“Sole Discretion” Language in LLC Agreement does not Eliminate Fiduciary Duties
The Delaware Court of Chancery considered a number of issues in Skye Mineral Investors, LLC et al v DXS Capital (U.S.) Limited et al. The dispute was among members of a Delaware limited liability company, Skye Mineral Partners, LLC (“SMP”). SMP’s majority members alleged that its minority members orchestrated a scheme wrongfully to divest SMP of its lone asset, a wholly owned operating subsidiary, CS Mining, LLC (“CSM”), by driving CSM into bankruptcy and then buying its assets at a steep discount in an auction sale conducted under Section 363 of the United States Bankruptcy Code.
Among other things, the Plaintiffs claimed the minority members of SMP intentionally used their blocking rights to cause harm to SMP in a manner that was not exculpated by the clear terms of SMP’s constitutive documents.
The Defendants countered noting that the LLC Agreement provided that “except as otherwise specifically provided in this Agreement, all votes, approvals, or consents of a Member may be given or withheld, conditioned or delayed, as such Member may determine in such Member’s sole and absolute discretion.” According to Defendants, the “sole discretion” language was an unambiguous waiver of any “Member-level fiduciary duty.”
The Court rejected the Defendants’ argument. According to the Court, if the SMP Agreement’s drafters wished to exempt members from the fiduciary duty of loyalty, they could do so only with express disclaimer language, not “by implication.” In the Complaint, the Plaintiffs alleged member fiduciaries took a “bad faith action to injure [SMP] for [their] own personal advantage.” The Court stated this allegation implicates the “core aspect of the duty of loyalty,” which the “sole discretion” language cannot “coyly” eliminate. Citing precedent, the Court stated “To the extent that an Agreement purports to insulate a [fiduciary] from liability even for acts of bad faith . . . it should do so in the most painstakingly clear terms.” The Court added the day may come when the Court must decide whether to enforce express language that “permits a [fiduciary]—by its unmistakable terms—to exercise its discretion in bad faith,” but that day had not arrived.
The Court made the ruling on a motion to dismiss and has not found any Defendant liable.
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