Fiduciary Duties in the Alternative Entity Context

August 16, 2012

Publication| Limited Liability Company & Partnership Advisory

Delaware limited partnerships (LPs) and limited liability companies (LLCs), sometimes referred to collectively as alternative entities, are not the same as corporations, although there are many similarities. Just as in corporations, fiduciary duties apply by default to those who manage Delaware LPs and LLCs. Both the Delaware Limited Liability Company Act and the Delaware Revised Uniform Limited Partnership Act (DRULPA), however, reflect a strong policy favoring broad freedom of contract in connection with almost all aspects of the formation, operation, and termination of Delaware LPs and LLCs, including relationships among the partners or members. Consistent with the policy favoring freedom of contract, a limited partnership agreement or a limited liability company agreement can modify and even eliminate such fiduciary duties, subject to the implied contractual covenant of good faith and fair dealing. To the extent that these fiduciary duties are modified by contract, Delaware courts will enforce the terms of the limited partnership agreement or limited liability company agreement. This can lead to results that are far different from cases decided in the corporate context.

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