Useful insights from the Delaware Bench were provided on the topic of contractual definitions, or limitations, on fiduciary duties in LLCs and LPs at a recent seminar. The program was moderated by Catherine Dearlove of the Delaware Bar. Other panel members included Chief Justice Leo Strine, Jr. of the Delaware Supreme Court. The program was designed to be interactive.
One of the attendees was former Vice Chancellor Donald Parsons. He and the Chief Justice engaged in what apparently was an unplanned colloquy about recent decisions involving “safe harbor” provisions in alternative entity agreements that provide for protection from claims when a transaction was conflicted — if certain conditions are met for a safe harbor even though all fiduciary duties have been waived in the alternative entity agreement. The panel discussion I attended in Washington, D.C. on Friday, November 17, 2017, at the American Bar Association’s Fall meeting of the Business and Corporate Litigation Committee was entitled: “Bespoke Governance: What Institutional Investors Need to Know about Contractual Alternatives to Fiduciary Duties”
These highlights from the seminar are not a transcript nor does this short blog post claim to be an authoritative record of what one current and one former member of the judiciary, and others, actually said at the seminar, but rather it attempts to provide a good faith paraphrasing of some of the key points made that might be of interest to readers of this blog.
The following bullet points are especially noteworthy:
- By way of introduction, references were made to sections of the Delaware Limited Liability Company Act and the Delaware Limited Partnership Act that expressly allow for maximum freedom of contract and for the waiver of all fiduciary duties, although the implied covenant of good faith and fair dealing cannot be waived.
- At least one school of thought, however, supports the view that one cannot be exculpated for bad faith liability. One judicial officer on the panel noted that there is no “neutral faith,” but rather the lack of good faith equals bad faith.
- Unlike the Delaware General Corporation Law, there is no mandatory indemnification default provision in the LLC Act or the LP Act as there is in DGCL § 145.
- The Chief Justice noted that recent Delaware Supreme Court decisions have upheld basic principles of contract interpretation, especially in the context of waivers of fiduciary duty, including the following: (1) Waivers need to be clear in order to be enforceable; (2) The implied covenant is not a panacea for inartful drafting of every stripe. See, e.g., Brinckerhoff decision highlighted on these pages.
- Recent cases have applied the doctrine of contra proferentem when there is ambiguity in the agreement.
- There was a robust discussion about alternative entity agreements with provisions that provide as follows: “One is not liable if:” and then several categories of conduct are described as not resulting in liability. One judicial officer present at the seminar said that those clauses should be interpreted to mean that one is liable unless the conduct fits within the enumerated described categories that follow the phrase “… not liable if:” …”
- A current member of the Delaware judiciary and a former member of the Delaware judiciary engaged in a debate of sorts, along with others, regarding a comparison of recent Delaware Supreme Court decisions and prior Chancery decisions which described interpretations of “safe harbor” provisions of alternative entity agreements. It would be fair to say – from this spectator’s perspective — that there was a lack of unanimity among the persons engaged in the discussion on that topic.
SUPPLEMENT: Professor Bainbridge provides expert insights on these observations on his eponymous blog.