXIS
348 (Bankr. M.D. Ga. 2008).
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DUTIES IN GEORGIA LLCS
Indeed the discussion of the issue of “duties” in Georgia LLCs
in this decision is refreshing for its clarity and precision, aptly
pointing out the Georgia standard is not a traditional fiduciary
standard, but rather a variation of the business judgment
rule.
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DUTIES IN GEORGIA LLCS
But, even if modified by other provisions, an LLC Operating
Agreement is a contract. And all contracts contain an
implied duty of good faith in the exercise of discretion by a
manager or member, at least where the agreement is not
explicitly clear that the control person is relieved of that duty.
ULQ, LLC v. Meder, 293 Ga. App. 176 (2008). [Termination
of an officer triggering a buy-out right may not have been
made in “good faith” and therefore was issue for jury.]
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DUTIES IN GEORGIA LLCS
And the LLC duties and standards are not the same as for
partnership. James E. Warren, M.D., P.C. v. Weber &
Warren Anesthesia Servs., 272 Ga. App. 232 (2005). [Trial
court was justified in refusing to give an instruction that
resignation could be wrongful where contemplated by the
operating agreement and the statute.]
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DUTIES IN GEORGIA LLCS
Notwithstanding these cases, given the proclivity of our courts
to apply corporate law concepts to LLCs, do we need to
worry about the impact of Marshall v. W. E. Marshall Co.,
189 Ga. App. 510 (1988) which imposes duties on a majority
shareholder?
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DEFAULT FIDUCIARY DUTIES IN DELAWARE
Duty of Care
A duty to act and make decisions in an informed and
deliberate manner, availing oneself of all reasonably
available material information
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DEFAULT FIDUCIARY DUTIES IN DELAWARE
Duty of Loyalty
Requires decisions to be made based on the best interests of
the entity and its equityholders, and not for personal or other
reasons
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DEFAULT FIDUCIARY DUTIES IN DELAWARE
Duty of Disclosure
Requires fiduciary to speak honestly anytime communicating
with equityholders.
Requires fiduciary to disclose all material information
reasonably available when seeking equityholder action
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DEFAULT FIDUCIARY DUTIES IN DELAWARE
Unless a limited liability company agreement expands,
restricts or eliminates the fiduciary duties owed by a
manager, a manager is subject to the fiduciary duties of
loyalty and care.
Auriga Capital Corporation v. Gatz
Properties, LLC, C.A., 4390-CS (Del. Ch. Jan. 27, 2012).
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CONTRACTUAL FLEXIBILITY IN DELAWARE
Ability to Modify Fiduciary Duties:
– 6 Del. C. §18-1101(c) provides:
– To the extent that, at law or in equity, a member or manager
or other person has duties (including fiduciary duties) to a
limited liability company or to another member or manager or
to an other person that is a party to or is otherwise bound by a
limited liability company agreement, the member’s or
manager’s or other person's duties may be expanded or
restricted or eliminated by provisions in the limited liability
company agreement; provided, that the limited liability
company agreement may not eliminate the implied
contractual covenant of good faith and fair dealing.
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IMPLIED CONTRACTUAL COVENANT OF GOOD
FAITH AND FAIR DEALING IN DELAWARE
Purpose – to enforce the reasonable expectations of the
parties to a contract when situations arise that are not
contemplated and provided for in the contract
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IMPLIED CONTRACTUAL COVENANT OF GOOD
FAITH AND FAIR DEALING IN DELAWARE
The test: It is [clear] [more likely than not] that the parties
would have agreed to proscribe the act later complained of
as a breach of the implied contract covenant had they
thought to negotiate with respect to that matter
It requires a court to extrapolate the “spirit” of a contract and
determine what the parties would have agreed to had they
foreseen the dispute
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IMPLIED CONTRACTUAL COVENANT OF GOOD
FAITH AND FAIR DEALING IN DELAWARE
Doctrine is narrowly construed and applied to ensure that the
parties’ reasonable expectations are fulfilled.
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IMPLIED CONTRACTUAL COVENANT OF GOOD
FAITH AND FAIR DEALING IN DELAWARE
The implied covenant has no application when the contract’s
express terms cover the situation.
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CASE LAW DEVELOPMENTS IN
DELAWARE
Delaware courts have struggled with the tension between
application of corporate fiduciary principles as “gap-fillers”
and the statutory policy in favor of freedom of contract.
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CASE LAW DEVELOPMENTS IN
DELAWARE
Courts have long history and vast precedent defining fiduciary
principles.
Courts have less experience with and traditionally have been
hesitant to expand the implied covenant.
Relationships in LLC context often look like traditional
corporate relationships by analogy.
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CASE LAW DEVELOPMENTS IN
DELAWARE
As more cases are decided involving LPs/LLCs that have
modified or eliminated fiduciary duties, the scope and
application of the implied covenant is becoming more well
defined.
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AVOIDING POTENTIAL PITFALLS
UNDER DELAWARE LAW
• Elimination or modification of fiduciary duties must be
express and unambiguous.
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AVOIDING POTENTIAL PITFALLS
UNDER DELAWARE LAW
•
For better or worse, there may always be some
inherent bias towards fiduciary analysis.
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AVOIDING POTENTIAL PITFALLS
UNDER DELAWARE LAW
Managers and advisors must take care in importing fiduciary
“cleansing” mechanisms applicable in the corporate context,
to avoid “voluntarily assumed” fiduciary duties. E.g., fairness
opinions, special committees, majority of minority votes.
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Thank You For
Joining Us for
an MMM
“Lunch ‘n Learn”
Charles R. Beaudrot, Jr.,
Partner
Tax and Real Estate Capital
Markets Practices
cbeaudrot@mmmlaw.com
Direct: (404) 504-7753
Morris, Manning & Martin, LLP