Monday, September 5, 2016
Limited Partnership Law: Should Tennessee Follow Delaware's Lead On Fiduciary Duty Private Ordering?
I originally was going to write about overconfidence today. But I will reserve that post for a later date. Instead, for today, I am sharing with you a Tennessee legislative drafting issue on which my voice (together with the voices of others) has been solicited and asking for your views and comments.
A committee of the Tennessee Bar Association has been working on proposed revisions to the Tennessee Revised Uniform Limited Partnership Act. Several thorny issues remain for consideration and final decision making, among them, whether Tennessee law, like Delaware limited partnership and limited liability company law, should allow for the elimination of general partner fiduciary duties. The committee soon will be voting on this issue, and we are circulating among us our current views (having earlier debated the matter in telephone conference calls). I took a shot at writing down my views for the group and circulated them last night. I am including the main substantive part of what I wrote here, minus some typos that I caught after the message was sent (and please forgive the disfluencies in places), and requesting comments from you:
. . . I continue to believe in the value of a minimum level of mandatory fiduciary duties for managers in unincorporated business associations. I view the unincorporated business association as more than a mere contract between business venturers . . . [It is, rather], . . . an association that includes an inherent, underlying trust relationship that is only reinforced and legally enforceable through fiduciary duties. As such, fiduciary duty doctrine fills the gap between and among the structural and [additional] governance mandates of business associations law.
In its incorporation of mandatory fiduciary duties, business associations law takes from the common law principles of agency on which its central governance principles are founded. Agency is a fiduciary relationship, by definition. The common law fiduciary duty doctrine comprised in agency law encourages business principals (among others) to join together with others to act for them and on their behalf. Limited partners are similarly incentivized to invest in limited partnerships in which general partners act for and on behalf of the partnership and owe the partnership fiduciary duties. Lawyers and other agents acting for and on behalf of the partnership have legally enforceable fiduciary duties to the partnership that cannot be waived. Why should those authorized to act for and on behalf of the limited partnership every day be treated differently—be permitted to contract for agency without accompanying fiduciary duties?
As a former planner and drafter for business clients, . . . [I must] note that mandatory fiduciary duties constrain management actions. Mandatory fiduciary duties also introduce uncertainty and unpredictability into the equation when assertions are made that a transaction is invalid or otherwise legally flawed. I acknowledge these issues and take them into account in disfavoring the Delaware lead on the contractual elimination of limited partnership fiduciary duties.
I also acknowledge that fiduciary duties exist by default under the Delaware proposal. Thus, the partners and partnership would have to affirmatively and clearly contract out of those duties, requiring unanimous consent. This, of course, means that prospective partners may choose not to agree to the elimination of fiduciary duties through a partnership agreement waiver, if they so choose. Of course, this may mean that the dissenting partner[s] will have to forego (absent a change in the partnership agreement deleting the waiver of fiduciary duties) participation in the limited partnership altogether. What we know from Professor Manesh’s work on Delaware limited partnerships and limited liability companies (previously recommended by me [for review] in my May 18, 2016 message to the committee) is that almost all partnership agreements and limited liability company agreements, respectively, for publicly held limited partnerships and limited liability companies [organized] in Delaware do include provisions eliminating managerial fiduciary duties. It is hard to know how free and informed the partner . . . decisions were on those fiduciary duty waiver/elimination provisions.
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In closing, I should note that [if my point of view on this issue prevails,] I recognize that many lawyers in Tennessee will advise their clients to use Delaware limited partnerships or limited liability companies for their new businesses (as many now do), rather than Tennessee limited partnerships or limited liability companies. I am willing to live with that. Honestly, I am not sure that allowing for the elimination of fiduciary duties under TRULPA would change the advice of counsel in Tennessee such that they would then necessarily recommend Tennessee limited partnerships; but I may be wrong on that. There would seem to be little or no incentive, however, for a client to move outside Tennessee in organizing a limited partnership or limited liability company if the formation and maintenance costs as between the states are substantially similar, the client already uses Tennessee limited partnerships or limited liability companies in its business, and the client’s representatives in management are determined to act with care, in the best interests of the firm, and in good faith. The cost/benefit analysis on those facts would seem to favor the continued use of Tennessee limited partnerships or limited liability companies.
Do you disagree with my views, as expressed here? If so, in what respects and why? If not, did I miss a point that you would raise? Regardless, have I mischaracterized or inaccurately described anything here (or omitted anything needed to make what I said not misleading)? [That is the securities lawyer in me talking, obviously. :>)] I welcome your views and feedback and will pass everything relevant on to members of the committee as additional information for them to use in voting on this issue.