Members of a LLC Have Two Different Fiduciary Duties to a Business
Video Transcribed: Tulsa Cannabis Business Attorney Isaiah Brydie coming at you with another video. This video is actually going to be part three in our ongoing discussion on disputes between owners of businesses.
Going back to limited liability companies, one of the things that I forgot to add on to my last video, where certain things that could actually forfeit someone’s interest in a vote on a matter to be determined by the member meeting.
As a general matter, members of a LLC have two different fiduciary duties to a business. The first one being a duty of loyalty. Second one being a duty of care. A duty of loyalty is self-explanatory. It entails that a individual owner of a business will put the interests of that business before their personal interests or before the interest of any other business or any other individuals.
The duty of care spells out that any individual member of a business while conducting business on behalf of their LLC will treat each transaction and action and conduct themselves as a reasonably prudent business person would in the same situation with the same information that they have to them.
You can run into some issues where members of an LLC might find themselves to be, let’s say, interested parties, and because they’re interested parties, their actions and conduct might constitute them breaching their fiduciary duties of either loyalty or care.
That might come about when let’s say you have a cultivation business that’s going to acquire a processor. Maybe they’re trying to get vertically integrated, or you have a dispensary that is going to do a fire sale of all the assets of the business, something or other like that.
You might run into there being a party on the other side of that transaction that also has an ownership interest in the business that is doing the fire sale for example. That person might potentially then be an interested party and may potentially be violating one of their fiduciary duties, if not, both by continuing on.
Now, obviously you have to you reconcile that with what’s in the operating agreement on behalf of the business. There might be provisions in the operating agreement that allow for that conduct. Courts are generally split on whether or not you can contract away fiduciary duties, but again, that goes into making sure that you have a really nice buttoned up operating agreement on behalf of the business and that you actually read it to make sure you see what’s in there.
But as a general matter, under common law, if there isn’t an operating agreement in place, those fiduciary duties of loyalty and care do in fact exist. Also, too, if the operating agreement is silent on those matters, Oklahoma statute will treat those fiduciary duties as existing.
Oh, yeah, and then as a general matter too, if you have an interested party to a transaction, depending on what’s in the operating agreement that individual may or may not be required to abstain from that vote on the conduct of the business. Definitely, they might be required to disclose that they’re an interested party before any vote and what their interest in the transaction is.
Again, it all goes back to that operating agreement and what’s spelled out there. That’s a good part to leave off at on this video. Be sure to tune in again to see my follow-ups and actually going into mediation on behalf of a member dispute. Thank you, guys.