Fiduciary Duty Considerations In Choosing Between Limited Partnerships
and Limited Liability Companies©
By
Kenneth M. Jacobson
Katten Muchin Zavis
Chicago, Illinois1/
Introduction
Many real estate attorneys would consider the limited partnership or the limited liability
company (“LLC”) as the investment vehicle of choice today for ownership of real estate.2/ Each
form of entity provides for limited personal liability for liabilities of the entity for all of its
owners in the case of a LLC and for some of its owners in the case of limited partners in a
limited partnership.3/ In addition, under the check-the-box rules found in the check-the-box
regulations at Treasury Regulation Sections 301.7701-2 and 301.7701-3, limited partnerships
and LLCs will be classified as partnerships by “default” if the entity in question has two or more
owners or is disregarded as an entity separate from its owner if it has a single owner.4/ Such
treatment as a partnership eliminates the U.S. income tax planning concern for possible double
taxation of the entity and its owners. Accordingly, non-personal liability and non-tax concerns
will have a significant influence on the choice between the two forms of entities. One possible
area of concern that may influence the choice of entity is the application of fiduciary duty
analysis. To what extent do the two forms of entity differ with regard to the application of
1/
This paper is based on a paper presented by the author for a workshop presentation at the Mid-Year 2000
meeting of the American College of Real Estate Lawyers.
Nothing contained in this paper shall be construed as legal, tax or accounting advice. The author reserves
the right to assert positions contrary to those stated in this paper.
2/
The registered limited liability partnership or limited liability limited partnership provide other alternatives,
but are not addressed in this paper. The limited liability partnership is a general partnership that provides
limited liability for its partners. See, e.g., Del. Code Ann. tit. 6 §15-306(b). See generally, Alan R.
Bromberg and Larry E. Ribstein, Bromberg and Ribstein on Limited Liability Partnerships and the Revised
Uniform Partnership Act (1998). However, not every jurisdiction provides the same type of limited
liability for its partners. Compare Delaware [Del. Code Ann. tit. 6 §15-306(b) (limited liability for contract
and tort matters)] to Illinois [805 ILCS 205/15 (limited liability for matters arising out of negligence,
wrongful acts, omissions, misconduct or malpractice). A limited liability limited partnership also provides
limited liability for both general partners and limited partners. See, e.g., Del. Code Ann. tit. 6 §17-214(c).
However, inasmuch as limited liability partnerships are general partnerships having taken an additional step
of registering or other appropriate action to obtain such status and limited liability limited partnerships are
limited partnerships having taken appropriate action to obtain the status of limited liability limited
partnership, the discussion in this paper on fiduciary duties for limited partnerships has some applicability.
3/
See, e.g., 805 ILCS 180/10-10 (LLC members) and 805 ILCS 210/303 (limited partnership limited
partners).
4/
Kenneth M. Jacobson, Howard M. Richard and Sheldon I. Banoff, Illinois Limited Liability Company
Forms and Practice Manual 1-17 (1999).
©Copyright 2000. Kenneth M. Jacobson
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fiduciary duties and the ability to waive, limit or modify fiduciary duties? To what extent will
fiduciary duty considerations affect the choice of entity assuming all other considerations are
equal? In this regard, this paper will compare the two types of entities for fiduciary duties by
analysis of the following issues:
1.
What fiduciary duties are imposed on the owners and managers of each form of
entity?
2.
Who owes fiduciary duties for each form of entity?
3.
May fiduciary duties be waived, limited or eliminated by agreement among the
parties for each form of entity?
In answering the three questions posed above, this paper will consider the application of
the Revised Uniform Limited Partnership Act (1976) with the 1985 amendments (RULPA”),5/
the Delaware Revised Uniform Limited Partnership Act (“DRULPA”)6/, and the August 2000
Annual Meeting Discussion Draft of the Revision of the Uniform Limited Partnership Act (1976)
with 1985 Amendments (hereinafter “Re-RULPA”)7/ for analysis of fiduciary duties as they
pertain to limited partnerships. In reviewing fiduciary duties imposed on general partners in a
limited partnership, this paper also considers the Uniform Partnership Act (1997) (“RUPA”)8/
and the Uniform Partnership Act (1914) (hereinafter, “UPA”)9/. In reviewing fiduciary duties
that pertain to a LLC consideration will be given to the Uniform Limited Liability Company Act
(1995) (hereinafter “ULLCA”)10/ and the Delaware Limited Liability Company Act (hereinafter
“DLLCA”)11/
As the discussion below indicates, there are differences in fiduciary duties and the ability
to waive, limit or modify fiduciary duties between Delaware limited partnerships and Delaware
LLCs. Outside of the Delaware context, there may be distinctions for a fiduciary duty analysis
between limited partnerships and LLCs based on whether the limited partnership is organized in
a jurisdiction that has not adopted RUPA. One would expect that this difference will recede as
additional jurisdictions adopt RUPA. Limited partnerships have been around much longer than
LLCs and have a “greater judicial track record” that might provide guidance to future courts and
practitioners. However, with the development of non-corporate limited liability entities such as
limited partnerships, limited liability partnerships, limited liability limited partnerships and
5/
Rev. Unif. Ltd. Part. Act §101 et seq.
6/
Del. Code Ann. tit. 6, §17-101 et seq.
7/
Rev. Unif. Ltd. Part. Act (August 2000 Annual Meeting Discussion Draft §101 et seq. (available
at <http:||www.law.upenn.edu/bll/ulc/ulc_frame.htm)).
8/
Rev. Unif. Part. Act §101 et seq.
9/
Unif. Part. Act §1 et seq. For a criticism concerning the necessity for Re-RULPA, see generally, Larry E.
Ribstein, “Limited Partnerships Revisited”, 69 U. Cin. L. Rev. 953 (1999).
10/
Unif. Ltd. Lia. Co. Act §101 et seq.
11/
Del. Code Ann. tit. 6, §18-1101 et seq. Unif. Ltd. Lia. Co. Act §101 et seq.
2
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LLCs, all designed in one form or another to insulate ownership from liabilities of the business
enterprise, as a policy matter it appears there is no logical reason to distinguish among such
forms of entity for fiduciary duties.12/
Analysis of Distinctions Regarding Fiduciary Duties Between Limited Partnerships
and LLCs
The Limited Partnership
1.
What fiduciary duties are imposed on the general partners and limited partners in
a limited partnership?
Duties of a General Partner
Neither RULPA nor DRULPA identifies the fiduciary duties of a general partner.
Rather, to determine what fiduciary duties are owed in a limited partnership by the general
partners, reference must be to the UPA or, in those jurisdictions that have adopted RUPA, to
RUPA.13/ Under DRULPA, reference must also be made to the Delaware Uniform Partnership
Law (“DUPA”)14/ or to the Delaware Revised Uniform Partnership Act (“DRUPA”).15/ Under
DRULPA the rights and obligations of a general partner in a limited partnership are determined
by reference to the applicable act regulating the rights and obligations of general partners.16/
However, DRULPA repeals DUPA except with respect to limited partnerships.17/ Accordingly,
unless the limited partnership agreement specifies that the rights and obligations of the general
partners are to be determined with reference to DRULPA it appears as if DUPA may continue to
be applicable for purposes of determining the fiduciary duty obligations of general partners.18/
Analysis of the text indicates that, surprisingly, fiduciary duties are not enumerated and it has
been left to case law to identify the nature of the fiduciary duties of a general partner.19/ Case
law under the UPA has developed the following as fiduciary duties of a general partner in a
general partnership:
12/
The owners of a general partner may, as a practical matter, attempt to insulate themselves from unlimited
liability through the use of properly capitalized corporate or other limited liability entities.
13/
RULPA §404. See J. William Callison, “Blind Men and Elephants: Fiduciary Duties Under the Revised
Uniform Partnership Act, Uniform Limited Liability Company Act, and Beyond”, 1 J. Small & Emerging
Bus. L. 109, 161 (1997).
14/
The Delaware Uniform Partnership Law was repealed (effective January 1, 2002) except for limited
partnerships. Del. Code Ann. tit. 6 §15-1205. Transition rules are set forth in Section 15-1206 of DRUPA.
Del. Code Ann. tit. 6 §15-1206.
15/
Del. Code Ann. tit. 6 §15-101 et seq.
16/
Del. Code Ann. tit. 6 §17-403.
17/
Del. Code Ann. tit. 6 §15-1205.
18/
Del. Code Ann. tit. 6 §17-1101(c).
19/
Elliot M. Surkin, “When Joint Venturers Can’t Agree, The Buy-Sell Revisited” (paper presented to the
American College of Real Estate Lawyers, May 8, 1998).
3
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1.
A duty of loyalty, defined as a duty not to appropriate partnership opportunities, a
duty not to enter into competition with a partnership and a duty not to act
adversely to the partnership’s interests;
2.
A duty of good faith and fair dealing;
3.
A duty of care; and
4.
A duty to disclose material information to the partnership.20/
Unlike the UPA, Section 404 of RUPA enumerates the fiduciary duties of a general
partner.21/ Section 404 of RUPA eliminates any specific reference to a duty of disclosure and
does not treat the duty of good faith and fair dealing as a fiduciary duty, but rather treats such
duty as a contractual obligation imposed on the general partner in carrying out its duties and
discharging its obligations.22/ Specific disclosure obligations are set forth in RUPA Section 403
and a disclosure obligation may exist under the contractual obligation of good faith and fair
dealing.23/ The enumerated fiduciary duties are considered to be an exclusive list of fiduciary
duties.24/ The enumerated exclusive fiduciary duties are the duty of loyalty and the duty of
care.25/
The duty of loyalty consists of a duty to account to the partnership for property, profit or
benefit derived from the conduct and winding up of the business of the partnership, including the
appropriation of a partnership opportunity, a duty to refrain from dealing in an adverse manner to
the partnership in the conduct and winding up of the business of the partnership and a duty to
refrain from competing with the partnership before the dissolution of the partnership.26/ The duty
of care consists of duty to refrain from engaging in grossly negligent or reckless conduct,
intentional misconduct or knowing violation of law.27/ The enumeration of fiduciary duties in
DRUPA is very similar to the enumeration of fiduciary duties in RUPA.28/
Although Section 404 of RUPA attempts to specify the fiduciary duties owed by one
general partner to the other, like any other statute, it must be applied by courts in actual
20/
Callison, 114.
21/
RUPA §404.
22/
RUPA §404(d).
23/
RUPA §404, Comment 4.
24/
RUPA §404, Comment 1.
25/
RUPA §404(a).
26/
RUPA §404(b).
27/
RUPA §404(c).
28/
Del. Code Ann. tit. 6 §17-404.
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situations and by real estate practitioners in providing planning advice and structuring and
negotiating partnership arrangements.29/ For example, secured lenders who are partners may
foreclose on their security interests encumbering partnership property even though such action is
inconsistent with an obligation not to take action that adversely affects the ability of a
partnership to continue its business.30/ Indeed, RUPA provides that a partner may lend money to
the partnership with the rights and obligations of a person not a partner.31/ RUPA Section 404(e)
provides that a person does not breach a fiduciary duty or duty of good faith and fair dealing
solely by virtue of acting to further its own interest.32/
Re-RULPA takes a different tack than RUPA in that the fiduciary duties of a general
partner are set forth within the text and without requiring a reference to UPA or RUPA for such
purposes. Re-RULPA sets forth the fiduciary duties of a general partner in a limited partnership
in Section 408, “General Standards of General Partner’s Conduct.”33/ The duties of a general
partner under Re-RULPA are very similar to the duties of a general partner under RUPA.
However, the Reporter’s Notes to Re-RULPA try to draw a distinction based on differences in
control of general partners in a general partnership over other general partners and the degree of
control over limited partners by general partners in a limited partnership in connection with a
consideration of a perceived need for varying treatment between general partnership and limited
partnerships. As with RUPA, Re-RULPA leaves it to the courts to consider the application of
fiduciary duties based on statutory provisions.
In summary, differences may exist based on whether a jurisdiction has adopted RUPA or
is continuing use of UPA. One would assume that forum-shopping based on these differences
will diminish as additional jurisdictions adopt RUPA.34/
Duties of a Limited Partner
Neither RULPA nor DRULPA expressly provides that a limited partner has fiduciary
duties to the limited partnership or to the other partners in the limited partnership. However,
neither RULPA nor DRULPA provides that a limited partner owes fiduciary duties. Yet, under
appropriate circumstances, limited partners have been held to have fiduciary duties.35/ This is
29/
For example, see AB Group v. Wertin, 59 Cal. App. 4th 1022, 69 Cal. Rptr. 652 (Ca. Ct. App. 1997)
(purchase by partner of unsecured debt without discount was not appropriation of partnership opportunity
to negotiate discount).
30/
Westminister Properties v. Atlanta Assoc., 301 S.E.2d 158 (Ga. 1983); cf. Natpar Corporation v. E.T.
Kassinger, Inc., 365 S.E.2d 442 (Ga. 1988).
31/
RUPA §404(f). See also Del. Code Ann. tit. 6 §15-404(f).
32/
RUPA §404(e). See also Del. Code Ann. tit. 6 §15-404(e).
33/
Re-RULPA §408.
34/
As of January 2000, RUPA was effective in 23 states and the District of Columbia.
35/
Tri-Growth Centre City, Ltd. v. Silldorf, Burdman, Duignan & Eisenberg, 216 Cal. App. 3d 1139, 265 Cal.
Rptr. 330 (Ca. Ct. App. 1989). See In Re Villa West Associates, 193 B.R. 587 (D. Kan. 1996) (limited
partner not liable for breach of fiduciary duty by acting to reduce liability under personal guaranty without
advising other limited partners of the possibility). In Re Kids Creek Partners L.P., 212 B.R. 898 (Bankr.
5
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analogous to the fiduciary duty owed by a controlling shareholder in a corporation.36/ RULPA
sets forth certain safe-harbors that identify actions that, if taken by a limited partner, do not put a
limited partner in control of the limited partnership business for purposes of determining whether
a limited partner will have liability to others as a general partner.37/ Re-RULPA is not silent on
the issue of fiduciary duties of a limited partner. Section 305 of Re-RULPA imposes certain
limited fiduciary duties on limited partners who exercise authority vested in general partners
pursuant to Re-RULPA.38/ Section 305(b) of Re-RULPA imposes fiduciary duties on a limited
partner for exercising general partner-type rights and apparently a limited partner that does not
exercise a general-partner type granted to it might not be exposed to liability for breach of a
fiduciary duty.39/ Of course, a limited partner might have fiduciary duties to a limited
partnership arising out of another relationship with the partnership such as the attorney-client
relationship. If Re-RULPA were to be adopted, presumably the fiduciary duties imposed would
be based on Section 408 of Re-RULPA. Section 305 does not specify which rights usually
vested in a general partner would have to be exercised by the limited partner to impose liability
and could be construed possibly to result in fiduciary duties imposed on a limited partner in
circumstances where the limited partner is voting in accordance with a “major-decision”
provision in a limited partnership agreement. Re-RULPA does not include a list of safe-harbor
actions that, if taken by a limited partner, would not, standing alone, subject the limited partner
to general partner treatment for liability purposes.40/ Unlike RULPA, Re-RULPA expressly
imposes a duty of good faith and fair dealing on limited partners.41/
Although RULPA and DRULPA are silent on fiduciary duties of a limited partner, a
limited partner might find itself held to a fiduciary duty standard. Re-RULPA explicitly
N.D. Ill. 1997) (limited partner not liable as fiduciary because it took no management role and did not act
to interfere with or mislead other equity holders).
See Aon Properties, Inc. v. Riveraire Corporation, 1999 WL 12739 (Tx. Ct. App. 1999) (unpublished
opinion) (under Texas Revised Uniform Limited Partnership Act, limited partner did not become a
fiduciary by voting not to allow a general partner to retain its partner status, as such action did not
constitute participation in control of limited partnership where Texas Revised Uniform Limited Partnership
Act provided that voting on the admission, removal or retention of a general partner did not constitute
participation in a business sufficient to make the limited partner a general partner).
36/
See Claire Moore Dickerson, “Equilibrium Destabilized: Fiduciary Duties Under the Uniform Limited
Liability Company Act”, 25 Stetson L. Rev. 417, 430 (1995).
37/
RULPA §303(b).
38/
Re-RULPA §305.
39/
Re-RULPA §305, Reporter’s Notes. Earlier drafts of Re-RULPA indicated that there was some thought
that fiduciary duties might arise where the limited partner has the power to exercise general partner-type
powers but did not do so.
40/
Re-RULPA §303, Reporter’s Notes. Section 303 of Re-RULPA provides that a limited partner will not be
liable for the liabilities of the limited partnership solely by virtue of the limited partner’s status as a limited
partner. Presumably, this is designed to be analogous to the limited liability shield afforded shareholders in
a corporation.
41/
Re-RULPA §306(d).
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provides that a limited partner may be subject to fiduciary duties and is subject to an obligation
of good faith and fair dealing.
2.
Who owes fiduciary duties in a limited partnership?
As indicated above, general partners owe fiduciary duties and limited partners may,
depending on the circumstances, owe fiduciary duties. Directors of a corporate general partner
and the parent company of a general partner have been held to have fiduciary duties to the
limited partners in a partnership.42/
3.
May fiduciary duties be waived, limited or eliminated by agreement
among the parties with respect to a limited partnership?
Because partners often consider their relationship to be one business relationship among
many, partners will often seek to specify the degree to which they will be bound by fiduciary
duties. Of course, this is contrary to the view expressed by Judge Cardozo that the partnership
relationship required “… not honesty alone, but the punctilio of an honor the most sensitive is
… the standard of behavior.”43/ For example, partners may have other businesses that they
would like to engage in or may have other opportunities that they wish to appropriate for their
own benefit rather than for the benefit of the common enterprise. Accordingly, partnership
agreements may provide for advance contractual limitations on, or waivers of, fiduciary duty
obligations.44/ On other occasions, the partners may specify in their agreements the mechanism
for “blessing” actions that might be construed to be breaches of fiduciary duties by specifying
the number of partners whose consent is required for an activity or creating a committee to
address matters that might constitute a breach of fiduciary duty. In addition, the partnership
agreement may impose fiduciary duties on limited partners.45/ The UPA does not expressly
address whether the partners may waive, limit or restrict fiduciary duties and the obligation of
good faith and fair dealing. The absence of such a provision means that RULPA does not
expressly address whether fiduciary duties may be waived, limited or restricted in a jurisdiction
having adopted RULPA, but not having adopted RUPA. However, case law has upheld the
ability of partners to specify by contract the degree to which their fiduciary duties may be limited
in several contexts.46/ Drafters of partnership agreements have crafted a variety of provisions
defining the scope of fiduciary duties, the standards for determining the scope of fiduciary duties
and mechanisms for “blessing” actions that, if not consented to, might breach a fiduciary duty.
Exhibits A, B and C contain examples of these provisions.
42/
In re USA Cafes, 600 A. 2d 43 (Del. Ch. 1991) (directors). Wallace v. Wood. 752 A. 2d 1175 (Del. Ch.
1999) (parent company).
43/
Meinhard v. Salmon, 249 N.Y. 458, 464, 164 N.E. 545, 546 (1928).
44/
See attached Exhibits B and C for examples of such waiver provisions.
45/
Cantor v. Fitzgerald. 2000 WL 307370 (Del. Ch. Ct. 2000)(partnership agreement imposed fiduciary duty
on limited partners by its terms).
46/
See Larry E. Ribstein, “Fiduciary Duty Contracts in Unincorporated Firms”, 54 Wash. & Lee L. Rev. 537,
571-577 (1997).
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RUPA sets forth certain statutory guidelines for limitations on fiduciary duty obligations,
but does not provide that such fiduciary duties may be eliminated in their entirety.47/ Indeed,
RUPA provides that the default rules of the statute that include fiduciary duties may be waived
or varied with only 10 exceptions set forth in RUPA Section 103(b).48/ Three of the 10
exceptions pertain to fiduciary duty and the duty of good faith and fair dealing. Although the
duty of loyalty may not be eliminated, the partners are free to provide by agreement for the
identification of specific types of activity that do not violate the duty of loyalty if not “manifestly
unreasonable.”49/ The partnership agreement may specify a mechanism for a consent by the
partners after full disclosure of a specific act or transaction that might otherwise violate the
fiduciary duty of loyalty.50/ The partnership agreement may not unreasonably reduce the duty of
care (which is limited by statute to grossly negligent or reckless conduct, intentional misconduct
or knowing violation of law).51/ The non-fiduciary duty of good faith and fair dealing may be
defined within the agreement but may not be manifestly unreasonable.52/ The manifestly
unreasonable test and the outer limits of specification for good faith and fair dealing is to be left
to the courts. Of course, the partnership agreement may specify higher standards of care, loyalty
and good faith.53/ For example, partners with strong bargaining power may insist on a higher
standard of care in managing the assets of the enterprise.54/
DRULPA does not specify a minimum standard beyond which fiduciary duties and the
duty of good faith and fair dealing may not be waived. Rather, under DRULPA the principles of
freedom of contract are expressly adopted, the partnership agreement may specify the duties of a
partner and the degree to which such duties may be expanded or restricted and a partner is
protected if it relies in good faith on the provisions of the partnership agreement.55/ Under
47/
RUPA §103.
48/
RUPA §103(b).
49/
RUPA §103(b)(3)(i).
50/
RUPA §103(b)(3)(ii). See Miltland Raleigh-Durham v. Myers, 807 F. Supp. 1025 (S.D.N.Y. 1992)
(unconsented appropriation of assets).
51/
RUPA §103(c). See also RUPA §404(c) for the matters that would constitute a breach of the duty of care.
52/
RUPA §103(b)(4).
53/
RUPA §103, Comment 6.
54/
For example,
“General Partner shall manage and administer the assets of the Partnership in accordance with the
standards used by General Partner and its Affiliates for the management and administration of
assets held for its own account.”
See Davenport Group MG, L.P. v. Strategic Investment Partners, Inc., 685 A. 2d 715 (Del Ch. Ct. 1996)
(breach of fiduciary duty occurred where general partner failed to properly supervise management
company). In that case, the general partner agreed that “. . . in carrying out its duties . . . General Partner
shall exercise reasonable care and business judgment and shall act at all times in what it deems to be the
best interest of the Partnership . . . the General Partner shall not act in a manner . . . inconsistent with the
best interests of the Partnership . . .”. Id. at 721.
55/
Del. Code Ann. tit. 6, §17-1101. See United States Cellular Investment Company of Allentown v. Bell
Atlantic Mobile Systems, Inc., 677 A.2d 497 (Del. Ch. Ct. 1996) (complaint did not allege bad faith in
8
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DRUPA, the partners may agree to eliminate fiduciary duties entirely. DRUPA expressly
enumerated the fiduciary duties to which general partners are bound.56/ Under DRUPA, the
partners are free to modify, waive or eliminate any provisions of the statute except those
provisions that pursuant to Section 15-103 may not be eliminated.57/ The “default” fiduciary
duties of loyalty and care set forth in Section 15-404 of DRUPA are not enumerated as
provisions that may not be eliminated and accordingly, the parties may agree to eliminate
fiduciary duties in their entirety pursuant to DRUPA.
However, the obligation of good faith and fair dealing may not eliminated.58/ It should be
noted that the standard of performance of the obligation of good faith and fair dealing may be
spelled out and the obligation itself may be restricted.59 Unlike RUPA, the modification of the
good faith and fair dealing standard is not subject to the test of manifest unreasonableness. Thus,
substantial flexibility is built into DRUPA that would allow the partners to eliminate fiduciary
duties and restrict the obligation of good faith and fair dealing. In addition, a partner is entitled
to rely in good faith on the provisions of the partnership agreement. It is conceivable that in
egregious situations, such as fraud, partners might be protected through the utilization of other
principles of law in a DRUPA partnership.60 A DRULPA partnership, as noted above, is not
automatically linked to DRUPA. To achieve the intended results of elimination of fiduciary
duties to limited partners, the partnership agreement would thus likely have to opt-in to DRUPA.
An example of a provision eliminating fiduciary duties is attached as Exhibit D. Re-RULPA’s
provisions are substantially similar to RUPA’s provisions for the ability of the partners to vary
fiduciary duties by contract.61/
In summary, there is no limit on the ability of the partners to “raise the bar” for enhancing
the standards by which fiduciary duties and the duty of good faith and fair dealing are to be
measured. Differences may occur for the ability of the partners to “lower the bar” by reducing
such standards between Delaware and other jurisdictions and jurisdictions that have adopted
RUPA or have retained UPA.
Limited Liability Companies
In reviewing fiduciary duties that are applicable to members in, and managers of, LLCs,
this paper will consider differences that may arise between LLCs that are managed by managers
or managing members and LLCs that are managed by the members. The former situation, where
reliance on partnership agreement where entity that was both a limited partner and a general partner was
barred as a general partner from competing in cellular service in adjoining areas).
56/
Del. Code Ann. tit. 6 §15-404.
57/
Del. Code Ann. tit. 6, §103(b).
58/
Del. Code Ann. tit. 6 §103(b)(3).
59/
Del. Code Ann. tit. 6, §103(b)(3).
60/
Del. Code Ann. tit. 6 15-104. See Allan G. Donn, “The Delaware Version of the Revised Uniform
Partnership Act”, Journal of Pass-Through Entities. (March-April 2000), p. 16.
61/
Re-RULPA §110.
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management is by managers or managing members, would logically call to mind the limited
partnership context and the latter situation, where management is by the members, would
logically call to mind the general partnership context. In connection with this analysis, this paper
will focus on ULLCA. Not every jurisdiction has adopted ULLCA and it may be that variations
among those jurisdictions will result in material differences in the treatment of fiduciary duties
between limited partnerships and LLCs. For example, before 1998, it was not clear under the
Illinois Limited Liability Company Act whether and when members and managers had fiduciary
duties.62/ However, fiduciary duties have been found to exist for LLCs.63/ As indicated above,
this paper will also look at the treatment of fiduciary duties under the DLLCA.
1.
What fiduciary duties are imposed on the managers and members in a
LLC?
ULLCA’s recitation and identification of fiduciary duties is substantially similar to
RUPA. Under Section 409 of ULLCA, fiduciary duties are limited only to the fiduciary duties of
loyalty and care.64/ The fiduciary duty of loyalty is limited to (a) accounting to the company and
to hold as trustee any property or profit derived from the member in winding up the business of
the company or derived from the use of a member of company property, including appropriation
of a company opportunity,65/ (b) refraining from dealing with the company in the conduct or
winding up of the company’s business in an adverse manner, and (c) competing with the
company’s business before dissolution of the company.66/ The duty of care is limited to
refraining in engaging in grossly negligent or reckless conduct, intentional misconduct or a
knowing violation of law.67/ Like RUPA, the duty of good faith and fair dealing is imposed, but
not as a fiduciary duty.68/ Like RUPA, no violation of a fiduciary duty or the duty of good faith
and fair dealing will occur when the action in question furthers the member’s own interest.69/
Furthermore, as with RUPA, lending money or transacting business with the company is
permitted.70/ However, such transaction should generally be approved by the company or
members either by reference to the specific transaction or by adherence to a procedure set forth
in the operating agreement of the company. The agreement may specify that such actions are a
62/
Steven G. Frost, “New Revisions to the Illinois Limited Liability Company Act,” 85 Illinois State B.J. 592,
595 (1997).
63/
McConnell v. Hunt Sports Enterprises, 1999 WL 681757 (Ohio Ct. App. 1999) (unpublished opinion), 17
(“limited liability company . . . like a partnership, involves a fiduciary relationship”) (normally, fiduciary
duties would preclude competition with the business of the company).
64/
ULLCA §409(a) (member-managed company) and ULLCA §409(h) (manager-managed company).
65/
See Lynch Multimedia Corporation v. Carson Communications L.L.C., 2000 WL 873638 (D. Kan. 2000)
(obligation to present opportunity satisfied through informal presentation of opportunity).
66/
ULLCA §409(b).
67/
ULLCA §409(c).
68/
ULLCA §409(d).
69/
ULLCA §409(e).
70/
ULLCA §409(f).
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violation of the agreement or may specify other duties.71/ Unlike ULLCA, DLLCA does not
specify the existence or absence of fiduciary duties or purport to define such duties.
2.
Who owes fiduciary duties in a LLC?
In a manager-managed LLC, under ULLCA, managers owe fiduciary duties to the
company, the other managers and the members.72/ However, managers are relieved from
fiduciary duty obligations to the extent that managerial authority is delegated to the members
under the company’s operating agreement.73/ Members of a manager-managed limited LLC owe
no fiduciary duties solely by reason of such member’s membership status.74/ However, members
in a manager-managed LLC who exercise managerial rights will have fiduciary duties to the
extent such member exercises such rights.75/ Unlike RULPA, ULLCA does not set forth “safe
harbors” that do not constitute control of a business for purposes of determining whether a
member has sufficient control of a business so as to subject itself to liability for the company’s
debts. DLLCA does not expressly address the existence of fiduciary duties among managers and
members. Members in a member-managed LLC owe fiduciary duties to the company and other
members under an ULLCA LLC.76/ By agreement, LLCs that adopt board of director-type
management structures may impose fiduciary duties on the members of such boards of
directors.77/
3.
May fiduciary duties be waived, limited or eliminated by agreement
among the parties with respect to a LLC?
Existing case law permits LLC members to modify the fiduciary duties that they may
owe one another.78/ ULLCA’s provisions on the waiver, restriction or limitation of fiduciary
duties and the covenant of good faith and fair dealing are substantially similar to RUPA. Under
Section 103 of ULLCA, the operating agreement of a LLC may not eliminate the duty of loyalty,
but may identify specific types or categories of activities that do not violate the duty of loyalty if
71/
ULLCA §103(a).
72/
ULLCA §409(h).
73/
ULLCA §409(h)(4).
74/
ULLCA §409(h)(1).
75/
ULLCA §409(h)(3).
76/
ULLCA §409.
77/
Froelich v. Erickson, 2000 WL 655991 (D. Md 2000) (operating agreement of LLC provided that directors
were subject to the duties of a corporate fiduciary).
78/
McConnell v. Hunt Sports Enterprises, 1999 WL 681757 (Ohio Ct. App. 1999) (unpublished opinion)
(LLC operating agreement may limit the scope of fiduciary duties in case where member was permitted to
compete with another LLC of which it was a member in connection with competing applications for
National Hockey League franchise where operating agreement provided that members were not prohibited
from or restricted in engaging in any business venture including a venture that might be competitive with
the business of the company).
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not manifestly unreasonable and may specify a mechanism for approval of actions that might
otherwise breach the duty of loyalty.79/
The operating agreement in an ULLCA LLC may not unreasonably reduce the duty of
care.80/ Furthermore, the operating agreement may not eliminate the obligation of good faith and
fair dealing, but the operating agreement may specify the standards by which performance of that
obligation is to be measured, provided such standards are not manifestly unreasonable.81/
The implication of all of this is that the persons forming the LLC may have broad
discretion in drafting operating agreements, but such discretion is not unlimited.82/ One
commentator has criticized the contractual waiver provisions of ULLCA as possibly narrower
than case law by perhaps requiring identification of specific types of transactions as opposed to
conduct such as self-dealing and noted that no case law exists analyzing the “reasonableness” of
waivers as may be required by ULLCA.83/
The DLLCA is substantially similar to DRULPA with regard to its treatment of this
issue. DLLCA provides that it is the policy of DLLCA to give maximum effect to the principle
of freedom of contract.84/ Like DRULPA, a member or manager will not be liable for good faith
reliance on the provisions of the LLC agreement and members’ or managers’ duties may be
expanded or restricted by the LLC agreement.85/ DLLCA is not characterized by the
“reasonableness” tests imposed on waivers as under ULLCA and does not purport to limit how
fiduciary duties may be limited. It should be noted that as indicated above, a Delaware limited
partnership that, by agreement, incorporates DRUPA, may eliminate fiduciary duties and, in that
regard, DLLCA does not presently include an analogous provision that would permit elimination
of fiduciary duties.
Limited Partnership and LLC Compared
1.
What fiduciary duties are imposed on the owners and managers of each form of
entity?
Absent an express provision in a Delaware limited partnership opting to utilize DRUPA,
there appears to be little or no difference between DLLCA and DRULPA. Neither act specifies
the fiduciary duties of owners and managers and, accordingly, one would apparently not make a
decision, under those circumstances, as to choice of entity for a Delaware entity based on
79/
ULLCA §103(b)(2).
80/
ULLCA §103(b)(3).
81/
ULLCA §103(b)(4).
82/
Frost, supra note 48 at 596 (in discussing analogous provision in Illinois Limited Liability Company Act).
83/
Larry E. Ribstein, “Fiduciary Duty Contracts in Unincorporated Firms,” 54 Wash. & Lee L. Rev. 537, 593
(1997). This article includes a lengthy analysis of cases dealing with fiduciary duties.
84/
Del. Code Ann. tit. 6 §18-1101(b).
85/
Del. Code Ann. tit 6 §1801-1101(c).
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fiduciary duties. However, given the general management-friendly attitude of the Delaware
courts, one might consider opting for a Delaware entity when choosing the jurisdiction of
formation of the entity. There appears to be little difference between ULLCA and limited
partnerships organized in jurisdictions having adopted RUPA (except DRUPA as discussed
above) for the fiduciary duty of general partners, but there is a difference between ULLCA LLCs
and limited partnerships formed in jurisdictions that have not adopted RULPA with respect to the
fiduciary duty of general partners. Limited partners do not have fiduciary duties under the
express terms of RULPA and members in a LLC may have fiduciary duties dependent on the
management rights of such members and their exercise of such rights. However, case law has
imposed fiduciary duties on limited partners notwithstanding the absence of an express provision
in RULPA pertaining to limited partners’ fiduciary duties. Re-RULPA would result in express
fiduciary duties for limited partners under certain circumstances. With the exception of
“arbitrage” between limited partnerships still bound up with UPA, there appears to be little
reason to chose between limited partnerships and LLCs based solely on fiduciary duty analysis.
2.
Who owes fiduciary duties with respect to each form of entity?
General partners and managers owe fiduciary duties in limited partnerships and LLCs,
respectively. Limited partners may, as noted above, owe fiduciary duties in connection with
limited partnerships. Members in a LLC owe fiduciary duties under ULLCA in specified
circumstances. There appears to be little to distinguish limited partnerships and LLCs from one
another with respect to the fiduciary duties owed by persons in analogous positions.
3.
May fiduciary duties be waived, limited or eliminated by agreement among the
parties with respect to each form of entity?
There may be a difference between LLCs organized under ULLCA and limited
partnerships organized under RULPA that remain bound up with UPA. Cases have held that
fiduciary duties may be modified or actions otherwise a breach of a fiduciary duty may be
consented to, but ULLCA provides specific statutory blessing for such matters. There appears to
be little to distinguish ULLCA LLCs and limited partnerships with RUPA general partners (other
than DRUPA) and, accordingly, fiduciary duty analysis would not be dispositive in considering
the choice of entity between a LLC and a limited partnership except, perhaps, with Delaware
entities. Delaware limited partnerships that opt into DRUPA may eliminate fiduciary duties
imposed on general partners. Given that limited partnerships may, by agreement, specify that
DRUPA is to be the applicable general partnership reference when referring to the rights and
duties of general partners in a Delaware limited partnership and the provisions of DRUPA that
do not preclude complete elimination of fiduciary duties and the elimination of the “manifest
unreasonable” standard for measuring contractual limitations on the duty of good faith and fair
dealing, there appears to be a statutory basis for selecting a Delaware limited partnership over a
Delaware LLC when elimination of fiduciary duties is of primary concern to the entity
organizers.
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EXHIBIT A
15.01 Notwithstanding anything that is or may appear to be to the contrary contained in
this Agreement or at law, the Partners recognize and agree that:
(i)
if a Partner takes any action or fails to take any action that is in such
Partner’s discretion pursuant to the terms of this Agreement, including a failure to
provide discretionary capital or advances pursuant to Article VII hereof, even if such
action or inaction is motivated solely by what such Partner perceives to be in its own best
interest and not necessarily in the best interest of the other Partners or the Partnership,
such Partner’s taking or failing to take such action shall not be deemed a breach of any of
its duties or obligations, including fiduciary duties, owed to the other Partners or to the
Partnership; and
(ii) if a Partner has entered into a contractual relationship with the Partnership (as a
lender to the Partnership, other creditor to the Partnership, supplier to the Partnership,
manager for the Partnership’s activities, or on any other basis), and such relationship is
disclosed to the other Partners prior to or contemporaneously with entering into such
relationship, then such Partner may take or fail to take any and all actions in its capacity
as a party contracting with the Partnership, even if such action or inaction is motivated
solely by what such Partner perceives to be in its own best interest as a party contracting
with the Partnership and not as a Partner, and such actions or failure to act shall not be
deemed to be a breach of such Partner’s duties or obligations, including fiduciary duties,
owed to the other Partners or the Partnership.
15.02 Notwithstanding anything that is or may appear to be to the contrary in law or
contained in this Agreement, including the Partnership’s purpose as set forth in Article IV
hereof, the Partners recognize and agree that from time to time any Partner has the right to refuse
to consent to or approve any action requiring such Partner’s consent (i) even if such refusal
prevents the Partnership from pursuing its stated purpose, (ii) regardless of whether such refusal
to consent or approve is motivated by what such Partner perceives to be in its own best interest
and not necessarily in the best interest of the other Partners or the Partnership, and (iii) such
refusal shall not be deemed to be a breach of such Partner’s duties or obligations, including
fiduciary duties, owed to the other Partners or to the Partnership.
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EXHIBIT B
SECTION ____.
Other Activities and Competition.
(a)
The General Partner shall not be required to manage the Partnership as its sole
and exclusive function, and that except as set forth in Section ____, the General Partner, its
Affiliates and agents, officers, directors and employees of the General Partner and its Affiliates
may engage in or possess any interests in business ventures and may engage in other activities of
every kind and description independently or with others in addition to those relating to the
Partnership, including the rendering of advice or services of any kind to other investors and the
making or management of other investments or other investment partnerships. Without in any
way limiting the foregoing, the General Partner, its Affiliates and any agent, officer, director or
employee of the General Partner or its Affiliates may act as a director of any corporation, trustee
of any trust, partner of any partnership or administrative officer of any business entity, and may
receive compensation for service as a director, employee, advisor, consultant or manager with
respect to, and participate in profits derived from, investments in or of any such corporation,
trust, partnership or other business entity. Subject to the limitations contained below, each
Limited Partner authorizes, consents to and approves of such present and future activities by
such Persons, regardless of whether any such activities may conflict with any interest of the
Partnership or any of the Partners or be competitive with the business of the Partnership.
Without in any way limiting the foregoing but subject to the provisions of Section ____ below,
the General Partner shall not have any obligation or responsibility to refer any such investments
or other activities to the Partnership or any Partner. Subject to the provisions of Section ____
below, neither the Partnership nor any Partner shall have any right by virtue of this Agreement or
the partnership relationship created hereby in or to other ventures or activities of the General
Partner or its Affiliates or of their respective agents, officers, directors or employees or to the
income or proceeds derived therefrom.
SECTION _____.
Investment Opportunities.
(a)
Exclusivity. Notwithstanding anything in this Agreement to the contrary, without
the prior written consent of the Non-Defaulting Limited Partners owning not less than 66 2/3%
of the Participating Percentages, neither the General Partner nor any of its Affiliates shall form or
cause to be formed any _________________ or serve in a general partner capacity with respect
to any ________________ other than this Partnership that has as its primary investment
objective, the investment, directly or indirectly, in ________________, until the end of the
Exclusivity Period. Notwithstanding anything herein to the contrary, the General Partner and its
Affiliates may, without the consent of any Limited Partners, form one or more
___________________ during (or after) the Exclusivity Period if each such
_________________ formed during the Exclusivity Period does not have more than
$____________ in committed capital and is involved primarily in investing in operating
businesses and ancillary real estate assets that are not directly competitive with the Partnership
Assets.
(b)
Allocation of Investment Opportunities. Without the prior written consent of the
Advisory Committee, neither the General Partner nor any of its Affiliates shall allocate a
Suitable Investment at any time during the Exclusivity Period to one or more Affiliates of the
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General Partner rather than to the Partnership; provided, however, the restrictions contained in
this Section _____ shall not apply to, and neither the General Partner nor any of its Affiliates
shall be restricted with respect to, (i) investment opportunities requiring an initial capital
investment (without regard to leverage incurred by the Partnership) of less than $_________,
(ii) investment opportunities related to existing investments made by any of such entities, prior to
the date of this Agreement or relating to investments that are the subject of a contract or letter of
intent that is in existence as of the date of this Agreement, (iii) investment opportunities first
presented to companies or other entities of which Key Executive may be a trustee or director or
otherwise acting in a fiduciary capacity, (iv) investments in publicly traded securities that
represent less than ____ percent (____%) of the total outstanding capital stock of such issuer and
(v) investments by ________________ formed after the expiration of the Exclusivity Period and
investments by ____________________ permitted by the last sentence of Section _______.
SECTION ____.
Advisory Committee. The General Partner shall cause an
advisory committee (the “Advisory Committee”) of the Partnership to be formed to review and
approve those certain matters and determinations for the management of the Partnership
specified in this Section _____ and elsewhere in this Agreement. The Advisory Committee shall
consist of at least ___________ members, each of whom shall be appointed by the General
Partner and shall be a Limited Partner or a representative of a Limited Partner. After the initial
appointment of the Advisory Committee by the General Partner, members of the Advisory
Committee shall serve on the Advisory Committee for such periods as the General Partner may
determine. Any subsequent vacancy on the Advisory Committee shall be filled by an individual
nominated by the General Partner and approved by a Majority-in-Interest of the Non-Defaulting
Limited Partners. Unless otherwise expressly provided herein, all decisions and actions of the
Advisory Committee shall require the affirmative written vote of a majority of the members,
with each member entitled to one vote in all matters. In lieu of holding a meeting, the members
of the Advisory Committee may vote or otherwise take action by a written instrument indicating
the consent of the number of members required to approve or take such action. Each member of
the Advisory Committee may authorize another Person or Persons to act and vote on its behalf
by proxy. The members of the Advisory Committee may participate in any meeting of the
Advisory Committee by means of conference telephone or similar communications equipment,
as long as all Persons participating in the meeting can speak with and hear each other, and
participation by a member of the Advisory Committee pursuant to the method described above
shall constitute presence in person at such meeting.
(a)
To the extent permitted under Section 17-303 of the Revised Uniform Act for
Persons that do not thereby become liable to any party as general partners of the Partnership, the
Advisory Committee shall have authority or discretion to review and approve only those matters
and determinations concerning the management of the Partnership that are specifically set forth
in this Agreement as requiring approval of the Advisory Committee. Nothing contained in this
Section _____ or elsewhere in this Agreement shall empower or authorize the Advisory
Committee to act as a general partner of the Partnership or otherwise be construed to deem the
Advisory Committee as acting as a general partner of the Partnership. Other than as specifically
set forth in this Section ____ or elsewhere as specifically set forth in this Agreement, the
Advisory Committee shall not participate in the management or control of the Partnership’s
business nor shall it transact any business for the Partnership, nor shall it have the power to act
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for or bind the Partnership, such powers being vested solely and exclusively in the General
Partner.
(b)
The General Partner shall provide the Advisory Committee sufficient information
and factual analysis to enable the Advisory Committee to make a reasoned and informed
decision on any matter submitted to the Advisory Committee under this Section ____ or
submitted under the provisions set forth elsewhere in this Agreement. Except as otherwise
expressly set forth herein, the members of the Advisory Committee shall use reasonable efforts
to approve or disapprove of any proposal or other matter to be decided by the Advisory
Committee within ten (10) Business Days after such matter has been submitted to the Advisory
Committee.
(c)
No member of the Advisory Committee shall be entitled to receive any fees or
other compensation for serving as a member of the Advisory Committee. The Partnership shall
reimburse each member of the Advisory Committee for such member’s out-of-pocket expenses
incurred in connection with such member’s service on the Advisory Committee, including
without limitation, all reasonable expenses for airfare, lodging, meals and other travel expenses
incurred in attending meetings of the Advisory Committee.
(d)
The Partnership shall defend, indemnify and hold harmless each member of the
Advisory Committee, the Limited Partner that appointed such member, the employer of such
member, and all Affiliates of such member, Limited Partner or employer (each, an “Indemnitee”)
from and against any and all liabilities, demands, claims, actions or causes of action, losses or
expenses (including reasonable attorneys’ fees, expenses and costs of investigation) sustained or
incurred by any such Indemnitee by reason of the fact that such Indemnitee is or was a member
of the Advisory Committee, or by reason of action taken or omitted to be taken by such
Indemnitee in any such capacity, provided that such Indemnitee acted in good faith and in a
manner the Indemnitee reasonably believed to be in or not opposed to the best interests of the
Partnership.
SECTION ____.
Transactions with Affiliates.
(a)
Requirements. Unless otherwise specifically permitted by this Agreement or
approved by the Advisory Committee, the General Partner shall not, without the prior written
consent of the Advisory Committee, permit the Partnership to, directly or indirectly, (i) enter into
any transaction for the provision of services to the Partnership or any Person for which the
General Partner or any of its Affiliates may have an interest or receive a benefit (other than as
contemplated by this Agreement), or (ii) engage in a transaction for which the General Partner or
any of its Affiliates may receive additional compensation or other benefit not contemplated by
this Agreement (both clauses (i) and (ii), an “Affiliate Transaction”) unless the terms and
conditions of the contract are at least as favorable to the Partnership or the Controlled Affiliate as
the terms available in an arm’s length transaction with an independent third party. As used
herein, the term “Affiliate Transaction” shall not include transactions and activities contemplated
by the Advisory Agreement.
(b)
Other Fees. Except as provided in this Section ____, as permitted under
Section 8.4 or as otherwise approved by the Advisory Committee, and except for the General
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Partner’s interests in distributions, capital, profits, income, gain, loss, deduction and credit of the
Partnership and the Management Fee payable pursuant to the Advisory Agreement, none of the
General Partner nor any Affiliate of the General Partner shall receive anything of economic value
from the Partnership, nor shall any of them receive any fees or other compensation on account of
any Real Estate Investment in which the Partnership may invest, including without limitation,
any acquisition, disposition or similar transaction-related fee.
(c)
Joint Investment with Affiliates. Notwithstanding anything to the contrary in this
Agreement, the Partners acknowledge that it is possible that the Partnership or any Investment
Vehicle may invest jointly with the General Partner or its Affiliates. All such joint investments
by the Partnership shall be approved in writing by the Advisory Committee, and in considering
whether to approve or disapprove any request by the General Partner for such a joint investment,
the Advisory Committee shall address, without limitation, any relative valuation issues that may
arise as a result of such joint investments. In connection therewith, the Partners acknowledge
that the terms of any such joint investment may not have been determined through arms-length
negotiations and that, in connection with any such joint investments, neither the General Partner
nor the Advisory Committee shall be required to obtain fairness opinions, appraisals,
independent consultant reports or the consent of the Limited Partners in recommending (in the
case of the General Partner) or in approving (in the case of the Advisory Committee) any such
joint investment. However, any request for approval of any such joint investment by the
Advisory Committee shall be submitted by the General Partner in a writing which shall set forth
in reasonable detail (i) the General Partner’s reasons for desiring that the Partnership make such
joint investment, (ii) the General Partner’s relative valuation analysis for such joint investment
and (iii) the benefits that the General Partner or its Affiliates are likely to receive as a result of
such joint investment other than by virtue of their Interests in the Partnership.
SECTION ____.
Certain Approval Rights.
(a)
Related Investments. Except as permitted in Sections ____ and ____, the General
Partner shall not, without the prior written consent of the Advisory Committee, cause or permit
the Partnership to invest in, or enter into any transaction with, any partnership or other entity in
which the General Partner or any Affiliates has an economic interest other than investments by
the General Partner or any Affiliates of less than 2% by value of the securities of any publiclytraded entities or mutual funds.
(b)
No Duplication of Fees. Notwithstanding anything to the contrary contained
herein, unless otherwise approved by the Advisory Committee, neither the
General Partner nor any Affiliate shall receive consulting fees, annual director’s
or trustee’s retainers or fees, break-up fees, investment banking fees, performance
fees, or management fees from any entity in which the Partnership may invest;
provided, however, that (i) the General Partner may be reimbursed for out-ofpocket costs or expenses incurred by any such party for such other entity and may
receive compensation or fees for any other services not listed above performed by
the General Partner (or any such party) for such entity that could otherwise be
provided by an unaffiliated third party; and (ii) the approval of the Advisory
Committee shall not be required for that portion of any such fees or other
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compensation that is not or will not be borne, directly or indirectly, by the
Partnership.
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EXHIBIT C
6.7
Other Activities and Competition.
(a)
The General Partner and the members, officers and employees thereof
shall devote such time and effort to the activities of the Partnership as the General Partner deems
necessary or appropriate to manage responsibly the affairs of the Partnership.
(b)
Subject to Section 6.7(a) and except as specifically provided in this
Agreement, it is understood and agreed that: (i) the General Partner shall not be required to
manage the Partnership as its sole and exclusive function, and the General Partner, its Affiliates
and the respective agents, officers, directors, members, managers, shareholders, partners and
employees thereof may engage in or possess any interests in business ventures and may engage
in other activities of every kind and description independently or with others in addition to those
relating to the Partnership, including the rendering of advice or services of any kind to other
investors and the making or management of other investments or other investment partnerships,
regardless of whether any such activities may conflict with any interest of the Partnership or any
of the Partners or be competitive with the business of the Partnership; (ii) neither the General
Partner nor any of its Affiliates shall have any obligation or responsibility to refer any such
investments or other activities to the Partnership or any Partner; and (iii) the General Partner, its
Affiliates and any agent, officer, director, member, manager, shareholder, partner or employee
thereof may act as a director of any corporation, trustee of any trust, partner of any partnership or
administrative officer of any business entity, and may receive compensation for service as a
director, employee, advisor, consultant or manager with respect to, and participate in profits
derived from, investments in or of any such corporation, trust, partnership or other business
entity. Each Limited Partner authorizes, consents to and approves of such present and future
activities by such Persons; and neither the Partnership nor any Partner shall have any right by
virtue of this Agreement or the partnership relationship created hereby in or to other ventures or
activities of the General Partner or its Affiliates or of their respective agents, officers, directors,
members, managers, shareholders, partners or employees or to the income or proceeds derived
therefrom.
6.8
Liability of General Partner. The General Partner will not be liable to any
Limited Partner or the Partnership for any act or omission taken or omitted as General Partner
with respect to the Partnership that is not in violation of the provisions of this Agreement, or for
any act or omission taken or omitted by any member, shareholder, director, officer, affiliate,
employee or agent of the General Partner, except in the case of the General Partner’s (or such
other person’s) own willful, wanton or intentional misconduct, malfeasance or gross negligence.
6.9
Services to Portfolio Companies. The General Partner or its Affiliates may
provide to the Partnership or its Portfolio Companies various services from time to time,
including, but not limited to, marketing and public relations services, strategic consulting
services, and investment, financial and legal services, and may charge the Partnership or its
Portfolio Companies therefor, provided that the General Partner and its Affiliates can provide
such services at no greater cost than would be the case if unaffiliated third parties were to
provide such services, as determined by the General Partner in its sole and absolute discretion.
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6.10 Investment Opportunities. The Partners expressly acknowledge and agree that the
General Partner shall not be required to cause the Partnership to invest in any specific Target
Investment and that the General Partner and its Affiliates may allocate Target Investments at any
time to one or more Affiliates of the General Partner rather than to the Partnership. In such
event, the General Partner shall deliver written notice to the Advisory Board at least ten (10)
days prior to the consummation of a Target Investment by an Affiliate of the General Partner
other than the Partnership; provided, however, that in no event shall the General Partner be
required to obtain the approval or consent of any of the Limited Partners or the Advisory Board
prior to consummating such investment. Notwithstanding the foregoing to the contrary, the
General Partner shall not be required to deliver such prior written notice for (i) any follow-on
investment relating to any existing investments made by the General Partner or any of its
Affiliates prior to the date of this Agreement, (ii) any investments that are the subject of a
contract or letter of intent that is in existence as of the date of this Agreement and any follow-on
investments thereto, or (iii) any investment in publicly traded securities that represent less than
five percent (5%) of the total outstanding capital stock of such issuer.
6.11 Investments Involving Affiliates. The Partners expressly acknowledge that it is
possible that the Partnership may invest in Investments in which the General Partner or its
Affiliates has or may obtain a direct or indirect interest. For these Investments, the following
policies shall apply:
(a)
Without the prior written approval of the Advisory Board, the General
Partner shall not cause the Partnership to invest in Investments in which the General Partner or
any of its Affiliates has an interest at the time of such Investment.
(b)
The General Partner may cause or permit (i) any Affiliate of the General
Partner (other than the Partnership) to invest in Portfolio Companies or (ii) any entity in which
an Affiliate of the General Partner (other than the Partnership) holds twenty-five percent (25%)
or more of the outstanding Equity Securities of such entity to invest in or acquire fifty percent
(50%) or more of the outstanding Equity Securities of a Portfolio Company. In either event, the
General Partner shall deliver written notice to the Advisory Board at least ten (10) days prior to
the consummation of such Investment; provided, however, that in no event shall the General
Partner be required to obtain the approval or consent of any of the Limited Partners or the
Advisory Board prior to the consummation of such Investment.
(c)
The General Partner may cause the Partnership to invest jointly with
Affiliates of the General Partner in Investments in which none of the Partnership, the General
Partner or any Affiliates of the General Partner has an interest at the time of such Investment;
provided, however, that such joint Investments shall be made on a pari passu basis and on
substantially similar economic terms. If the terms of any such joint Investment are not on a pari
passu basis and substantially similar economic terms, such joint Investment shall be approved in
writing by the Advisory Board; provided, however, that no approval shall be required for any
such joint Investment made by the Partnership on the same terms and conditions as any
unaffiliated third party participating in such joint Investment. The amounts to be invested by the
Partnership and any Affiliates of the General Partner for such joint Investments shall be
determined by the General Partner in its sole and absolute discretion.
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(d)
In considering whether to approve or disapprove any request by the
General Partner for any Investment requiring the approval of the Advisory Board under this
Section, the Advisory Board shall address, without limitation, any relative valuation issues that
may arise as a result of such Investments. In connection therewith, the Partners acknowledge
that the terms of any such Investment may not have been determined through arms length
negotiations and that, in connection with any such Investments, neither the General Partner nor
the Advisory Board shall be required to obtain fairness opinions, appraisals, independent
consultant reports or the consent of the Limited Partners in recommending (in the case of the
General Partner) or in approving (in the case of the Advisory Board) any such Investment.
However, any request for approval of any such Investment by the Advisory Board shall be
submitted by the General Partner in a writing that shall set forth in reasonable detail (i) the
General Partner’s reasons for desiring that the Partnership make such Investment, (ii) the General
Partner’s relative valuation analysis for such Investment, and (iii) the benefits that the General
Partner or its Affiliates are likely to receive as a result of such Investment other than by virtue of
their Interests in the Partnership.
6.12
Advisory Board.
(a)
The General Partner shall cause an advisory board (the “Advisory Board”) of the
Partnership to be formed for the purpose of reviewing and approving those certain matters and
determinations for the management of the Partnership set forth in this Agreement. The Advisory
Board shall consist of at least five (5) members, each of whom shall be appointed by certain
Limited Partners granted the right to appoint a member of the Advisory Board by the General
Partner and at least one (1) of whom shall be the representative of an ERISA Partner. After the
initial appointment of the Advisory Board, members of the Advisory Board shall serve on the
Advisory Board for such periods as may be determined by the Limited Partner that appointed
such member. Unless otherwise expressly provided herein, all decisions and actions of the
Advisory Board shall require the affirmative written vote of a majority of all of the members,
with each member entitled to one vote in all matters. In lieu of holding a meeting, the members
of the Advisory Board may vote or otherwise take action by a written instrument indicating the
unanimous consent of the members. Each member of the Advisory Board may authorize another
Person or Persons to act and vote on its behalf by proxy. The members of the Advisory Board
may participate in any meeting of the Advisory Board by means of conference telephone or
similar communications equipment, as long as all Persons participating in the meeting can speak
with and hear each other, and participation by a member of the Advisory Board pursuant to the
method described above shall constitute presence in person at such meeting.
(b)
No member of the Advisory Board shall be entitled to receive any fees or other
compensation for serving as a member of the Advisory Board. The Partnership shall reimburse
each member of the Advisory Board for such member’s out-of-pocket expenses incurred in
connection with such member’s service on the Advisory Board, including without limitation, all
reasonable expenses for airfare, lodging, meals and other travel expenses incurred in attending
meetings of the Advisory Board.
(c)
The Partnership shall defend, indemnify and hold harmless each member of the
Advisory Board, the Partner that appointed such member, the employer of such member, and all
affiliates of such member, Partner or employer (each, an “Indemnitee”) from and against any and
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all liabilities, demands, claims, actions or causes of action, losses or expenses (including
reasonable attorneys’ fees, expenses and costs of investigation) sustained or incurred by any such
Indemnitee by reason of the fact that such Indemnitee is or was a member of the Advisory Board,
or by reason of action taken or omitted to be taken by such Indemnitee in any such capacity,
provided that such Indemnitee acted in good faith and in a manner the Indemnitee reasonably
believed to be in or not opposed to the best interests of the Partnership.
6.13 Co-Investment Rights. The General Partner may, but shall not be obligated to,
permit one or more (a) Limited Partners (but not necessarily all Limited Partners) and Affiliates
thereof or (b) employees of Portfolio Companies, to invest in Investments (a “Co-Investment”).
The Partners agree that the General Partner shall have the right to structure Co-Investments in
such manner as it deems appropriate under the circumstances, including the terms of all
agreements relating thereto. Unless otherwise approved by the Advisory Board, Co-Investments
shall be made on a pari passu basis and on economic terms substantially the same (to the extent
practicable) as the terms of the Partnership’s investment in such Securities.
6.14 Partner Duties. Pursuant to Section 1101(d) of the Act, the duties of the Partners
to the other Partners and to the Partnership are hereby limited to those provided expressly in this
Agreement, including, but not limited to, the provisions of Sections 6.7, 6.10 and 6.11.
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EXHIBIT D
0.01 If a Partner or an Affiliate of a Partner shall, without being required to do so, be
the agent, lender or participant of all or any portion of any loan to the Company or any Company
Subsidiary, such Partner or such Affiliate shall have no obligations whatsoever to the other
Partners or to the Company, fiduciary or otherwise, in its capacity as such an agent, lender or
participant, including, but not limited to, with respect to the profits or interest income obtained or
earned in connection therewith or the spread between the interest payments to be made by the
Company with respect thereto and the cost of funds to such Partner or Affiliate.
0.02 Except as expressly stated in Sections ___, ___ and ___ of this Agreement, the
XYZ General Partner shall have no obligations, fiduciary or otherwise, to any Partner.
0.03 Upon the occurrence of Management Control Event (i) the management, control
and operation of the Company and the Subsidiaries and the formulation and execution of
business and investment policy shall no longer be vested in the ABC General Partner and shall
be vested exclusively in XYZ General Partner, and XYZ General Partner or its designee shall be
entitled, but shall not be obligated, to exercise any and all powers necessary and convenient for
the purposes of the Company and the Subsidiaries, and (ii) XYZ General Partner may at its
option take any action on behalf of the Company and the Subsidiaries and may bind the
Company and the Subsidiaries without the consent of any Partners or any other Person, including
any action that the XYZ General Partner may deem necessary or advisable in its sole and
absolute discretion. During the continuance of a Management Control Event the XYZ General
Partner or its employees or agents may, without notice to the Company or to any other Partners
and at such time or times as the XYZ General Partner in its sole and absolute discretion may
determine, in the Company’s (or the Subsidiaries’) or in the XYZ General Partner’s name collect
any and all amounts due to the Company (or the Subsidiaries) from obligors, under or with
respect to any of the Properties by legal proceedings or otherwise. The XYZ General Partner
shall not be under any obligation whatsoever to take any of the foregoing actions, and the XYZ
General Partner and its Partners, directors, officers, employees and agents shall have no liability
or responsibility for any act taken or omitted with respect thereto. A copy of this Agreement
and, if applicable, a statement by the XYZ General Partner that a Management Control Event
exists shall be conclusive evidence of the XYZ General Partner’s right to act on behalf of the
Company under this Agreement as against all third parties. Upon the occurrence of any
Management Control Event, the XYZ General Partner may immediately and automatically sell
or otherwise dispose of any and all of the Properties and apply any proceeds from such sale or
disposition to satisfy in whole or in part any of the Company’s obligations under the Note and
Warrant Purchase Agreement or the Notes, in addition to and without limiting all other remedies
not inconsistent therewith permitted under this Agreement, the Note and Warrant Purchase
Agreement and at law or equity.
0.04 This Agreement shall not be construed in any manner to preclude any Partner or
any of its Affiliates from engaging in any activity whatsoever permitted by applicable law
(whether or not such activity might compete, or constitute a conflict of interest, with the
Company or any of its Subsidiaries), including, but not limited to, engaging in other real estate
investments and related ventures (whether or not competitive with the Company or any
Company Subsidiary). No Partner or any of its Affiliates will have any obligation to present or
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otherwise make available to the Company any business opportunity that such Partner or any of
its Affiliates may become aware of. Nothing contained in this Agreement shall not be construed
to excuse or release any Person from their respective obligations under the Employment
Agreements. This Agreement shall not be construed in any manner to preclude any Partner (or
Affiliate of any Partner) from (a) lending money to, (b) borrowing money from, (c) acting as a
surety, guarantor or endorser for, (d) guaranteeing or assuming one or more obligations of, (e)
providing collateral for or (f) transacting other businesses with, the Company or its Subsidiaries.
A Person performing any of the transactions set forth in this Section ____ shall have the same
rights and obligations with respect to any such transaction as a Person who is not a Partner.
0.05 Notwithstanding any other provision contained in the Act to the contrary, except
as otherwise expressly provided in this Agreement to the contrary, it is agreed that the rights,
duties and obligations of the General Partners shall be as set forth in the General Partnership Act.
It is recognized and agreed that pursuant to this Agreement and as permitted under the General
Partnership Act, XYZ General Partner has no fiduciary obligations to the Company or the
Partners.
0.06 Nothing contained in this Agreement shall be construed to exculpate a Partner or
other Person from liability for such Person’s own fraud.
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