Professor Lyman P.Q. Johnson has written an article that adds much-needed depth, and some level of controversy (in a positive manner), to the scholarship on fiduciary duties in the context of alternative entities. Professor Lyman is well known for his scholarship in the area of fiduciary duties, especially on the duties of officers (as compared to directors). See, e.g., here. He just published an article that addresses fiduciary duties in the non-corporate context. Although the Delaware LLC Act allows for waivers of fiduciary duties (other than the duty of good faith and fair dealing), Professor Johnson argues that the waiver allowed by statute may be an invalid encroachment on the jurisdiction of the Court of Chancery to impose fiduciary duties. This of course is at odds with articles on the topic written by Chief Justice Steele. See, e.g., here.
Professor Johnson argues, contrary to received wisdom, that fiduciary duty waivers in non-corporate business entities in Delaware are not automatically valid and that, constitutionally, the General Assembly cannot encroach on the Chancery Court’s jurisdiction or power to impose fiduciary duties if the judges so choose in a particular case in the LLC or partnership area. The article is forthcoming in the Boston University Law Review and Professor Johnson suggests that it likely will stir some significant discussion given Chief Justice Steele’s writings and speeches on this subject.
The abstract to the article follows:
This Article disputes the view – seemingly settled among scholars, judges, and lawyers – that recently – enacted statutes in Delaware legally permit fiduciary duties to be waived in noncorporate business associations. The argument is a rarity in business law because it is a constitutional argument, not one initially based on policy considerations or statutory interpretation, and it seeks to harmonize judicial review of fiduciary duties in noncorporate businesses with that in Delaware corporations, where waivers are not permitted. Delaware’s Constitution vests the Delaware Court of Chancery with general equity jurisdiction and powers of a kind that cannot be curtailed by legislative action. Consequently, neither the new and much-heralded waiver statutes, nor the private agreements they endorse, have divested Delaware courts of their traditional power and responsibility over fiduciary duties in limited liability companies (LLCs) or partnerships.
In addition to raising a serious and unresolved separation-of-powers issue for Delaware, the practical consequences of the argument made here are far-reaching. First, the argument casts substantial doubt on the efficacy of all those provisions in extant partnership and LLC agreements that seek to eliminate fiduciary duties. Second, the argument challenges the judges of the Court of Chancery to reassert their constitutional authority – and responsibility – over this field of jurisprudence and restore time-honored fiduciary duties to the law of unincorporated business associations in Delaware. The judges can exercise their inherent power to articulate fiduciary duties both where private agreements fail to address that subject at all and, where agreements do address the subject of duties ex ante – including agreements with waivers – the judges ex post should apply traditional duties in the manner a particular context may, to achieve commutative justice, equitably require. The key point is that, in every case, that specific determination must be made judicially; it cannot, by the constitutional nature of equity, be made a priori and categorically, either by the General Assembly or private contract or both together. Third, the law of noncorporate business associations in Delaware is, accordingly, far more indeterminate than widely believed and more indeterminate than the law of other states, thereby more closely resembling Delaware corporate law in this regard.
The good professor’s article is available here. A citation to the article is: Johnson, Lyman P. Q., Delaware’s Non-Waivable Duties (2010). Boston University Law Review, Vol. 91, 2011.
SUPPLEMENT: Professor Larry Ribstein, one of the nation’s foremost scholars in the area of alternative entities, provides learned commentary on Professor Johnson’s article here.