Delaware 2013 Amendments to the Limited Liability Company Act Confirm That Single Member LLC’s are Entitled to the Same Protections as Multi-Member LLC’s and that Default Fiduciary Duties Exist Under the Delaware Act
The 2013 Amendments to the Delaware Limited Liability Company Act have not yet been introduced in the General Assembly. The Delaware Bar Association traditionally proposes annual amendments to Delaware laws. This article is a preview of what is likely to be introduced. The amendments being proposed are modest, dealing primarily with single member LLC’s and confirming the existence of default fiduciary duties.
Sections 1-5 of the Act are technical. They provide that in the case of a merger, consolidation, transfer, domestication or conversion of a limited liability company or the conversion of another entity to a limited liability company, the interests may remain outstanding or may be cancelled. The “remain outstanding” concept was added to the Act. Many people believe that this could have been accomplished before the amendment, however in certain EU and cross border transaction this has become important. In order to give clean opinions the “remain outstanding” language was added.
Some commentators who have written on asset protection have expressed the opinion that Section 18-703(d), which deals with charging orders, and which states that the charging order “is the exclusive remedy by which a judgment creditor of a member or a member’s assignee may satisfy a judgment out of the judgment debtor’s limited liability company interest.” does not foreclose all other remedies where the company is a single member company, notwithstanding the fact that the Section uses the word “exclusive”. In response to the criticism Section 6 of the Act adds at the end of the Section 18-703(d) the phrase “and attachment, garnishment, foreclosure or other legal or equitable remedies are not available to the judgment creditor, whether the limited liability company has 1 member or more than 1 member.”
The Act further focuses on the single member company in Section 7. There are few cases in the US, outside of the Bankruptcy Courts where corporations with a single stockholder are treated differently from corporations with multiple stockholders in the absence of the traditional basis of veil piercing, such as active fraud. In the LLC area, however, some courts have expressed the proposition that single member LLC’s are not entitled to the same protections. No Delaware court has ever expressed such a proposition, however Delaware LLC’s often find themselves in court rooms outside of the State of Delaware where the judges may not be entirely conversant with the Delaware Act. To clarify that a single member LLC is entitled to the same protections, the Act amends Section 18-1101 to add a new Subsection (j) which reads: “The provisions of this chapter shall apply whether the limited liability company has 1 member or more than 1 member.” This amendment should put the question to rest.
Within the Delaware Supreme Court, the Delaware Court of Chancery and the Delaware Bar the question as to whether there exist default fiduciary duties under the Delaware LLC Act has been an open question. The LP Act, through its integration with the GP Act provides for default fiduciary duties. The LLC Act does not contain a provision dealing with default fiduciary duties. That absence caused some commentators, including Delaware’s Chief Justice, to argue that as a contractual entity the duties of the members and managers should only be those contained in the company agreement and that the Act does not contain default fiduciary duties. The other side argued that the similarity between the LLC and LP acts and the fact that Section 18-1101(c) provides that “[t]o the extent that, at law or in equity, a member or manager … has duties (including fiduciary duties)… [those duties]… may be expanded or restricted or eliminated by provisions in the limited liability company agreement…”. Some have argued, including this commentator, that in order for these fiduciary duties to be expanded, restricted or eliminated, they must first exist within the Act. In a recent Per Curium decision by the Delaware Supreme Court in the case of Gatz Properties, LLC v. Aruga Capital Corp., 2012 WL 5425227 (Del. Nov. 7, 2012), the Court invited the Delaware Bar to suggest legislation to the Delaware General Assembly if it believed that default fiduciary duties exist under the Delaware Act. Section 8 is the result of that invitation. Section 8 confirms that default traditional fiduciary duties exist within the Act by amending Section 18-1104 to add the highlighted language: In any case not provided for in this chapter, the rules of law and equity, including the rules of law and equity relating to fiduciary duties and the law merchant, shall govern.”
If adopted by the Delaware General Assembly the amendment will become effective on August 1, 2013, and as is traditional with all Delaware amendments, unless otherwise provided in the legislation, the amendment are applicable to all Delaware limited liability company irrespective of when created.
I can be reached at sgoldberg@stevendgoldberg.com
