Fiduciary Duties and Merchant Princes

     posted by Gary Rosin

The recent opinion by the Delaware Chancery court in Ryan v. Lyondell Chemical Co., C.A. No. 3176-VCN (Del. Ch. Ct. July 29, 2008), has stirred up the blawg-o-sphere (begin with Francis Pileggi, then see Steve Bainbridge, Eric Chiappenelli, Jeff Lipshaw, Larry Ribstein, and Gordon Smith). In Ryan, the court allowed a shareholder suit against the directors of a public corporation despite a Section 102(b)(7) exculpatory clause.  While the scope of this blog includes close corporations, public corporations are a different matter, so I have not previously commented on the case.

Larry Ribstein now argues that Ryan shows why LLCs are better than corporations, even for public companies. He argues, essentially, that LLCs are contractual entities, and so courts will defer to the parties’ contract, and will not “import” “corporate” fiduciary duties to dilute that contract. Citing Wood v. Baum, Ribstein argues that public ownership is irrelevant.  This despite his earlier argument against LLC derivative suits, (presumably, unless expressly authorized by statute or contract).

I have already criticized this mere contractual entity reductionism, as well as its adoption in a public company context in Wood v. Baum.  Public LLCs without derivative suits would give managers of public companies complete license.  Only new managers--or a trustee in bankruptcy--could even sue them. Even then, it will not matter:  the managers will already have contracted away fiduciary duties, or at least of liability for breach of those duties.

Can Rollerball be far behind?