Many venture capital business arrangements are structured using one or more Limited Liability Companies or "LLCs" set up under Delaware law. Earlier this year, I wrote in these pages that cases such as Auriga Capital Corp. v. Gatz Props., LLC, No. CA. 4390-CS, 2012 WL 294892 (Del. Ch. Jan. 27, 2012) suggested a trend in Delaware corporate law to imply fiduciary duties on the part of Limited Liability Company ("LLC") members. "Not so fast," the Delaware Supreme Court said recently in an opinion reviewing the Auriga decision. See http://courts.delaware.gov/opinions/download.aspx?ID=180430. While affirming the holding of Chancellor Leo J. Strine, Jr's trial court decision -- essentially that fiduciary-like duties applied to the managing member of the LLC (one Mr. Gatz) who bought the golf course in question at an auction that looked a bit like a "fire sale" -- the Delaware high court went out of its way to underscore that the issue of "default" fiduciary duties for LLC members (what duties apply in the absence of specific provisions) has not yet been decided, and that they (not the lower Court of Chancery, no matter how well known its judges) will decide the issue when it is properly presented.
The Delaware Supreme Court opinion has gotten a lot of press, not the least of which was a piece in the New York Times "Dealbook" blog that focused on Chancellor's Strine's courtroom demeanor and the portion of the Court's opinion that rebuked him for deciding issues that could have been decided more narrowly. http://dealbook.nytimes.com/2012/11/09/in-unusual-move-the-delaware-supreme-court-rebukes-a-judge/ As interesting as judicial turf battles can be, a few points from the latest Auriga Capital opinion may be of greater interest to the venture community.
First, it is probably a good idea in venture deals to say more rather than less in LLC agreements about everyone's rights and responsibilities. Judges going forward are likely to look first to the LLC agreement to resolve disputes, and things will go more predictably if the answers can be found there. Some commentators have suggested amending one's LLC Agreement before disputes arise to make everyone's intentions more clear…not a bad idea.
Second, until the Delaware Supreme Court says something more definitive, the issue of fiduciary duties in LLCs will be harder to handicap in litigation. There has been some tension in Delaware law about the extent to which LLC's should be treated strictly as contracts, and the extent to which there should be an "equitable overlay" including, for example, the kinds of fiduciary duties traditionally implied in partnerships. Chancellor Strine's Auriga opinion in the lower court put some weight on the pro-fiduciary-duty side of the scale; the Delaware Supreme Court opinion brushed it aside, declaring that the issue was one on which reasonable minds could disagree. The resulting equipoise makes it harder to predict winners and losers in any particular case.
Finally, it must be remembered that the facts in Auriga were pretty extreme. Mr. Gatz admitted several times in pleadings and on cross-examination that he did owe fiduciary duties to the minority members of the LLC, so one can see how the case could have been decided on more narrow grounds. None of the parties even asked the lower court to decide the issue of fiduciary duty as it may exist apart from the LLC agreement. The Delaware Supreme Court's language was unusually salty in reining in the lower court, and in the end, may be more about asserting appellate authority and less about foreshadowing how the Court would rule on the merits of a case where the issue of "default" fiduciary duty was squarely presented, especially a case in which the minority members were treated badly.
Stuart Gasner is a Partner at Keker & Van Nest LLP, firstname.lastname@example.org
Stuart Gasner is a Partner at Keker & Van Nest LLP in San Francisco where he centers his practice in the areas of white collar criminal and securities defense, intellectual property litigation and complex corporate disputes. His clients include venture capital firms and their portfolio companies, investment partnerships, and companies in industries ranging from biotechnology to semiconductors. He can be reached at email@example.com and (415) 676-2209.
Keker & Van Nest LLP
For more than thirty years, Keker & Van Nest (www.kvn.com) has litigated complex, high-stakes civil and criminal cases throughout the nation. KVN takes the make or break cases where companies, products, careers and reputations are riding on the result.
This article reflects the law at the time of writing, but is for general educational purposes only, and should not be construed as legal advice or legal opinion on any specific facts or circumstances. It reflects personal views of the author and not necessarily those of the firm or any of its clients. For legal advice, please consult your personal lawyer or other appropriate professional. Reproduced with permission from Stuart L. Gasner.