Fiduciary Duty Modifications

canstockphoto16131199When it comes to Illinois LLCs, one member’s allegation that the LLC’s manager has breached its fiduciary duty can quickly spiral into a full-blown claim for judicial dissolution, i.e., a business divorce.  Link.

Illinois LLCs are materially different than Illinois corporations when it comes to one member’s duties to another member. Notably, the Illinois LLC Act, 805 ILCS 180/1-1, et. seq., unlike the Illinois Business Corporations Act, expressly allows for owners to set parameters on the fiduciary duties that they owe each other.

For “member-managed” LLCs, the LLC’s operating agreement may: (a) identify specific types or categories of activities that do not violate fiduciary duties, as long as they are “not manifestly unreasonable”; and (b) specify the number or percentage of members or disinterested managers that may authorize or ratify, after full disclosure of all material facts, a specific act or transaction that otherwise would violate fiduciary duties.  805 ILCS 180/15-5(b)(6)(A) and (B).

Additionally, while an operating agreement cannot eliminate or reduce the managing member’s obligation of good faith and fair dealing, it may determine the standards by which the performance of the obligation is to be measured, if the standards are “not manifestly unreasonable.”  805 ILCS 180/15-5(b)(7).

A manager in a “manager-managed” LLC is held to the same standards of conduct prescribed for members in “member-managed” LLCs, but the manager may be relieved of certain duties if those managerial duties are expressly delegated to a non-manager member in the operating agreement.  805 ILCS 180/15-3(g)(2) and (4).

These provisions in the LLC Act are significant because they allow for the modification of duties that, if breached, might otherwise support grounds for a business divorce.  However, these provisions have not really been tested in Illinois courts.  LLCs are a relatively new business form.  They did not exist in Illinois until January 1, 1994, when the Illinois LLC Act became effective.

The LLC seems to have replaced the corporation as the most popular business form because it combines the pass-through taxation benefits of a partnership with the limited liability attributes of a corporation.  However, because LLCs are relatively new, and Illinois trial court opinions are not regularly published, Illinois courts have provided little guidance interpreting the above-mentioned provisions on the parameters of fiduciary duties.

It is inevitable that claims will be brought that will require Illinois courts to interpret these provisions, especially the “not manifestly unreasonable” standard.

(This is for informational purposes and is not legal advice.)

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