1. www.rlf.com DELAWARE LLCS: FIDUCIARY DUTY OPPORTUNITIES AND PITFALLS INDIANAPOLIS BAR ASSOCIATION OCTOBER 17, 2012 Matthew S. Criscimagna 302-651-7593 criscimagna@rlf.com

2. Copyright © 2010 Richards, Layton & Finger, P.A. All rights reserved. Introduction  Default Fiduciary Duties  Modification of Fiduciary Duties  Modification of Liability  Considerations in Drafting LLC Agreements  Case Law Developments

3. Copyright © 2010 Richards, Layton & Finger, P.A. All rights reserved. Default Fiduciary Duties  The Delaware Limited Liability Company Act (the “LLC Act”) assumes that members and managers of a Delaware limited liability company (an “LLC”) have fiduciary duties, but does not specify the nature of such duties.  Delaware courts have historically imposed fiduciary duties on those who act for the benefit of another.  Delaware courts have stated that members and managers of an LLC have fiduciary duties.

4. Copyright © 2010 Richards, Layton & Finger, P.A. All rights reserved. Default Fiduciary Duties  Absent a provision in a limited liability company agreement to the contrary, a manager or controlling member of an LLC owes traditional fiduciary duties of loyalty and care to the LLC and its members.

5. Copyright © 2010 Richards, Layton & Finger, P.A. All rights reserved. Default Fiduciary Duties  The duty of care requires directors to inform themselves “prior to making a business decision, of all material information reasonably available to them.”  The duty of loyalty prohibits directors from using their “position of trust and confidence to further their private interests.” It requires that directors be motivated by the best interests of the corporation and its stockholders.

6. Copyright © 2010 Richards, Layton & Finger, P.A. All rights reserved. Modification of Fiduciary Duties  The LLC Act permits contractual modification of fiduciary duties in a limited liability company agreement.  Duties (including fiduciary duties) may be expanded, restricted or eliminated.  May not eliminate the implied contractual covenant of good faith and fair dealing.

7. Copyright © 2010 Richards, Layton & Finger, P.A. All rights reserved. Modification of Fiduciary Duties  6 Del. C. §18-1101(c) provides:  To the extent that, at law or in equity, a member or manager or other person has duties (including fiduciary duties) to a limited liability company or to another member or manager or to another person that is a party to or is otherwise bound by a limited liability company agreement, the member’s or manager’s or other person’s duties may be expanded or restricted or eliminated by provisions in the limited liability company agreement; provided, that the limited liability company agreement may not eliminate the implied contractual covenant of good faith and fair dealing.

8. Copyright © 2010 Richards, Layton & Finger, P.A. All rights reserved. Modification of Fiduciary Duties  Modifying fiduciary duties must be done expressly and unambiguously in the limited liability company agreement.

9. Copyright © 2010 Richards, Layton & Finger, P.A. All rights reserved. Modification of Fiduciary Duties  Implied Contractual Covenant of Good Faith and Fair Dealing  Purpose - to enforce the reasonable expectations of the parties to a contract when situations arise that are not contemplated and provided for in the contract.  Test - whether the parties would have agreed to proscribe the act later complained of as a breach of the implied contractual covenant had they thought to negotiate with respect to that matter.

10. Copyright © 2010 Richards, Layton & Finger, P.A. All rights reserved. Modification of Liability  Default Rule – No liability for breach of fiduciary duty for good faith reliance on the provisions of the limited liability company agreement.  The LLC Act permits limitation or elimination of liability for breach of contract and breach of duties (including fiduciary duties).  May not limit or eliminate liability for bad faith violation of the implied contractual covenant of good faith and fair dealing.

11. Copyright © 2010 Richards, Layton & Finger, P.A. All rights reserved. Modification of Liability  6 Del. C. §18-1101(d) provides:  Unless otherwise provided in a limited liability company agreement, a member or manager or other person shall not be liable to a limited liability company or to another member or manager or to another person that is a party to or is otherwise bound by a limited liability company agreement for breach of fiduciary duty for the member’s or manager’s or other person’s good faith reliance on the provisions of the limited liability company agreement.

12. Copyright © 2010 Richards, Layton & Finger, P.A. All rights reserved. Modification of Liability  6 Del. C. §18-1101(e) provides:  A limited liability company agreement may provide for the limitation or elimination of any and all liabilities for breach of contract and breach of duties (including fiduciary duties) of a member, manager or other person to a limited liability company or to another member or manager or to another person that is a party to or is otherwise bound by a limited liability company agreement; provided, that a limited liability company agreement may not limit or eliminate liability for any act or omission that constitutes a bad faith violation of the implied contractual covenant of good faith and fair dealing.

13. Copyright © 2010 Richards, Layton & Finger, P.A. All rights reserved. Considerations in Drafting LLC Agreements  Provisions regarding:  Modification/elimination of fiduciary duties  Limitation/elimination of liability  Exculpation and indemnification  Outside business (“corporate” opportunities)  Affiliated transactions  Conflicts of interest

14. Copyright © 2010 Richards, Layton & Finger, P.A. All rights reserved. Considerations in Drafting LLC Agreements  “Sole Discretion”  To the fullest extent permitted by law and notwithstanding any other provision of this Agreement or in any agreement contemplated herein or applicable provisions of law or equity or otherwise, whenever in this Agreement the [Manager] is permitted or required to make a decision (a) in its "sole discretion" or "discretion" or under a grant of similar authority or latitude, the [Manager] shall be entitled to consider only such interests and factors as it desires, including its own interests, and shall have no duty or obligation to give any consideration to any interest of or factors affecting the Company, any Member or any other Person, or (b) in its "good faith" or under another express standard, the [Manager] shall act under such express standard and shall not be subject to any other or different standard.

15. Copyright © 2010 Richards, Layton & Finger, P.A. All rights reserved. Considerations in Drafting LLC Agreements  Elimination of Fiduciary Duties  To the fullest extent permitted by law, the [Manager] shall owe no fiduciary duties to the Company or the Members; provided that the [Manager] shall act in accordance with the implied contractual covenant of good faith and fair dealing.  The [Manager] shall owe no fiduciary duties to the Company or the Members; provided that the [Manager] shall act in accordance with the implied contractual covenant of good faith and fair dealing.  To the fullest extent permitted by law, the [Manager] shall owe no fiduciary duties to the Company or the Members.

16. Copyright © 2010 Richards, Layton & Finger, P.A. All rights reserved. Considerations in Drafting LLC Agreements  Limitation/Elimination of Liability  To the extent that, at law or in equity, the [Manager] has duties (including fiduciary duties) and liabilities relating thereto to the Company or to a Member, the [Manager] acting under this Agreement shall not be liable to the Company or to any such Member for its good faith reliance on the provisions of this Agreement.

17. Copyright © 2010 Richards, Layton & Finger, P.A. All rights reserved. Considerations in Drafting LLC Agreements  Outside Business (“corporate” opportunity)  Any Member and any Affiliate of any Member may engage in or possess an interest in other profit-seeking or business ventures of any kind, nature or description, independently or with others, similar or dissimilar to the business of the Company, whether now existing or hereafter acquired or initiated, whether or not such ventures are competitive with the Company, and the doctrine of corporate opportunity, or any analogous doctrine, shall not apply to any Member. No Member who acquires knowledge of a potential transaction, agreement, arrangement or other matter that may be an opportunity for the Company shall have any duty to communicate or offer such opportunity to the Company, and such Member shall not be liable to the Company or to the other Members for breach of any fiduciary or other duty existing at law, in equity or otherwise by reason of the fact that such Member pursues or acquires for, or directs such opportunity to another Person or does not communicate such opportunity or information to the Company. Neither the Company nor any Member shall have any rights or obligations by virtue of this Agreement or the relationship created hereby in or to such independent ventures or the income or profits or losses derived therefrom, and the pursuit of such ventures, even if competitive with the activities of the Company, shall not be deemed wrongful, improper or the breach of any duty to the Company or any Member existing at law, in equity or otherwise.

18. Copyright © 2010 Richards, Layton & Finger, P.A. All rights reserved. Considerations in Drafting LLC Agreements  Conflicts  Unless otherwise expressly provided herein, (i) whenever a conflict of interest exists or arises between the [Manager] or any of its Affiliates, on the one hand, and the Company, or any Member on the other hand, or (ii) whenever this Agreement or any other agreement contemplated herein or therein provides that the [Manager] shall act in a manner which is, or provides terms which are, fair and reasonable to the Company, or any Member, the [Manager] shall resolve such conflict of interest, take such action or provide such terms, considering in each case the relative interest of each party (including its own interest) to such conflict, agreement, transaction or situation and the benefits and burdens relating to such interests, any customary or accepted industry practices, and any applicable generally accepted accounting practices or principles. In the absence of bad faith by the [Manager], the resolution, action or terms so made, taken or provided by the [Manager] shall not constitute a breach of this Agreement or any other agreement contemplated herein or of any duty or obligation of the [Manager] at law or in equity or otherwise.

19. Copyright © 2010 Richards, Layton & Finger, P.A. All rights reserved. Considerations in Drafting LLC Agreements  Elimination or modification of fiduciary duties must be express and unambiguous –For better or worse, there may always be some inherent bias towards fiduciary analysis

20. Copyright © 2010 Richards, Layton & Finger, P.A. All rights reserved. Case Law Developments  Nemec v. Shrader, 991 A.2d 1120 (Del. Supr. 2010) and other implied contractual covenant cases  CML V, LLC v. Bax, 6 A.3d 238 (Del. Ch. 2010)  William Penn Partnership v. Saliba, 13 A.3d 749 (Del. 2011)  Kuroda v. SPJS Holdings, L.L.C., 2010 WL 925853 (Del. Ch. Mar. 16, 2010)  Auriga Capital Corp. v. Gatz Properties, 40 A.3d 839 (Del. Ch. 2012)  Hite Hedge LP v. El Paso Corp., C.A. No. 7117-VCG (Oct. 9, 2010)

21. Copyright © 2010 Richards, Layton & Finger, P.A. All rights reserved. Matthew S. Criscimagna  MATTHEW S. CRISCIMAGNA is a director in the firm’s Business Department. He is a transactional attorney with a practice focused on rendering advice as to matters of Delaware law relating to alternative entities, including Delaware general partnerships, limited liability partnerships, limited partnerships and limited liability companies.  Handling a wide variety of transactions involving Delaware alternative entities, Mr. Criscimagna has been involved in formation, operation and governance matters, structured finance transactions, investment fund transactions, joint venture transactions, mergers, acquisitions, conversions and domestications. His practice also involves analyzing fiduciary duty and contractual interpretation issues with respect to Delaware alternative entities.  Mr. Criscimagna is a member of the Delaware State Bar Association and the American Bar Association. He received a JD from the University of Missouri-Columbia, Order of the Coif, and a BA, magna cum laude, from Salisbury University.