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Governing Persons in Action: Overview of Fiduciary Duties, Excupation, and Indemnification in Texas Business Organizations Code
Statutory developments beginning in the 1990s have impacted the analysis of fiduciary duties in the business organizations context. The duties of general partners are now defined by statutory provisions that delineate the duties without referring to them as “fiduciary” duties and specifically provide that partners shall not be held to the standard of a trustee. Whether limited partners in a limited partnership have fiduciary duties is not well- settled, but the Business Organizations Code (BOC) clarifies that a limited partner does not owe the duties of a general partner solely by reason of being a limited partner. While the fiduciary duties of directors are still principally defined by common law, various provisions of the corporate statutes are relevant to the application of fiduciary duty concepts in the corporate context. Because limited liability companies (LLCs) are a relatively recent phenomenon and the Texas LLC statutes do not specify duties of managers and members, there is some uncertainty with regard to the duties in this area, but the LLC statutes allude to or imply the existence of duties, and managers in a manager-managed LLC and members in a member-managed LLC should expect to be held to fiduciary duties similar to the duties of corporate directors or general partners. In each type of entity, the governing documents may vary (at least to some extent) the duties and liabilities of managerial or governing persons. The power to define duties, eliminate liability, and provide for indemnification is addressed somewhat differently in the statutes governing the various forms of business entities.
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Duties, Exculpation From Duties and Indemnification of Governing Persons in Limited Liability Companies
Indemnification provisions under the limited liability company statutes, including the Texas Business Organizations Code (the “TBOC”), are likely to be under significant judicial scrutiny in the next few years, as the economic downturn causes claims and controversies against members and managers to arise. This article will focus on best practices to protect persons serving as members, managers and officers of an LLC, with an analysis of statutory foundations, current and evolving case law and suggested drafting solutions. As we all understand the basics of corporate law, which serves as the foundation of the TBOC statutory indemnification provisions, indemnification only is available if the accused is able to establish that there was no “misconduct.” Stated in the converse, indemnification payments, if successful, will only consist of advancement of defense costs. Once this fundamental premise is clear, indemnification rests on two topics: (A) definition of, and appropriate exculpation for, the duties applicable to the proposed indemnities, and (B) terms and conditions of advancement of expenses. Indemnification insurance also needs to be a part of the indemnification process. An explanation of terms is also in order. Under the TBOC, the generic term for a person operating in a fiduciary duty capacity is “governing person.” The term “governing person” includes directors, members of a member managed LLC and managers of a manager managed LLC. The main provision on exculpation and indemnity are in Section 7 and 8 of the “HUB” of the TBOC, and are drafted in terms of “governing persons,” and I will use the LLC specific terms of members and managers, and include a discussion of officers because of the specific statutory structure in place for LLCs. A cautionary note on ethics is also in order at the beginning of this analysis. Who you are representing as you are exculpating is quite important. This is an area that ALWAYS has a conflict of interest because you are considering the relationship of the agent to the principal, and is a question that is usually resolved in the formation stage, where there is usually only one lawyer. As a result, it is an area where you should take time to explain to the client, whoever that client is, the nature of fiduciary duties, their exculpation and indemnification, because they cannot begin to waive any conflicts until they have had a complete disclosure, which I believe requires the client to actually understand what they are waiving. I personally find this quite difficult to do, but I soldier on.
Overview of Fiduciary Duties, Exculpation, and Indemnification in Texas Business Organizations
Statutory developments beginning in the 1990s have impacted the analysis of fiduciary duties in the business organizations context. The duties of general partners are now defined by statutory provisions that delineate the duties without referring to them as “fiduciary” duties and specifically provide that partners shall not be held to the standard of a trustee. Whether limited partners in a limited partnership have fiduciary duties is not well- settled, but the Business Organizations Code (BOC) clarifies that a limited partner does not owe the duties of a general partner solely by reason of being a limited partner. While the fiduciary duties of directors are still principally defined by common law, various provisions of the corporate statutes are relevant to the application of fiduciary duty concepts in the corporate context. Because limited liability companies (LLCs) are a relatively recent phenomenon and the Texas LLC statutes do not specify duties of managers and members, there is some uncertainty with regard to the duties in this area, but the LLC statutes allude to or imply the existence of duties, and managers in a manager-managed LLC and members in a member-managed LLC should expect to be held to fiduciary duties similar to the duties of corporate directors or general partners. In each type of entity, the governing documents may vary (at least to some extent) the duties and liabilities of managerial or governing persons. The power to define duties, eliminate liability, and provide for indemnification is addressed somewhat differently in the statutes governing the various forms of business entities.