Abstract
The limited liability company (LLC) has quickly become the most popular business entity in the United States thanks to its favorable pass-through tax treatment, limited liability, and customizability. A catalyst to this success is the parties’ ability to customize their business’s leadership structure and members’ relations through an operating agreement. In the world of business law, the fiduciary relationship and the duties that accompany it—loyalty, care, and good faith—are essential due to the need in a complex society for parties to bargain for and share or acquire different knowledge, skills, or expertise to accomplish particular goals. The flexibility of the LLC allows business owners to modify the fiduciary duties, either through strengthening, reducing, or eliminating them, in ways they feel favor the needs of their LLC. Most states are clear in their approaches to fiduciary duties and how parties may alter them, if at all. Virginia aims to further promote the favorable feature of customization by stating in the Virginia LLC Act (the VLLCA) that the Act is to be construed in a way that gives maximum effect to the principle of freedom of contracting and the enforcement of the parties’ operating agreements. However, the VLLCA and the case law that interprets it, especially concerning fiduciary duties, are ambiguous and inconsistent. Such ambiguity is antithetical to this goal, and risks increased transaction costs amongst parties and unexpected outcomes when enforcing their agreements. The VLLCA’s approach to fiduciary duties is skeletal and does not detail what the duties entail and if they may be modified or eliminated. Therefore, Virginia’s case law surrounding this provision is the primary resource practitioners and contracting parties must rely upon when determining how to approach fiduciary duties. Two Supreme Court of Virginia precedents, Remora Investment, LLC v. Orr and Simmons v. Miller, both expressly state that parties are free to shape the VLLCA’s fiduciary duties requirement as they see fit and seem to indicate that they may do so in a significant way. Still, both cases mainly discuss the parties’ ability to strengthen the role of the fiduciary duties.
Concerning another provision of the VLLCA, another Virginia Supreme Court precedent, Ott v. Monroe, sets forth the canon of construction of the VLLCA that unless the phrase “unless provided in the articles of organization or an operating agreement” precedes the statutory dictates then that provision is mandatory and may not be altered by contract. This approach was further affirmed by an amendment from the Virginia General Assembly, solving the issue in that case. The Virginia fiduciary duties provision does not have the phrase, thus leading to the conclusion, based upon the holding in Ott, that its already ambiguous dictates are mandatory and may not be eliminated or reduced. Reading Ott consistently with Simmons and Remora would indicate that parties can strengthen their fiduciary duties through contract but not reduce or eliminate them. To solve the ambiguities surrounding the VLLCA’s fiduciary duties and further the goal of freedom of contracting, the Virginia General Assembly should first amend the VLLCA’s fiduciary duty provision to make it more detailed and precise through clear labeling and well-defined standards. Second, Virginia should look to the approach adopted by the majority of states and add a provision within the VLLCA outlining if any provisions are mandatory and, if so, to what extent they may still be modified. This provision should make the fiduciary duties modifiable. These critical changes will facilitate freedom of contracting and lead to parties being more informed about what they can draft into their operating agreements, leading to lower transaction costs and avoiding unexpected outcomes.
Recommended Citation
Leverette, Carter B.
(2024)
"The Virginia General Assembly Needs to Spe(LLC) It Out: What Are the VLLCA’s Fiduciary Duties and the Standards That Parties Must Abide By?,"
Liberty University Law Review: Vol. 19:
Iss.
1, Article 4.
Available at:
https://digitalcommons.liberty.edu/lu_law_review/vol19/iss1/4