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Sunday, February 17, 2013

The Last of the LLC Potpourri

As most business practitioners know,  a minority shareholder, a shareholder without a seat on the Board of Directors, or otherwise disadvantaged by the Articles or By Laws of a closely-held corporation can be squeezed by the Directors with little legal recourse. Many readers of this blog will have represented clients on either side of that inclined plane, wrapped helically around an axis.

One end of that axis can be effectively turned with a common tool. The other end, well, is better left alone.

The same disparities of power, avarice, mendacity, and the milk of human kindness can exist in a multi-member LLC.

Currently, IC 23-18-4-4 provides:

Written operating agreement

Sec. 4. A written operating agreement may do the following:
(1) Eliminate or limit the personal liability of a member or manager for monetary damages for breach of a duty provided for in section 2(a) of this chapter.
(2) Provide for indemnification of a member or manager for judgments, settlements, penalties, fines, or expenses incurred in a proceeding to which a person is a party because the person is or was a member or manager.

So let's go to section 2(a):

Acts and omissions liability; trustee for personal benefits derived through company; duties of member in company providing for manager
Sec. 2. (a) Unless otherwise provided in a written operating agreement, a member or manager is not liable for damages to the limited liability company or to the members of the limited liability company for any action taken or failure to act on behalf of the limited liability company, unless the act or omission constitutes willful misconduct or recklessness.

The proposed IC 23-8-4-4 would provide:
 (1) Eliminate or limit the personal Modify, increase, decrease, limit, or eliminate the duties (including fiduciary duties) or the liability of a member or manager for monetary damages for breach of a duty provided for the duties set forth in section 2(a) of this chapter.

Of concern here is the provision that can eliminate duties, including fiduciary duties.  It is the general rule that members of manager-managed LLCs have no fiduciary duties to the company or other members. But in member-managed LLCs, the members do have these fiduciary duties.

In the final analysis, this new Section (2)(a) may have little practical effect, but should reinforce the need for representation of counsel when forming or restructuring an LLC.

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