California’s new Limited Liability Company laws replaced important governing provisions of the operating agreements created prior to January 1, 2014 – mostly, the impact of default provisions. This blog focuses on the impact on Fiduciary Duties in California.
What are Fiduciary Duties?
Under the theory of common law, a person who held property for another (or others) had three fiduciary duties:
1) The duty of loyalty, which referred to taking actions in the best interest of others, such as members/managers of an LLC, rather than private benefit at their expense;
2) The duty of care, which referred to doing some level of due diligence before taking an action affecting others, such as LLC members/managers; and
3) The duty of good faith to not take actions that intentionally violate positive laws or failure to act on a known duty.
Additionally, depending on the action involved, such as selling the business, there may also be some enhanced duties owed.
Under California’s new LLC laws, there is a new set of default rules where the operating agreement is silent, including the area of fiduciary responsibility. This is particularly troublesome – and ripe for dispute – where managers/members entered into the operating agreement with the expectation that the full spectrum of fiduciary duties applied to each member and manager.
Now, by default, the Jan. 1, 2014 LLC law limits the Duty of Loyalty to Account, Refrain from self-dealing, and to Refrain from Competing. Moreover, the new law allows the managers/members to limit or eliminate other fiduciary acts unless they are “manifestly unreasonable.”
The impact of the new default provisions on pre-existing LLC’s may lead to significant legal disputes; therefore, it would be extremely prudent for managers/members to review their operating agreements or, to amend provisions based on the newly allowed restrictive duties.