Legal Memorandum: Operation of an LLC in DE

Issue: Is operation of an LLC as a stand-alone entity expressly required by the Delaware LLC Act?

There is no express provision in the Delaware Limited Liability Company Act (the “LLC Act”) that specifically mandates operation of an LLC as a stand-alone entity or, conversely, expressly prohibits accounting for its operations as part of a consolidated entity, Del. Code Ann., tit. 6 §§ 18-101 to 18-1109.  This is in keeping with the general policy underlying the LLC Act of permitting, “members to engage in private ordering with substantial freedom of contract to govern their relationship.”  Elf Atochem N. Am. Inc. v. Jaffari, 727 A.2d 286, 290 (Del. 1999); see Del. Code Ann., tit. 6, § 18-1101(b).  The two most prominent potential obligations that bear examination are (1) the fiduciary duty of loyalty and (2) the implied covenant of good faith and fair dealing.

Where the LLC members’ agreement does not entirely eliminate traditional common law fiduciary duties, those not eliminated apply as default fiduciary duties.  Kyle v. Apollomax LLC, No. 12-152 (D. Del. Nov. 1, 2013).  See Del. Code Ann., tit. 6, §§ 18-1101(c), 18-1104.  Although the Delaware Supreme Court has not yet addressed the question, recent cases in the Chancery Court hold that “managers and managing members of an LLC do owe fiduciary duties as a default matter.”  See Zimmerman v. Crothall, 62 A.3d 676, 702 n.145 (Del. Ch. 2013); Feeley v. NHAOCG, LLC, 62 A.3d 649, 660 n.1 (Del. Ch. 2012); Bay Ctr. Apartments Owner LLC v. Emery Bay PKI LLC  No. 3658 (Del. Ch. April 20, 2009).  In the absence of provisions in the LLC […]