Utah Law Developments
| Date | 01 December 2013 |
| Publication year | 2013 |
| Pages | 26 |
| Citation | Vol. 26 No. 6 Pg. 26 |
November, 2013
MANAGEMENT DUTIES UNDER THE UTAH REVISED UNIFORM LLC ACT (EFFECTIVE 1/1/14)
Langdon T. Owen, Jr.
A his article will analyze some key provisions of the Utah Revised Uniform Limited Liability Company Act (the "Revised LLC Act" or simply, the "Act") which becomes effective for new companies beginning January 1, 2014. This article will focus only on management duties and the closely associated topic of the indemnification of management persons, and it will not attempt even an overview of the entire Act, except to say that the Act, which becomes fully effective for all companies January 1, 2016, will make a very significant change in the law governing LLCs. The management duty provisions of the Act raise numerous questions. The Act, being so new and different, makes answering such questions at best speculative. Nevertheless, I will speculate as to some possible answers but will, more wisely perhaps, leave others unanswered.
MANAGEMENT DUTIES
The duty of management, whether in a manager-managed company or a member-managed company, encompasses duties to the company and to the members of loyalty and care. Utah Code Ann. § 48-3a-409(l) & (9) (a) (LexisNexis Supp. 2013).
Loyalty
The management duty of loyalty includes certain matters described in the Act. Note that the described matters are not necessarily the full extent of the duty. See Revised Uniform Limited Liability Company Act (2006), National Conference of Commissioners on Uniform State Laws (the "Uniform Act"), comment to Section 409(a) and (b). The described matters are to account for and hold as trustee property, profits, and benefits derived by the managing member or the manager, i.e., management persons in the conduct or winding up of the business, the use of company property, or the appropriation of company opportunities. Utah Code Ann. § 48-3a-409(2)(a) & (9) (a).
In addition to these described duties as to profits or benefits from operations or winding up, property use, and appropriation of company opportunities, the duty of loyalty also includes refraining from dealing with the company in the conduct or winding up of the business on behalf of anyone with an adverse interest to the company (presumably including the management person and third persons). Id. § 48-3a-409(2) (b) & (9) (a).
The duty of loyalty also includes the duty to refrain from competing with the business before dissolution. Id. § 48-3a-409(2) (c) & (9). For managers, this duty continues until the windup is concluded, but not for members with management authority in a member-managed company. Id. § 48-3a-409 (9) (b). The duty to refrain from competing may be extended by agreement to members in a manager-managed company. See id. §§ 48-3a-409(9) (a), 48-3a-112.
With these specifically described duties of loyalty in mind, let's turn to whether these, or other duties, may be modified by agreement, then let's return to discuss the duty of care since the duty of care raises some special issues.
Limiting Duty by Agreement
The duty of loyalty or care, generally may not be eliminated, subject to some specific exceptions set forth in Utah Code section 48-3a-112(4). Utah Code Ann. § 48-3a-112(3)(e) (LexisNexis Supp. 2013). This section does not similarly say that "other" fiduciary duties may not be eliminated subject to exceptions; rather such other duties may be altered or eliminated if not unconscionable or against public policy under Utah Code section 48-3a-112 (4) (c) (iv). Perhaps it is intended that other duties (presumably other than loyalty and care) should be more easily eliminated. The operating agreement may also alter or eliminate the listed aspects of the duty of loyalty described above, i.e., relating to holding profits or benefits in trust from operations or winding up, the use of property, and the appropriation of opportunities, refraining from acting for someone with an adverse interest, and refraining from competition, if not unconscionable or against public policy. Id. § 48-3a-113 (4) (c) (i). Also, under Utah Code section 48-3a-113 (4) (b), the operating agreement, under the not-unconscionable-or-against-public-policy standard, may identify specific types or categories of activities that do not violate the duty of loyalty. If provisions eliminating all the described aspects of the duty of the duty of loyalty and if provisions broadly describing the types of categories of conduct that will be allowed without violating the duty were contained in the operating agreement, the duty could be severely limited. It remains to be seen how much specificity will be required to eliminate or limit duties under an operating agreement. Perhaps more specificity will be required as to the specifically described aspects of loyalty than as to other duties.
Does "alter or eliminate any other fiduciary duty" mean that any not-specified duty of loyalty (remember the duty includes specified matters and those matters are not necessarily exclusive) may be altered or eliminated more easily like "other" duties generally? Probably so. According to the comments to the Uniform Act subsections 409(a) and (b), listed duties are not exclusive, but are "uncabined, " that is, not contained only in the statute. Non-specified aspects of the duty of loyalty thus appear to fall into the "other" category, which likely may be eliminated with less specificity.
The wording of Utah Code subsections 48-3a-110(4) (c) (i) and (iv) relating to loyalty and the "other" fiduciary duties (the duty of care is separately treated in the Act) is "alter or eliminate." Does "alter" imply that loyalty and the other fiduciary duties may be expanded by agreement? The answer appears to be "yes." See comment to Uniform Act § 110(g).
The Utah version has changed the standard as to modifying duties by agreement from "not manifestly unreasonable" under the Uniform Act as promulgated, see Uniform Act § 110(h) and the comment to § 110 (h) of the Uniform Act, to "not unconscionable or against public policy" This appears to be intended to allow lesser levels of fiduciary duty by agreement than would be allowable under the Uniform Act. A provision could easily be manifestly unreasonable but still not be found either unconscionable or against public policy. Unconscionability and violation of public policy are already limits to agreements under general contract law, and are narrow and difficult to demonstrate. The Utah statutory standard adds nothing and removes an important additional limitation.
The standard of unconscionability or violation of public policy is for the court to apply considering only circumstances at the time the provision in question entered the agreement. The court may invalidate the term only if, in light of the purposes, activities, and affairs of the company, it is "readily apparent" that the objective or the means to achieve an objective violates the standard, considering only circumstances at the time the challenged term became part of the operating agreement. Utah Code Ann.§ 48-3a-112 (5) (LexisNexis Supp. 2013). It is clear that the allowance of contractual exceptions to fiduciary duties has a big bite.
Could some other agreement do what an operating agreement cannot do under Utah Code section 48-3a-l 12, or will it be treated as if it were part of the operating agreement? The latter seems most likely. See id. § 48-3a-102(l6) (defining "operating agreement" as the agreement of the members "whether or not referred to as an operating agreement").
An operating agreement may expressly relieve a member of a member-managed company from responsibilities the member would otherwise have under the Act and impose that responsibility...
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