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  4.  | A Look at The Revised Uniform Limited Liability Company Act

A Look at The Revised Uniform Limited Liability Company Act

by | Mar 31, 2022 | Firm News

In 1996, with the adoption of what became Chapter 428 of the Hawai’i Revised Statutes, the limited liability company was added to the menu of business entity options under Hawai’i law[1].  Hawai’i’s1996 law was based on the Uniform Limited Liability Company Act (the “Original ULLCA”) drafted by the Uniform Laws Commission (“ULC”), promulgated in 1994.[2]  The Original ULLCA was not widely adopted by state legislatures, perhaps because by 1994 most states had already adopted limited liability company statutes, either “home grown” or based on the Prototype Limited Liability Company Act developed by the American Bar Association.[3]

Also in 1996, and just two years after the Original ULLCA, the ULC issued a revised model limited liability company statute (“ULLCA (1996)”) which took account of the so-called “check-the-box” regulations that had been recently proposed by the IRS.[4]  These regulations allowed certain eligible entities, including limited liability companies, to elect whether to be treated for tax purposes as a partnership, in which taxable income “flows through” to the company’s owners, or as a corporation subject to tax separately from its owners.  Before the promulgation of the check-the-box regulations, adoption of the limited liability company form was hampered by the uncertainty of the appropriate tax treatment of the entity.  Once this uncertainty was eliminated by the check-the-box regulations, the limited liability company form exploded in popularity.  By 2004, a commentator noted, the LLC had become the dominant form for new business in a majority of states.[5]  Hawai’i has amended its LLC statute on a number of occasions since its original adoption, but the statute remains largely based on the ULLCA (1996).

In 2006, the ULC adopted the Revised Uniform Limited Liability Company Act.  This model act was subsequently renamed to drop “Revised” from its title.  The current version is known as the “Uniform Limited Liability Company Act (2006) (Last Amended 2013)”, which this article will refer to simply as the “Revised Model Act.”  The Revised Model Act was seen by its drafters as an opportunity to “identify the best elements of the myriad ‘first generation’ LLC statutes and to infuse those elements into a new, ‘second generation’ uniform act.”[6]  The Revised Model Act also reflects the more recent goal of the ULC to “harmonize” all of the various business organization statutes, a topic that will not be addressed in this article.

The purpose of this article is to describe a few of the more substantial differences between, on the one hand, Hawai’i’s current LLC statute and the Original ULLCA on which it is based, and, on the other hand, the Revised Model Act.  This article is not a comprehensive review of the Revised Model Act or a section-by-section comparison of the Revised Model Act with the current Hawai’i LLC Act.  Nor does this article take a position on whether Hawai’i should revise its LLC statute, either to adopt the Revised Model Act or in some other way, an undertaking that would require the sort of comprehensive review just mentioned.  But bearing in mind that the LLC as a form of business organization is, after all, still a relatively recent invention, it may be worthwhile for practitioners to be aware of some of the areas about which the drafters of the model law upon which our statute is based apparently changed their minds.

We refer below to Chapter 428, H.R.S., as currently enacted, as the “Current Act.”   We use the term “company” below to mean a limited liability company organized either under the Current Act or some other law, as context requires.

  1. Preliminary note – the role of the statute as the provider of “default rules”

It goes almost without saying that businesspeople frequently choose to carry out their activities in the form of one or more “artificial” entities – corporations, various flavors of partnerships, limited liability companies, etc.  They do so for a number of reasons.  Perhaps the most significant reason for conducting a business under the auspices of a separate legal entity, and often the reason foremost on the mind of the businesspeople involved, is that doing so may provide the owners and managers of the business with some degree of protection from personal liability arising from the conduct of the business.

Another reason to carry on a business by way of an entity is to take advantage of an established legal framework delineating the rights and obligations of the various participants in the entity and those with whom the entity does business.  For example, Chapter 414 of the Hawai’i Revised Statutes, which governs Hawai’i corporations, provides fairly detailed rules regarding such things as the management of the corporation (by a board of directors elected by the shareholders), the rights of holders of a particular class of shares, the entitlement of shareholders to “dissent” from certain major corporate transactions, the rights of shareholders to access the corporation’s books and records, and many other rules setting forth substantive rights and procedures for exercising those rights.[7]  A corporation’s articles or bylaws may in some cases vary the effect of a given statutory provision, but to a large extent the statutory framework governing the relationships among the corporation’s constituents is mandatory.

Where corporate law is largely a matter of statute, a limited liability company is a “creature of contract”, in which the promoters, investors and others who will become the company’s members and/or managers may adopt an operating agreement “to regulate the affairs of the company and the conduct of its business, and to govern relations among the members, managers, and company.”[8]  The owners of a limited liability company (that is, in the parlance of the statute, the company’s “members”) are given very broad latitude to arrange their affairs in respect of the company in whatever manner they choose.  Only a very few provisions of the statute are considered important enough to be “nonwaivable.”[9]  Accordingly, the function of the Current Act provisions that address the internal affairs of the company and the relations among the company and its members and managers (i.e., the provisions that are within the scope of matters that can be addressed in an operating agreement at all) is to provide “default rules” that come into play if and only if the company’s operating agreement is silent on a particular point.[10]  These default rules are meant to reflect a set of assumptions as to how businesspeople would  choose to arrange the governance of the company, had they stopped to consider and put their choices in writing.

Many of the changes in the Revised Model Act deal with matters that could be addressed in the operating agreement, and are therefore changes only in the applicable default rules.  Persons forming a company would, under the Revised Model Act, still be able to contract around the revised statutory language.  Accordingly, these changes in the Revised Model Act reflect changes in how the drafters of the Model Act view the assumptions underlying the default rules.  In this regard, the most significant changes in the Revised Model Act may be the changes to the default rules requiring a company to purchase the interest of a dissociating member (described in Section II.A below), and the description of the default fiduciary duties owed among members and managers (described in Section II.C below).

  1. Summary of notable differences between the Current Act and the Revised Model Act

As noted above, what follows here is a list of some, but by no means all, of the more notable differences between the Current Act and the Revised Model Act.

  1. Elimination of “at will” companies and mandatory membership interest repurchase upon member dissociation

Under the Current Act, a company is either a “term company” or an “at will” company.  The choice is required to be set forth in the company’s articles of organization, which are filed with the State Department of Commerce and Consumer Affairs (the “DCCA”) to form the company.  A term company is one that specifies that the duration of the company is for a specified period of time.[11]    If no term is specified, the company is an “at will” company.[12]

The concept of an “at will” company is a carryover from the realm of partnership law, under which the withdrawal of any partner resulted in the dissolution of the partnership.[13]  Under the original Uniform Partnership Act, upon the dissolution of a partnership for any reason each partner was entitled to have the partnership use its assets to discharge all liabilities against the partnership, liquidate its assets, and pay to each partner the partner’s pro rata share of the partnership’s assets, in cash.[14]

This right of a withdrawing partner to force a cash purchase of the partner’s interest carried over into the Current Act, which provides that in the case of an “at will” company, unless otherwise agreed in the operating agreement, the company is required to repurchase the interest of a dissociated member for the “fair value” of the interest.[15]    If the parties are not able to agree on a price for the dissociated member’s interest in the company within certain statutorily prescribed time limits, the statute provides for a judicial determination of the price.  In effect, every member in an at will company is vested with the right to “put” his or her interest to the company at market value at any time, unless the operating agreement clearly eliminates this right.  In the case of a term company, the requirement to repurchase the dissociated member’s interest still exists but does not arise until the end of the term in effect on the date of the member’s dissociation.  Furthermore, under the Current Act any creditor of a member of an at will company that obtains a charging order (essentially a judicially imposed lien on a member’s interest in a company) can also seek judicial dissolution of the company if it is “equitable” to do so.[16]

The interests to be balanced when a member wants to leave a limited liability company are, on the one hand, the withdrawing member’s understandable desire not to be tied indefinitely to a stake in the company (i.e., would much prefer to liquidate his or her interest and sever ties with the company altogether) and, on the other hand, the ability of the company to finance that liquidation.  An investment in a limited liability company needn’t be perpetual, and company operating agreements frequently provide for events triggering the right of a member to be bought out.  Aside from these more or less well defined events, most company operating agreements eliminate the default rule, which seems to reflect a view that a member should not have the power to force a buy-back of the member’s interest at any time.[17]  The Reporters of the Revised Model Act apparently came to the same conclusion, noting that “the notion of an at-will LLC never took hold,” and that most LLC statutes provide for perpetual duration for an LLC unless the owners provide otherwise.[18]  Accordingly, the Revised Model Act does away with the concept of an “at will” company.  Under the Revised Model Act, all companies have perpetual duration.[19]  The Revised Model Act also eliminates the “put right” in favor of a dissociating member and the right of a creditor in possession of a charging order to seek a judicial decree of dissolution of the company.

  1. Management structure.

Changes in the rules governing management structure make up some of the most significant practical changes in the Revised Model Act.

  1. Public disclosure of management structure

Under the Current Act, a company is either “member managed” or “manager managed”.  The choice between these two approaches is required to be set forth in the articles of organization that are filed at the DCCA and are thereafter open to public review.  Indeed, the information provided in a company’s articles or organization, and in the annual reports required to be filed by all Hawai’i entities, is easily found through a search of the DCCA’s online database of entities formed or registered in Hawai’i.  This is not a “default rule” that can be varied under the company’s operating agreement.  Every Hawai’i LLC is required to declare itself publicly as either member- or manager-managed, and to disclose the identities of the persons or entities serving in the “management role” for the company.  If the company is member-managed, the names and addresses of all initial members must be reported in the company’s articles and updated annually by way of the company’s annual report.[20]

The Revised Model Act maintains the distinction between member-management and manager-management, but removes the requirement that a company disclose its choice of management structure and the identity of its managers (or members, in the case of a member-managed company) in its publicly-filed articles and annual reports.  The Revised Model Act would, however, still require the identification of at least one manager (or member in a member-managed company) in the annual reports filed by the company.[21]

  1. Elimination of “statutory apparent authority”

Because the Current Act requires the disclosure of the names of the people responsible for the management of a company (i.e., the managers in a manager-managed company, or the members in a member-managed company), it is a common practice for persons doing business with a company to use information from the DCCA’s searchable web database to determine, or at least to provide evidence of, the authority of a given person to act on behalf of the company.   In this way, the DCCA’s public filings become a source of “apparent authority” of the managers (if a manager-managed company) or members (if not) of a company.  Because the reporting and disclosure of this information is required by statute, the concept is sometimes referred to as “statutory apparent authority.”

The Current Act also provides that all managers in a manager-managed company and all members in a member-managed company have equal rights to manage the affairs of the company.[22]  This, however, is a default rule that can be and frequently is varied by the operating agreement.  Indeed, flexibility of management structure is one of the most frequently touted benefits of the LLC form.  Accordingly, there can be a conflict between the scope of the “statutory apparent authority” conferred on company management and the actual authority conferred by the operating agreement.  From the point of view of the company, the company is bound by the act of a manager/member that is within the ordinary course of the company’s business, unless the manager/member had no actual authority to act and the person with whom the manager/member was dealing knew or had notice of the lack of authority.[23]  Thus the company could find itself bound by the act of a “rogue” manager whose acts exceed his or her actual authority.  Well advised third parties may request copies of a company’s operating agreement to confirm actual authority rather than relying on the apparent authority of a publicly disclosed manager, but not all people doing business with an LLC have the time or sophistication to perform this sort of due diligence.  In any event, the disconnect can be a source of inefficiency.

The Revised Model Act makes several significant changes to this structure, and essentially does away with “statutory apparent authority”.  The ULC’s Drafting Committee contrasted LLCs with the general or limited partnership form, in which management authority is built into the structure of the company (vested in all partners in a general partnership, and in the general partners in a limited partnership).  The situation is different with LLCs:

“In the Drafting Committee’s evolving view, the modern LLC should not be conceptualized as merely a general or limited partnership with a liability shield. Instead, the Committee views the LLC as a very flexible vehicle, whose internal management structure may be almost infinitely varied.  Moreover, corporate law provides no apparent authority by position for shareholders or for individual directors.”

Accordingly, Section 301 of the Revised Model Act states flatly that “a member is not an agent of a limited liability company solely by reason of being a member.”  Nothing whatsoever is said in the statute about the authority of a manager of a company.  If a company desires to make a public declaration of authority, the Revised Model Act allows a company to file one or more “statements of authority” setting forth the authority, or limitations on the authority, of any specific person or position that exists within the company.[24]

  1. Changes to Default Fiduciary Duties

To brutally simplify matters, one could say that before, say, the 1980s, business ventures were carried on in one of three forms: as a sole proprietorships (unified ownership and management), as partnerships (shared ownership and management), or as corporations (ownership separated from management).  In the cases of partnerships and corporations (i.e., the forms involving more than a single person), the question immediately arises as to how the individuals involved in the venture are expected to act toward each other.  The details of the development of the duties owed among individuals involved together in a commercial venture are beyond the scope of this article. It is however safe to say that the courts long ago rejected an “every man for himself” approach, and it is generally understood that at least some of the individual participants in a given enterprise will owe duties to other participants, the nature of which depend on both the type of entity involved (e.g., a partnership or a corporation) and the role held by the individuals in question (e.g., a general partner in a partnership, or a shareholder in a corporation) .  In some circumstances, those duties may rise to the level expected of fiduciaries, i.e., one who “has a duty . . . to act primarily for another’s benefit.”[25]  For purposes of this article, the essential point is that there is a fairly well-developed body of caselaw that can be mined by co-venturers and their attorneys to identify the nature of the duties owed in a particular set of circumstances.

For example, in the case of general partnerships, it has long been understood that every partner is a fiduciary for the partnership and the other partners.[26]  This, however, is only a general rule applicable in the absence of an agreement among the partners establishing a different, and often more limited, understanding of the duties owed among partners.  This power to limit or more expressly define the nature and extent of partners’ duties flows from the understanding that partnerships are first and foremost contractual arrangements, and the belief that people should be free to contract for whatever arrangement they like.   Thus, for example, the Uniform Partnership Act expressly allows partners to agree that they may engage in types or categories of activities that would, absent that agreement, constitute a violation of the duty of loyalty.[27]  In a Delaware limited liability company, the duty of loyalty can be eliminated altogether.[28]

A detailed description of the nature of the duties owed among the various constituents of a corporation (e.g., directors, officers, and shareholders) is beyond the scope of this article.   Suffice it to say that, while the directors of a corporation are held to standards of conduct that may or may not be characterized specifically as “fiduciary duties,”[29] it has been generally recognized that a director’s relation to the corporation for which he or she serves is that of a fiduciary.[30]  And unlike in the partnership context, the duties owed by a director generally cannot be modified by agreement.

A limited liability company being something of a hybrid, in some ways similar to a partnership and in others to a corporation, one of the fundamental questions facing the drafters of the early LLC statutes was the nature and scope of the duties owed by members of an LLC to each other and to the company, and the extent to which those duties could be varied by agreement among the members.

The Current Act provides that “the only fiduciary duties a member owes to a member-managed limited liability company and its other members are the duty of loyalty and the duty of care.”[31]  The statute also provides that the scope of the duties of loyalty and care are “limited” (the word used in the statute) as set forth in sections 409(b) and (c), respectively.  The operating agreement may vary the scope of fiduciary duties, either expanding or narrowing the scope, except that the duty of loyalty may not be entirely eliminated, and the duty of care may not be “unreasonably reduced.”[32]  In short, the language used in the Current Act is intended to limit, or “cabin in” the default fiduciary duties among the constituents of a limited liability company.

The Revised Model Act changes the default rule regarding fiduciary duties in a subtle, but arguably wide-reaching, way.  Indeed, this change is among the “noteworthy” revisions made in the set of amendments adopted by the ULC in 2006.[33] The Revised Model Act continues to identify the duties of loyalty and care as being applicable in LLCs, but differs from the Original Act in that it does not purport to limit the applicable fiduciary duties to only those of loyalty and care.  Furthermore, in describing the duty of loyalty the Revised Model Act contains no “limiting” language at all.[34]  Fiduciary duties can still be limited by agreement, but here too the scope for limitation has narrowed, insofar as the operating agreement may not “alter or eliminate” the duties of loyalty or care except in a manner consistent with certain limits set by the statute.[35]  These revisions, which apparently engendered a vigorous debate among the drafters of the Revised Model Act and other commenters, has been referred to as the “uncabining” of default fiduciary duties.  The Prefatory Notes to the Revised Model Act indicate that the earlier approach to “cabin in” the scope of fiduciary duties “creates more problems than it solves”, by among other things relying too heavily on the concept of good faith and fair dealing.

As a result of these changes, a carefully crafted operating agreement subject to the Revised Model Act could define the scope of fiduciary duties of members and managers in much the same way as would be possible under the Current Act, but in the absence of such specific language in the operating agreement (i.e., in the “default” case) the scope of fiduciary duties among members and managers in a company formed under the Revised Model Act is probably broader than would be the case in a company formed under the Current Act.

  1. Operating agreement.

The Revised Model Act reflects a number of changes concerning a company’s operating agreement.  Among the changes are:

  1. Under the Revised Model Act, a person who becomes a member of an LLC is deemed to have assented to the operating agreement.[36] Businesspeople vary in the degree of formality in which they approach their relationships with the companies in which they are involved.  The Revised Model Act would prevent a person who was concededly a member of a company from arguing that he or she was not bound by the company’s operating agreement because the person hadn’t signed the operating agreement.  From the point of view of the member, it becomes even more important to have reviewed and approved the company’s operating agreement, since the member will be bound whether or not a signed joinder to the operating agreement exists.
  2. Many operating agreements impose obligations between the members and the company itself.  If the company itself does not sign the operating agreement, is the company nevertheless bound by the operating agreement?  Does the company have standing to enforce provisions of an operating agreement it has not executed?  Courts have provided various answers to these questions.[37]  The Revised Model Act makes it clear that the company is bound by and has the right to enforce its operating agreement, whether or not the company has signed the operating agreement.[38]
  3. Under the Current Act, an LLC comes into existence when its articles of organization are filed with the DCCA.[39] The articles of a member-managed company must contain the names of the initial members, while the articles of a manager-managed company must contain the names of the initial managers and the number of initial members.  There is no mechanism under the Current Act to file articles of organization until the identity of the initial members or managers have been established.

The Revised Model Act permits articles of organization to be filed before the members and/or managers have been identified.  The company comes into existence when the articles have been filed and at least one person has become a member.   No public filing is required when the initial member (or any subsequent member) becomes a member of the company, and indeed the comments to the Revised Model Act represent that by requiring only the most “bare bones” of disclosure, it thereby follows the “modern trend.”[40]

  1. Charging Orders

The Current Act allows a judgment creditor of a member of a company, or a transferee of a member’s interest, to obtain a court order “charging” the distributional interest of the member.[41]  The charging order itself constitutes a lien on the judgment debtor’s distributional interest, which can be foreclosed at any time by the judgment creditor.  Upon foreclosure, the purchaser of the interest has the rights of a transferee of the member’s interest.

The Revised Model Act makes several revisions in connection with charging orders.  It makes clear that immediately upon entry of a charging order, the company is required to pay over to the judgment creditor any amounts that would otherwise be distributed to the judgment debtor.[42]  Also, under the Revised Model Act when a charging order against the sole member of a single-member LLC is foreclosed, the purchaser at the foreclosure sale obtains the member’s entire interest, and not merely a distributional interest.   As a result, the purchaser becomes the sole member of the company, and the debtor is dissociated as a member.[43]  The Revised Model Act also eliminates the reference in the Current Act to “redeeming” the company interest subject to the charging order, which the comments to Section 503 refers to as “confusing.”  The Revised Model Act instead authorizes the company or its members to pay the judgment creditor in full, thereby succeeding to the rights of the judgment creditor.[44]  The comments point out that this remedy can be enforced without the consent of the judgment creditor, and provides a mechanism to prevent a creditor of a member from “doing mischief” to the company.

  1. Member liability for debts of the company.

The Current Act requires the articles of organization of all Hawai’i LLCs to include a statement as to whether the members of the company are to be liable for the company’s debts and obligations.[45]  In compliance with this requirement, the form articles of organization provided by the DCCA include a checkbox which, if incorrectly filled out, would eliminate the liability shield that is one of the main reasons for forming an LLC in the first place. [46]   The presence of this checkbox, presumably a relic from the time before the adoption of the check-the-box regulations, is an egregious legal bear trap, lying in wait for the unwary organizer to step on.  The Revised Model Act eliminates the requirement of such a statement.

III.       Conclusion

This article has attempted to describe a few of the differences between the Hawai’i LLC Act and what might be called the current “recommended practice,” at least insofar as a promulgation of the Uniform Laws Commission can be seen as a recommendation.  It is not obvious that Hawai’i would benefit by a wholesale adoption of the Revised Model Act, but certain of its changes – in particular the elimination of term companies, of “statutory apparent authority,” and of the baffling mandatory choice between keeping and foregoing the LLC’s liability shield – seem worthy of careful study.

 

 

 

[1] 1996 Haw. Sess. Laws Act 92.  Hawai’i was apparently the last state to adopt an LLC statute. See Allan W. Vestal & Thomas E. Rutledge, Disappointing Diogenes: The LLC Debate that Never Was, 51 St. Louis U. L. J. 53, at 60 (Fall 2006).

[2] See S. Stand. Comm. Rep. No 1853, in 1996 Senate Journal, at 917 (noting that the law was based on the 1994 model law).

[3] See Rutherford B. Campbell, Jr., The “New” Fiduciary Standards Under the Revised Uniform Limited Liability Company Act: More Bottom Bumping From NCCUSL (original LLC Act “had some difficulty in getting traction”).

[4] See Simplification of Entity Classification Rules, 61 Fed. Reg. 21,989 (May 13, 1996).

[5] Howard M. Friedman, The Silent LLC Revolution – The Social Cost of Academic Neglect, 38 Creighton L. Rev. 35 (Dec. 2004).

[6] Unif. Ltd. Liab. Co. Act (2006), Prefatory Note (hereinafter, “Prefatory Note”).

[7] See Haw. Rev. Stat. § 414-191 (management by a board of directors); § 414-71, -72 (rights of shareholders); § 414-342 (dissenters’ rights); § 414-470 (access to books and records).

[8] Haw. Rev. Stat. § 428-103

[9] See Haw. Rev. Stat. § 428-103(b).

[10] There is a difficulty here not often remarked upon, which is that it is not always clear whether a particular provision in an operating agreement was intended to vary or replace a particular statutory default rule.  For example, in a recent unreported case from California, Hillsborough Development Co., LLC v. Annen, 2019 WL 3758948 (Cal. Ct. App., Aug. 9, 2019), a provision in an operating agreement requiring the consent of all members to approve “all matters in which a vote, approval, or consent of the Members is required” was held not to apply to the removal of the manager.  Instead, the court in that case looked to the statutory default rule for removal of a manager, which required only a simple majority approval.

[11] Haw. Rev. Stat. § 428-203(a)(4).

[12] Haw. Rev. Stat. § 428-203(d).

[13] Unif. P’ship Act (“UPA”) § 29 (1914).

[14] UPA § 38.  Any partner wrongfully causing a dissolution would be subject to damages, but would still be entitled to payment of the value of the partner’s interest in the partnership, less damages.

[15] Haw. Rev. Stat. 428-701(a).

[16] Haw. Rev. Stat. 428-801(5).

[17] For a different view, see Donald J. Weidner, LLC Default Rules Are Hazardous to Member Liquidity, 76 Bus. Law. 151 (Winter 2021) (hereafter, “Weidner”).

[18] Briefing Memo from the Reporters, Drafting Committee on Amendments to the Uniform Limited Liability Company Act, at 2 (2003), available at https://www.uniformlaws.org/viewdocument/committee-archive-63?CommunityKey=bbea059c-6853-4f45-b69b-7ca2e49cf740&tab=librarydocuments.  A possible alternate explanation for the elimination of the default “put right” is given, namely that the elimination makes possible certain valuation discounts of interests for estate and gift tax purposes. See Weidner, supra, at 164.

[19] Revised Act 108(c).  “Perpetual” is an obvious overstatement – the company would exist until dissolved.   Also, see Revised Act 211(b)(2)(C), implying that articles may set a definite term.

[20] The 1996 Model Act required the disclosure only of the names and addresses of the managers of a manager-managed company.  The additional disclosure of member managers appears to be a Hawai’i modification.

[21] Revised Model Act § 212(a)(4), (5).

[22] Haw. Rev. Stat. § 428-404(a), (b).

[23] Haw. Rev. Stat. § 428-301(a), (b).  An exception applies to conveyances of real estate, authority over which can be limited by a suitable statement in the company’s articles of organization.

[24] Revised Model Act § 302(a).

[25] Black’s Law Dictionary 563 (5th Ed. 1979).

[26] See TSA Int’l Ltd. v. Shimizu Corp., 92 Haw. 243, 257, 990 P.2d 713, 727 (1999), as amended on denial of reconsideration (Dec. 30, 1999) (“every partner owes fiduciary duties to the partnership that he or she is a part of”). See also Haw. Rev. Stat. § 425-123(a) (characterizing the duties of loyalty and care owed by a partner to the partnership and its other partners as “fiduciary duties”).

[27] See Haw. Rev. Stat. § 425-103(b)(3)(A) (based on the Uniform Partnership Act).  The power to limit the duty of loyalty is itself limited insofar as the limitation not be “manifestly unreasonable.”

[28] Del. Code Ann. tit. 6, § 18-1101(c).

[29] The Hawai’i Business Corporation Act does not use the term “fiduciary duty” at all.

[30] See Lussier v. Mau-Van Dev., Inc., 4 Haw. App. 359, 381, 667 P.2d 804, 819–20 (1983) (“As a fiduciary, [a director’s] duties to the corporation include undivided, unselfish and unqualified loyalty, unceasing effort never to profit personally at corporate expense, and unbending disavowal of any opportunity which would permit the director’s private interests to clash with those of [the] corporation.”).

[31] Haw. Rev. Stat. § 428-409(a) (emphasis added).

[32] Haw. Rev. Stat. § 428-103(b)(2), (3).  Note that the Delaware LLC act goes even further, allowing the total elimination of fiduciary duties, but not the implied contractual covenant of good faith and fair dealing, which cannot be waived.  See supra, n. 28.

[33] See Prefatory Note to ULLCA (2006), at 2.

[34] See Revised Model Act § 409(b) (noting that the duty of loyalty “includes” certain specific duties) (emphasis added).

[35] Revised Model Act § 105(c)(5), (d).

[36] Revised Model Act § 106(b).

[37] Compare Elf Atochem North America, Inc. v. Jaffari, 727 A.2d 286 (Del. 1999) (company bound by operating agreement whether or not executed by the company) with Trover v. 419 OCR, Inc., 397 Ill. App. 3d 403, 404, 921 N.E.2d 1249, 1251 (2010) (company not bound).

[38] Revised Model Act § 106(a).

[39] Haw. Rev. Stat. § 428-202(b).

[40] Comment to Section 202(b), Revised Model Act.  The Revised Model Act requires disclosure of only (1) the name of the company and the address of its principal office, and the name and address of the company’s agent for service of process.

[41] Haw. Rev. Stat. § 428-504(a).

[42] Revised Model Act § 503(a).

[43] Revised Model Act § 503(f).

[44] Revised Model Act § 503(e).

[45] Haw. Rev. Stat. § 428-203(a)(6).

[46] See DCCA Form LLC-1.

 

This Goodsill Alert is a reprint from the February 2022 Hawai’i Bar Journal and was written by Joseph A. Dane, Counsel and can be reached at [email protected]

Written By:

Joseph A. Dane

[email protected]