Chancery Dismisses Complaint Against LLC Directors Based on Specific Terms of the Operating Agreement and Laches
Erisman v. Zaitsev, C.A. No. 2020-0903-JRS (Del. Ch. Dec. 29, 2021)
Under Delaware law, parties to limited liability company agreements have the freedom to alter or eliminate fiduciary duties, and to eliminate liability for breaches of contractual and fiduciary duties. Here, the Court of Chancery dismissed LLC members’ complaint because, among other reasons, the Operating Agreement (i) replaced default common law fiduciary duties with a contractual standard that limited director liability to claims in which directors did not rely on the terms of the Operating Agreement in good faith; and (ii) it further provided that the directors were not liable for money damages unless they failed to act in good faith, engaged in intentional misconduct or a knowing violation of the law, derived an improper personal benefit, or breached their duty of loyalty to the company.
Among other holdings, the Court dismissed fiduciary duty claims for dilution, because the Operating Agreement expressly gave the directors the right to approve transactions without notice to unitholders, including issuances of additional series of units. In addition, the Court concluded that a claim regarding an alleged failure to sell the company at an attractive price was devoid of factual support and, in any event, was not alleged to be motivated by self-interest.
The Court also ruled in the alternative that laches barred the contract and fiduciary duty claims. The requirements for equitable tolling were not met because, among other reasons, the plaintiffs had information rights that they could have exercised to discover the alleged breaches. Moreover, the facts alleged indicated that the plaintiffs were on inquiry notice for more than three years before they filed the complaint.Share