Delaware corporate and alternative entity law has long been the model for other states in drafting statutes and for practitioners in advising clients and preparing limited partnership agreements and limited liability company membership agreements.
In 2005 the Delaware legislature amended its Limited Liability Company Act and Revised Uniform Limited Partnership Act to provide drafters of LP and LLC agreements with broad flexibility to modify default fiduciary duties. Both Acts now provide that default fiduciary obligations mat be restricted or eliminated, provided that the implied covenant of fair dealing and good faith may not be eliminated. Many states have followed suit.
Delaware Corporate Law
Under Delaware law, the purpose of the implied covenant of fair dealing and good faith is to enforce the reasonable expectations of parties to a contract where situations arise that are not expressly contemplated and provided for in the language of the contract itself. Although the covenant of good faith and fair dealing itself cannot be waived, Delaware courts will not infer specific obligations that do not appear in the LLC or LP agreement. Moreover, courts will not override express provisions in the agreements. Accordingly, it is incumbent upon parties to set forth clear and unambiguous provisions to avoid doubt later. For instance, where management is entitled to compete with a company or exercise sole and unfettered discretion on matters, such provisions need to be clear and explicit.
With respect to discretionary acts, it is very important to spell out the scope of such discretion. If the intent is to allow the General Partner act in its own best interest, it needs to be so stated. Sample sole discretion language which has been upheld is as follows:
“Notwithstanding any other provision of this Agreement or otherwise applicable provision of law or equity, whenever in this Agreement, the General Partner is permitted or required to make a decision in its sole discretion or under a grant of similar authority or latitude, the General Partner shall be entitled to consider only such interests and factors as it desires, including its own interests, and shall, to the fullest extent permitted by applicable law, have no duty or obligation to give any consideration to any interest of or factors affecting the Partnership or Limited Partnership.”
The bottom line is that parties to an LLC or LP Agreement cannot underestimate the necessity to specifically set forth any fiduciary obligations and expectations to each other to avoid the application of statutory default obligations, which can be cumbersome and unintended.
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