LLC operating agreement can supplant implied duty of good faith
Apr. 16, 2012The Dickinson Law Newsroom
LLC operating agreement can supplant implied duty of good faith

The Delaware Court of Chancery recently considered whether a limited partnership agreement provision establishing a good faith standard could replace the implied duty of good faith. In re K-Sea Transportation Partners L.P. Unitholders Litigation (No. 6301-VCP, decided April 4, 2012). 

The relevant section of the limited partnership agreement declared that if the general partner relied on the opinions of investment bankers or other advisors it reasonably believed to be within their professional or expert competence, then the actions of the general partner taken in such reliance “shall be conclusively presumed to have been done or omitted in good faith….” 

In this case the general partner had approved a merger of the limited partnership into another entity only after inducing the acquirer to increase its bid to include an $18 million payment to the general partner for certain units only it held (and arguably worth only $100,0000).  A well-known investment banking firm issued a fairness opinion favorable to the transaction. 

Noting that the implied covenant of good faith is only a gap-filler and cannot be used to contradict an unambiguous contractual right, the court concluded that the plaintiff’s claims of breach of a fiduciary duty must be dismissed.  (For a variety of reasons the court narrowed the scope of the claims to an inquiry of bad faith.  See the opinion if you want to learn more.) 

Because of the similarities between limited partnerships and limited liability companies and their respective governing agreements, the principle in this case is easily applicable to LLC operating agreements.  Drafters may want to consider establishing a process by which managers of LLCs can be deemed to act in good faith and avoid application of the implied duty of good faith.

This article was first published online at Ward on Iowa Limited Liability Company Law.

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