Law in the Marketplace: The all-important LLC duty of loyalty — two further thoughts
Published: 11-11-2023 2:00 PM |
As I’ve written here repeatedly, my 30 years of practice in forming LLCs for my clients have totally persuaded me that if you’re an LLC lawyer:
■ The most important provisions you can include in the operating agreements of your LLC formation clients are provisions imposing clear and compelling duties of loyalty on members and managers who participate in their LLC’s management.
■ An even more important service you can provide for your clients is to teach them, whether or not they participate in LLC management, the practical meaning of the LLC duty of loyalty.
As I’ve often written, the LLC duty of loyalty means, in essence, the duty of members and managers who participate in the management of their LLCs to subordinate their personal interests to the best interests of their LLC in all matters relating to their LLC’s purpose. The “interest” of an LLC means, of course, its members’ interest in achieving its purpose. With regard to this interest, the LLC comes first and the members and managers come second.
The duty of loyalty is, of course, a legal duty unless the members decide to eliminate it (which, believe it or not, the New Hampshire LLC Act permits); and in litigation or arbitration, LLC members in their capacity as members have a right to make claims against managing members and managers for breaching this duty. However, their duty of loyalty is also the key ethical duty of LLC managing members and managers, and in my experience, the more clearly the members and managers of an LLC understand this duty as not just a legal duty but also as an ethical duty, the more likely their LLC will be profitable and that its members and managers will find their experience in owning and managing it to be personally rewarding.
But here are two additional truths about the duty of loyalty under the statutory and case law in effect in non-New Hampshire jurisdictions that, in my view, should also apply in New Hampshire:
General vs. subsidiary duties of loyalty. First, in explaining the duty of loyalty to their LLC formation clients, LLC lawyers should explain that, although it is not explicitly recognized in any state statute or case law in New Hampshire or elsewhere, it is useful to think of the duty of loyalty as involving two quite distinct types of duties—namely, a “general” duty, but also one or more “subsidiary” duties. A general duty of loyalty means, as indicated above, a duty of members and managers who participate in LLC management to subordinate their personal interests to those of their LLCs and its members. A subsidiary duty of loyalty means any duty of loyalty besides the general duty of loyalty — e.g., a duty not to compete against one’s LLC or to use its property for personal purposes..
■ The duty of loyalty as a duty of fairness. In explaining the duty of loyalty to their LLC formation duty, LLC lawyers should explain that the LLC duty simply means a duty of fairness — i.e., a duty not to treat themselves, with regard to LLC matters, any more favorably than they treat their LLC co-members.
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Indeed, in their all-important task of providing their LLC formation clients with a deep and practical understanding of the duty of loyalty, the most helpful concept available to LLC lawyers may well be the concept of fairness.
John Cunningham is a lawyer licensed to practice law in New Hampshire and Massachusetts. He is of counsel to the law firm of McLane Middleton, P.A. Contact him at 856-7172 or lawjmc@comcast.net. His website is llc199a.com. For access to all of his Law in the Marketplace columns, visit concordmonitor.com.