Law in the Marketplace: Do fiduciary duties matter?

Fiduciary duties are, at their most basic, the legal duties that one individual owes another if the first individual agrees to take responsibility for the needs of the second. The English courts originated fiduciary duties many hundreds of years ago; we inherited them from the English. There are two main kinds of fiduciary duties — the duty of care and the duty of loyalty. And there is a third kind of duty, called the implied covenant of good faith and fair dealing (the “Implied Covenant”), which is perhaps best described as a “quasi” fiduciary duty. LLC clients often ask me to review operating agreements drafted by other lawyers and to advise them whether they should sign these agreements. After many years of practice, I still find it shocking that a substantial majority of these agreements are completely silent about fiduciary duties. The reason I’m shocked is that I know from 30 years of practice experience that fiduciary duties are not merely legal obligations for which members and managers of business entities can be sued if they breach them; more importantly, they are the ethical code and the team spirit of these entities.

In short, for many LLCs — mainly for multi-member LLCs but also for many single-member LLCs — fiduciary duties are often not only the key to business success but even to business survival. This is why roughly one half of all LLC lawsuits in the Delaware courts and in the courts of many other states involve claims of fiduciary breaches.

For these reasons, in this column and my next few columns I will summarize everything I think New Hampshire business owners should know about fiduciary duties. I’ll start with an overview of the fiduciary provisions of the New Hampshire LLC Act. I chaired the committee of New Hampshire lawyers that drafted that act, and, for better or for worse, I myself drafted many of the fiduciary provisions in it.

The relevant sections of the New Hampshire Act are sections 304-C:106 through 117. The core contents of these sections are summarized below. In subsequent columns, I’ll address many of these sections in detail. But if you’re a business owner who wants to gain a practical understanding of New Hampshire fiduciary law, you should start with the big picture.

The reach of New Hampshire fiduciary law. Section 106 provides that, unless the operating agreement provides otherwise, fiduciary duties apply not only to the managers of manager-managed multi-member LLCs but also to the non-members of these LLCs to the extent they exercise management functions; and they apply to all of the members of member-managed multi-member LLCs. In other words, the reach of the fiduciary provisions of the New Hampshire LLC Act is extraordinarily broad — perhaps broader than those of any other U.S. LLC act.

The flexibility of New Hampshire fiduciary law. Section 107 provides that in their operating agreement, the members of an LLC can expend, restrict or even eliminate the fiduciary duties of members and managers. A key question for many New Hampshire business owners is whether and when to exercise these Section 107 options.

The duty of care. Section 108 defines the meaning of the duty of care under New Hampshire LLC law. However, it does not address the above Section 107 issue.

The business judgment rule. Section 109 provides a statutory “business judgment rule” — i.e., a “rebuttable presumption” that a person subject to LLC fiduciary duties will be deemed to comply with those duties if he or she acts in good faith, reasonably, and on the basis of adequate information. The reason for Section 109 is that management often requires taking risks. Thus, if managers guess wrong about these risks, they shouldn’t face the burden of proof in showing that their guess was reasonable.

The duty of loyalty. Section 110 addresses the duty of loyalty. The general duty of loyalty is the duty, in all matters relating to one’s LLC, to put the LLC first and oneself second. But under New Hampshire law, the duty of loyalty is very complex; for starters, there are no fewer than eight subsidiary duties of loyalty, each of which has its own complexities. Even a brief discussion of the terms and practical importance of the duty of loyalty will require at least two columns.

The Implied Covenant. Section 111 covers the Implied Covenant. The Implied Covenant, like the duty of loyalty, is complex, and is addressed in great detail in Delaware cases, many of which are likely to be persuasive in New Hampshire lawsuits. Thus, the Implied Covenant, too, deserves a column of its own.

Miscellaneous fiduciary provisions. Finally, Sections 112 through 117 provide for defenses to fiduciary claims, fiduciary remedies, and fiduciary indemnifications and exculpations.

Next week: What you should know about the duty of care.

John Cunningham is a lawyer licensed to practice law in New Hampshire and Massachusetts. He is of counsel to the law firm of McLane Middleton, P.A. His practice is focused on LLC law and tax, LLC formations and the handling of LLC disputes and lawsuits. His telephone number is (603) 856-7172. His email address is lawjmc@comcast.net. His website link is llc199a.com. For access to all of his Law in the Marketplace columns, visit concordmonitor.com.

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