Default rules and fiduciary duty waivers in alternative entities: policy issues and empirical insights.

• Author: Miller, Sandra K.
• Position: VI. Conclusion, with footnotes and appendices, p. 186-222

VI. CONCLUSION

Against a backdrop of exceedingly complex and troubling litigation, Chief Justice Strine and Vice Chancellor Laster propose treating duty of loyalty waivers differently from duty of care waivers and would make the duty of loyalty mandatory in certain diversely-held alternative entities. Unlike Delaware corporate law, Delaware alternative entity law places the duty of care and the duty of loyalty on an equal footing with regard to waivers and indemnification provisions. This Article raises, although it does not pretend to answer, the broad questions of whether stakeholders view the duty of loyalty differently from the duty of care and whether they support waivers of the duty of care more readily than waivers of the duty of loyalty, in public and private company contexts. However, it begins a long overdue empirical investigation into business community perceptions of how the law should work. It reports the results of a pilot survey of 117 executives to which 45 responded regarding a breach in a hypothetical Duty of Loyalty Scenario and in a Duty of Care Scenario. The respondents displayed significantly less support for the waiver in the Duty of Loyalty Scenario than for the waiver in the Duty of Care Scenario and least support overall for a waiver of the duty of loyalty when the company posited was publicly-owned. Care must be taken to avoid generalizations beyond the two rather extreme scenarios that were presented in the survey. Nevertheless, the findings warrant broader research into perceptions regarding default duties, waivers in private and public company contexts, and comprehension levels of internal governance laws. The Article makes recommendations for improving the design of future studies and urges further empirical exploration of comprehension levels of fiduciary duty waivers among seniors over the age of 50--an age group which has invested in publicly-traded alternative entities with reduced legal protections. The discussion contextualizes the empirical survey by identifying the policy issues at stake, recommends updating the Nexus of Contracts paradigm in light of developing case law, and argues for an integrated approach to ethical training in business and law schools particularly now that fiduciary duties may be substantially or completely waived in a number of jurisdictions.

Appendix A: Survey Results

Scenario I

Scenario I: Duty of Loyalty Breach: For the past twelve years Sam has owned 25% of an LLC that operates a retail carpet business and Fred owns 75%. Sam works in the business and Fred does not. Sam gets an offer to sell the business for $10 million but doesn't tell Fred. Instead, Sam offers to buy out Fred for $1 million. Fred accepts, then three months later Sam sells and makes a big profit.

Agree or Disagree Strongly or Agree Strongly Disagree DEFAULT BUILT-IN DUTY OF LOYALTY 91% 9% Assume there is no limited liability company agreement, just minimum filing with the state. Q10 The law should allow Fred to sue Sam because Sam never told his partner about the $10 million offer. WAIVER OF LOYALTY PRIVATE CO. 38% 62% Assume that there is an agreement and it provides "The owners of this LLC expressly agree to eliminate the fiduciary duty of loyalty (i.e. the duty to act in the best interests of the business, to avoid competing, and to act with candor)." Q11a The law should let Sam use this waiver provision as a complete defense. WAIVER OF LOYALTY PUBLIC CO. 23% 77% Q11b If the LLC Sam managed had been publicly traded and included this waiver, the law should let Sam use this waiver provision as a complete defense against an investor lawsuit. WAIVER OF LOYALTY PUBLIC CO. Yes: 2% No: 98% WILLINGNESS TO INVEST Q12 If the LLC Sam managed had been publicly-traded, and included this waiver, would you have been willing to invest in the company? Scenario II

Scenario II: Duty of Care Breach: For the past twelve years, Jason has been a 15% owner and the full-time manager of Orange Rehabilitation Center, LLC, a nursing home located in New Britain, Connecticut. The remaining 85% is owned by four private individuals who do not participate in the business. Over the last few years, Jason has been careless in managing the LLC. Although he works 35 hours per week, he has failed to properly supervise and manage employees. Medicare nursing home ratings have declined. The number of patient falls and lawsuits has risen as have instances of employee failure to follow rules and regulations. A major patient lawsuit threatens to bring the nursing home dangerously close to bankruptcy. Although Jason's conduct is hardly commendable, he has not violated any specific criminal laws and has not intentionally acted to harm the nursing home or its patients.

Agree or Disagree Strongly or Agree Strongly Disagree DEFAULT BUILT-IN DUTY OF CARE 15% 85% Assume there is no LLC operating agreement, just the minimal filing with the state. Q13 The law should allow investors to sue Jason for money damages. WAIVER OF DUTY OF CARE PRIVATE CO. 74% 26% The facts remain the same, except there is an LLC Agreement that that every investor had to sign when buying into the LLC. The agreement provides "The LLC manager shall not be subject to money damages except for fraud, willful misconduct, known criminal acts, deliberate intent to cause injury, and reckless disregard. Recklessness isn't defined in the agreement but it is commonly thought to be conscious indifference to the consequences of one's conduct. Q14a The law should let Jason use this waiver provision as a complete defense against an investor lawsuit. WAIVER OF CARE PUBLIC CO. 67% 33% Q14b Assuming Jason managed a publicly traded LLC, the law should let Jason use the waiver provision as a complete defense against an investor lawsuit. COMPREHENSION OF DUTY OF CARE Yes: 31% No: 69% Willingness to Invest in Company with a Duty of Care Waiver Q15 If the LLC Jason managed had been publicly traded and included this waiver, would you have been willing to invest in the company? Yes No Not Sure Liability of Board Members of 92% 5% 3% Fortune 100 Companies Q18 Have you acquired stock in a Fortune 100 Company (either directly or through a mutual fund) within the last few years? Q19 Are board members of a Fortune 51% 31% 18% 100 Company usually personally liable if the directors act in a grossly negligent manner? (i.e. the Board members fail to properly inform themselves before making important business decisions, or manage the business in a careless way with a devil-may-care attitude?) Appendix B: LLC Statutes Nationwide

State Statutory Provisions Alabama ALA. CODE [section][section] 10A-5A-1.01 to-12.05 (2014). Alaska ALASKA STAT. [section][section] 10.50.010 to .955 (2007). Arizona ARIZ. REV. STAT. ANN. [section][section] 29-601 to-857 (2008). Arkansas ARK. CODE [section][section] 4-32-101 to-1401 (2010). California CAL. CORP. CODE [section][section] 17701.01 to .17 (2014). Colorado COLO. REV. STAT. [section][section] 7-80-101 to-1101 (1990). Connecticut CONN. GEN. STAT. [section][section] 34-9 to-646 (2012). But see 2016 Conn. Legis. Serv. P.A. 16-97 (H.B. 5259) (Sections repealed). Delaware DEL. CODE ANN. tit. 6, [section][section] 18-101 to-1109 (2010). District of D.C. CODE [section][section] 29-801.01 Columbia to-810.01 (2011). Florida FLA. STAT. [section][section] 605.0101 to .1108 (2014). Georgia GA. CODE ANN. [section][section] 14-11-100 to-1109 (1993). Hawaii HAW. REV. STAT. [section][section] 428-101 to-1302 (2006). Idaho IDAHO STAT. [section][section] 30-25-101 to-806 (2015). Idaho Uniform Bus Org Code; effective July 1, 2015 with some provisions effective July 1, 2017. Illinois 805 ILL. COMP. STAT. 180/1-1 to /60-1 (1994). But see Ill. P.A. 099-0844 (effective Aug. 19, 2016) (makes technical changes in sections). Indiana IND. CODE [section][section] 23-18-1-1 to-13-1 (1993). Iowa IOWA CODE [section][section] 489.101 to .1304 (2009). Kansas KAN. STAT. ANN. [section][section] 17-7662 to-17-76-146 (2014). Kentucky KY. REV. STAT. ANN. [section][section] 275.001 to .540 (1994). Louisiana LA. REV. STAT. ANN. [section][section] 1301 to 1370 (1990). Maine ME. REV. STAT. tit. 31, [section][section] 1501 to 1693 (2011). Maryland MD. CODE ANN., CORPS. & ASS'NS [section][section] 4A-101 to-1303 (2012). Massachusetts MASS. GEN. LAWS CH. 156C, [section][section] 1 to 72 (1995). Michigan MICH. COMP. LAWS ANN. [section][section] 450.4101 to .5200 (1993). Mississippi MISS. CODE ANN. [section][section] 79-29-101 to-1317 (2011). Missouri MO. REV. STAT. [section][section] 347.010 to .740 (1993). Montana MONT. CODE ANN. [section][section] 35-8-101 to-1307 (1993). Nebraska NEB. REV. STAT. [section][section] 21-101 to-197 (2011). Nevada NEV. REV. STAT. [section][section] 86.011 to .590 (2013). New Hampshire N.H. REV. STAT. ANN. [section][section] 304-C:1 to-C:210 (2013). New Jersey N.J. STAT. ANN. [section][section] 42:2C-1 to :2C-94 (2012). New Mexico N.M. STAT. ANN. [section][section] 53-19-1 to-74 (1999). New York N.Y. LTD. LIAB. Co. law [section][section] 101 to 1403 (2006). North N.C. GEN. STAT. [section]57D-1-01--57D-11-03 Carolina (2014). North Dakota N.D CENT. CODE [section][section] 10-32.1 to 10.32.1-101 (2015). Ohio OHIO REV. CODE ANN. [section][section] 1705.01 to .61 (2012). Oklahoma OKLA. STAT. tit. 18, [section][section] 2000 to 2060 (1992). Oregon ORE. REV. STAT. [section][section] 63.001 to .990 (2010). Pennsylvania 15 PA. CONS. STAT. [section][section] 8901 to 8998 (1994). Rhode Island 7 R.I. GEN. LAWS [section][section] 16-1 to-76 (1992). South S.C. CODE ANN. [section][section] 33-44-101 Carolina to-1208 (1976). But see 20152016 Senate Bill 603S (bill to Amend). South Dakota S.D. CODIFIED LAWS [section][section] 47-34A-101 to-1207 (2013). Tennessee TENN. CODE ANN. [section][section] 48-201-101 to-249-1133 (1994). Texas TEX. BUS. ORGS. CODE ANN. [section][section] 101.001 to .622 (2006). Utah UTAH CODE ANN. [section][section] 48-3a-101 to-1405 (2014)...