Majority-owning LLC Managers in Delaware Have Fiduciary Duties to Minority Owners

The Delaware Chancery Court passed down a decision this week in the case Auriga Capital Corp. v. Gatz Properties LLC, C.A. No. 4390-CS (Del. Ch., Jan. 27, 2012) involving majority-stake-owning LLC managers’ fiduciary duties to minority stakeholders in the LLC. The case involved a golf course property owned by the LLC; the manager of the LLC, who along with his family owned the majority stake in the LLC, used his position as manager to effectively squeeze out minority owners and obtain total control of the LLC at a less than fair price by vetoing potential bids and conducting a sham auction with himself as the only bidder.

The Delaware Chancery Court ruled that default fiduciary duties apply to LLC managers unless those duties (with the exception of the duty of good faith and fair dealing) are expressly limited or eliminated by the LLC’s operating agreement. A manager’s fiduciary duties towards minority stakeholders requires the manager not to economically oppress or otherwise coerce or duress minority stakeholders into unfavorable positions (in this case, selling full control of the LLC to the majority-stakeholder manager for less than the fair value of the minority’s stake).

Although the case nominally affects Delaware law, it is worth being mindful of in other states whose courts have yet to tackle the issue of LLC majority stakeholder manager fiduciary duties, especially in respect to the minority stakeholders of the LLC, as Delaware has often been a trendsetter in the area of business law. It is also further important for entrepreneurs and startup owners to be cognizant of this potential trend in LLC law, particularly as many startup ventures are organized as LLCs. Entrepreneurs must be mindful to exercise fiduciary duties, especially the duties of good faith and fair dealing, towards particularly passive minority investors such as family/friends and nonprofessional angel investors.