Advertisement

April 17, 2014

Subjective vs. Objective – Beliefs Matter for Fiduciaries of Delaware Limited Liability Partnerships and Limited Liability Companies

The Delaware Supreme Court recently clarified when a contractual fiduciary duty imposes a subjective, rather than an objective, standard for determining the appropriateness of a fiduciary’s actions. Under Delaware law, limited liability companies and limited partnerships are allowed—subject to the strictures of Delaware’s Limited Liability Company Act (“LLC Act”) and its Revised Uniform Limited Partnership Act (“RULPA”)—to contractually modify or eliminate traditional fiduciary duties of loyalty, care, and candor. Within this context, one commonly used contractual fiduciary duty provision appears to obligate the fiduciary to act in a manner that he or she believes is in the best interests of the entity (whether limited liability company (“LLC”) or limited partnership (“LP”)). This type of provision has wildly different impact depending on whether or not it is interpreted as requiring a fiduciary to act on a reasonably-held belief or simply a subjectively-held belief that an action is in fact in the entity’s best interests.

In William Allen v. Encore Energy Partners, L.P., the Delaware Supreme Court, affirming an earlier decision by Vice Chancellor Parsons, explained that a fiduciary’s belief that she was acting in the best interests of the LP, if unqualified by a reasonableness requirement, is held to a subjective standard. Del. Supr., C.A. No. 6379 (July 22, 2013). Although William Allen involved the application of the RULPA and not the LLC Act, courts interpret identically the LLC Act’s and RULPA’s respective provisions on contractual fiduciary duties and many other issues. In other words, unless the LP or LLC agreement specifically requires the fiduciary’s belief to be “reasonable,” the fiduciary need only subjectively believe that she acted in the best interests of the entity in order to satisfy her fiduciary obligations. This is, of course, something to keep in mind when drafting an LLC or LP agreement; the lack of a “reasonableness requirement” could afford an executive protection for a decision that harms the entity and flies in the face of commonsense—as long as the executive is empty of head and pure of heart.

This objective vs. subjective distinction also has important implications for a litigator pleading a breach of a contractual fiduciary duty. To plead a breach of a subjective belief, a plaintiff must plead facts from which a court could reasonably infer that the fiduciary did not actually believe he or she was acting in the LLC’s or LP’s best interests. A plaintiff can satisfy this pleading requirement in one of two ways. First, a plaintiff can plead that the fiduciary believed he or she was acting against the LLC’s or LP’s best interests. Second, a plaintiff can plead that the fiduciary consciously disregarded his or her duty to form a subjective belief that he or she was acting in the LLC’s or LP’s best interests. Each option is difficult to satisfy. As a result, courts frequently dismiss cases in which the fiduciary’s subjective belief is at issue.

In sum, both corporate lawyers and litigators need to pay close attention to the distinction between a subjective and an objective belief when analyzing fiduciary duties in connection with an LLC or LP agreement. A party representing a fiduciary in a transaction will want to incorporate a subjective standard; a party concerned about keeping some control over the actions of corporate fiduciaries will prefer the objective standard that comes with a “reasonableness requirement.” Likewise, a litigator faced with the subjective standard may want to advise his or her client that, absent very compelling evidence, it will be extremely difficult to successfully plead a breach of fiduciary duty claim.

© 2014 BARNES & THORNBURG LLP

About the Author

Jacob Zipfel, Legal, Law Firm, Business, Barnes Thornburg, Associate
Associate

Jacob P. Zipfel is an associate in the Chicago office of Barnes & Thornburg LLP, where he is a member of the firm’s Litigation Department. Mr. Zipfel represents clients in commercial and securities litigation matters. 

Prior to joining Barnes & Thornburg, Mr. Zipfel was an associate in the Chicago office of Jenner & Block LLP, where he represented clients in commercial litigation matters and government and internal investigations. Mr. Zipfel also represented the Examiner in the Lehman Brothers bankruptcy case. He has successfully represented...

312-214-8306

Boost: AJAX core statistics

Legal Disclaimer

You are responsible for reading, understanding and agreeing to the National Law Review's (NLR’s) and the National Law Forum LLC's  Terms of Use and Privacy Policy before using the National Law Review website. The National Law Review is a free to use, no-log in database of legal and business articles. The content and links on www.NatLawReview.com are intended for general information purposes only. Any legal analysis, legislative updates or other content and links should not be construed as legal or professional advice or a substitute for such advice. No attorney-client or confidential relationship is formed by the transmission of information between you and the National Law Review website or any of the law firms, attorneys or other professionals or organizations who include content on the National Law Review website. If you require legal or professional advice, kindly contact an attorney or other suitable professional advisor.  

Some states have laws and ethical rules regarding solicitation and advertisement practices by attorneys and/or other professionals. The National Law Review is not a law firm nor is www.NatLawReview.com  intended to be  a referral service for attorneys and/or other professionals. The NLR does not wish, nor does it intend, to solicit the business of anyone or to refer anyone to an attorney or other professional.  NLR does not answer legal questions nor will we refer you to an attorney or other professional if you request such information from us. 

Under certain state laws the following statements may be required on this website and we have included them in order to be in full compliance with these rules. The choice of a lawyer or other professional is an important decision and should not be based solely upon advertisements. Attorney Advertising Notice: Prior results do not guarantee a similar outcome. Statement in compliance with Texas Rules of Professional Conduct. Unless otherwise noted, attorneys are not certified by the Texas Board of Legal Specialization, nor can NLR attest to the accuracy of any notation of Legal Specialization or other Professional Credentials.

The National Law Review - National Law Forum LLC 4700 Gilbert Ave. Suite 47 #230 Western Springs, IL 60558  Telephone  (708) 357-3317 If you would ike to contact us via email please click here.