Delaware Supreme Court Chief Justice Leo Strine and Court of Chancery Vice Chancellor Travis Laster have authored a paper calling for a new set of standard fiduciary defaults for limited liability companies (LLCs) and limited partnerships (LPs). The paper suggests, among other things, making the fiduciary duty of loyalty non-waivable for publicly traded entities.

The paper represents something of a rebuttal against the common practice in private-equity-sponsored LLC and LP agreements of waiving all traditional fiduciary duties, including the duty of loyalty, and drafting a tailored version from scratch. The authors describe a situation in which this practice has led to a proliferation of "dense, complex, and heavily cross-referenced legalese" that can easily trap the unwary. (This is a development that Practical Law also discussed in Article, New Guidance for Drafting and Negotiating the Standard of Care in LLC Agreements.) In addition, the authors dispute the widely accepted notion that the rise of alternative entities should be attributed to a freedom to contract out of the corporate-opportunity doctrine, when in fact this permission is already granted for corporations under Section 122(17) of the DGCL. The authors also reject the idea that the ability to waive the duty of loyalty should be taken as a positive development when it forces practitioners to rethink every contractual relationship on a case-by-case basis.

The authors therefore suggest a new approach in which the governing agreement would presumptively waive investors' ability to hold managers liable for money damages for breaches of the duty of care, while presumptively retaining the traditional fiduciary duty of loyalty. For publicly traded entities, the duty of loyalty would be non-waivable. This framework, the authors add, would not threaten the two key benefits that motivated the rise of LPs and LLCs as alternatives to corporations:

The paper is available here.