Court Of Chancery Explains Effect Of Fiduciary Duty Waiver

Posted on October 11, 2010 by Edward M. McNally

Lonergan v. EPE Holdings LLC, C.A. 5856-VCL (October 11, 2010)

Delaware law permits an LLC or an LLP agreement to eliminate fiduciary duties of managers or members.  In addition, it is common in such agreements to provide for a "Special Approval " committee to permit self-dealing transactions by management.  The duty of good faith and fair dealing remains in such circumstances but exactly how that applies is often unclear.  This decision helps explain how all this works.

Briefly, the duty to act in good faith and to deal fairly operates as a sort of reverse business judgment rule.  If the transaction is so bad that no one could approve it in good faith, then the duty to act in good faith has been violated.  No Special Approval Committee can validly approve such a  deal.

Ok that is an oversimplification, but this is just a blog for goodness sake.

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