Know Your Duties Under the New LLC Act
[This article originally appeared in the Greater Concord Chamber of Commerce’s Business Focus Column, March 2014.]
Many New Hampshire businesses are organized as limited liability companies. LLCs are formed and governed as provided by statute. In 2012, New Hampshire adopted a new limited liability company act, RSA 304-C. The act took effect on January 1, 2013, and applied to all LLCs formed on or after that date. But with respect to LLCs already in existence, the terms of the act did not take effect until January 1 of 2014. That date has come and gone, and the new act now applies to all New Hampshire LLCs.
Some of the act’s provisions are mandatory and some are not. Among the non-mandatory provisions, some automatically apply by default unless the LLC’s operating agreement says otherwise. In other words, if the operating agreement is silent on a subject, the default terms of the act are deemed to apply. These mandatory and, in many cases, non-mandatory provisions now apply to pre-existing New Hampshire LLCs whether the LLC’s members realize it or not.
Among other things, the act contains a comprehensive statement of fiduciary duties that managers, managing-members, and in some cases non-managing members owe to the LLC and the LLC’s members. The act describes three categories of fiduciary duties: a duty of good faith and fair dealing, a duty of care, and a duty of loyalty.
Duty of Good Faith and Fair Dealing.
The duty of good faith and fair dealing is based on the covenant of good faith and fair dealing that is implied in every contract by law. The act explicitly incorporates the covenant of good faith and fair dealing and specifies that its obligations include “a duty to use reasonable efforts to meet the reasonable expectations of the limited liability company and its members on matters within the scope of the operating agreement but not specifically addressed in it.” The duty of good faith and fair dealing is mandatory and cannot be limited or eliminated by the operating agreement.
Duty of Care.
The duty of care requires members and managers to “discharge their management duties with the care that a person in a like position would reasonably believe appropriate under the circumstances.” This duty applies by default, but the operating agreement may limit or eliminate the duty.
- A duty not to compete against the LLC;
- A duty not to “engage in self-interested transactions” with the LLC;
- A duty not to “usurp business opportunities” of the LLC;
- A duty to “maintain the confidentiality” of the LLC’s confidential information;
- A duty to disclose “material information” concerning the LLC to the members with “reasonable promptness;”
- A duty to use LLC property only for the LLC’s benefit;
- A duty to avoid “improper personal benefits” including “excessive compensation” for services rendered to or for the LLC; and
- A duty to act with “fiduciary good faith,” which is defined to include the avoidance of conduct that will cause injury to the LLC or its members in their capacity as members.
Like the duty of care, the duty of loyalty applies by default, but may be limited or eliminated by the operating agreement. In addition, unless the operating agreement provides otherwise, the duty of loyalty will not apply in a specific instance if the member or manager discloses the “material facts” concerning an action the member or manager wants to take and, prior to taking that action, it is approved by majority vote of the disinterested members.
A member or manager may be held liable for violating any of the foregoing duties, except (in the case of the duties of care and loyalty) to the extent limited or eliminated by the terms of the operating agreement. New Hampshire businesses organized as LLCs should evaluate their operating agreements in light of the new act to determine whether they wish to modify or opt out of the act’s default provisions, including the duties of care and loyalty. Such a review is especially important for those LLCs operating under an agreement that was drafted before the act took effect, and which therefore would not have taken the act’s default provisions into account. Because the new act specifies that the terms of an operating agreement need not be in writing, but may be oral or even implied by the parties’ course of conduct, the members’ prior discussions and conduct should also be considered. Such an evaluation should be made before disputes between the members arise.