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Abstract

Between 1995 and 2001, the influential National Conference of Commissioners on Uniform State Laws (NCCUSL) promulgated iterations of uniform laws pertaining to partnerships, limited partnerships and limited liability companies. One or more of those acts have been widely adopted by state legislatures. Each of the three acts—the Uniform Partnership Act (1997) (hereinafter RUPA), the Uniform Limited Partnership Act (2001) (hereinafter ULPA (2001)), and the Uniform Limited Liability Company Act (1996) (hereinafter ULLCA) —contains identical fiduciary duty provisions. The acts all adopt the same standards for the duty of care and the duty of loyalty, and offer parties the same limited rights to opt out of the statutory fiduciary standards. The fiduciary standards and the opt-out rights in RUPA, ULPA (2001), and ULLCA are badly flawed. The fiduciary duty provisions in the three acts reflect a pro-management bias that facilitates managers’ pecuniary interest in constructing inefficient transactions with the entity’s investors. The default standards themselves, which are likely to govern most situations, are inefficiently lax and limited, and the opt-out provisions, which permit the parties within broad limits to re-make the default standards of care and loyalty, fail to facilitate fully-informed bargaining between managers and investors respecting the nature of fiduciary duties, making it likely that parties will misperceive and misprice their fiduciary duties. The recently promulgated Revised Uniform Limited Liability Company Act (hereinafter RULLCA) offered the NCCUSL the opportunity to begin to correct its past mistakes regarding the fiduciary duties applicable to managers of unincorporated business entities. Unfortunately, the Commissioners squandered this opportunity and, once again in RULLCA, enacted duties that are poorly designed and bound to lead to inefficient and unfair outcomes. RULLCA contains many of the same misdirected fiduciary duty notions that plague its predecessor uniform acts, although the Commissioners in RULLCA did make a sensible adjustment to managers’ duty of loyalty standards and, at least arguably, to managers’ duty of oversight or monitoring, a part of their overall duty of care. Any modest progress in these regards, however, was more than offset by the adoption of the “business judgment rule” as a part of an awkward statutory framework for RULLCA’s duty of care provision. This overlaying of the “business judgment rule” on RULLCA’s negligence standard of care will be confusing to LLC parties and to courts, which in turn will increase transaction costs and the probability of unexpected and unintended outcomes. Even more importantly, the adoption of a business judgment standard will reduce managers’ standard of care to a level that is even more lax and inefficient than the present gross negligence standard that one finds in RUPA, ULPA (2001), and ULLCA.

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