Monday, June 26, 2023

Trust in Business Associations: Fiduciary Duties

The University of Tennessee College of Law's business law journal, Transactions: The Tennessee Journal of Business Law, recently published my essay, "The Fiduciary-ness of Business Associations."  You can find the essay here.  This essay--or parts of it, anyway--has been rattling around in my brain for a bit.   It is nice on a project like this to be able to get the words out on a page and release all that tension building up inside as you fashion your approach.

The abstract for the essay is included below. 

This essay offers a window and perspective on recent fiduciary-related legislative developments in business entity law and identifies and reflects in limited part on related professional responsibility questions impacting lawyers advising business entities and their equity owners. In addition—and perhaps more pointedly—the essay offers commentary on legal change and the legislative process for state law business associations amendments in and outside the realm of fiduciary duties. To accomplish these purposes, the essay first provides a short description of the position of fiduciary duties in U.S. statutory business entity law and offers a brief account of 21st century business entity legislation that weakens the historically central role of fiduciary duties in unincorporated business associations. It then reflects on these changes as a matter of theory, policy, and practice before briefly summarizing and offering related reflections in concluding.

Although I always welcome thoughts on my work, I am especially interested in your thoughts on this essay. It relates to all three of my activities as a law professor--my scholarship, teaching, and service.  And I know that fiduciary duty waivers and opt-ins have different impacts in different business sectors . . . .  So, let me know what you think.

Corporate Governance, Corporations, Entrepreneurship, Ethics, Joan Heminway, Lawyering, Legislation, LLCs, Management, Partnership, Research/Scholarhip, Teaching | Permalink


Professor Heminway: Thanks for sharing. First, I have added a new term to my vocabulary – “Fiduciary-ness.” As I suspect you already know, I have long asked the question “At what point do we quit protecting people from themselves?” I tend to prefer discretion exist for clients to choose contractarian and fiduciarian. It’s back to the old, “If you can’t run with the big dogs, stay on the porch.” I was unaware of the conversion feature; but, it makes total sense. In a cynical fashion in answer to your question, “Did lawmakers appreciate…?” Of course not! That would infer that they involved themselves and engaged in any meaningful way to become conversant. As I regularly discuss with clients, “You’re not just hiring legal counsel to help you sidestep potential landmines. You’re hiring legal counsel for when ‘things blow up.’ Seldom are you hiring legal counsel because everything is ‘honky dory.’” That said, I would proffer that there should be almost a sophisticated investor status to participate in a DAO. I think Tennessee Revised Limited Liability Company Act has managed adjustment to be in Goldilockian terms “just right.” As always, I really appreciate that your work is invariably “workplace applicable.”

Posted by: Tom N. | Jul 8, 2023 12:23:17 PM

Thanks for the commentary, Tom. I agree with you on some (most?) of your comment. But I am having trouble squaring these two sentences:

“That said, I would proffer that there should be almost a sophisticated investor status to participate in a DAO. I think Tennessee Revised Limited Liability Company Act has managed adjustment to be in Goldilockian terms ‘just right.’” If DAI LLCs, as I define them in the article, are intended to serve DAOs, then the Tennessee General Assembly missed the boat (so to speak) when it did not require investor/participant sophistication. Of course, investor sophistication and other like requirements exclude people from market innovations—and not merely because they are not “big dogs,” in many cases.

Anyway, I always welcome your thoughtful comments. I do appreciate your readership of and participation in conversations on this blog.

Posted by: joanheminway | Jul 8, 2023 2:41:42 PM

Professor Heminway: Sorry for the confusion. I believe we are coming from a similar perspective. I attribute Goldilockian to the LLC Act’s framing of member, manager, director managed entities (except for permitting that pesky “parole operating agreement” (or, as I refer to it, an ‘attorneys full employment provision’)). Most certainly I cheer as contrasted with the original Tennessee Act fashioned to “keep organizers within the tax guardrails” at formation. I do distinguish the “what has now become traditional entities” from the DAO. I find DAO’s to be a wholly different animal. With them, the “proof is ‘baked into’ the programming.” In my “minds eye” sophistication in due diligence with a DAO would involve having someone capable of “digging in the Code” with the legal and experiential acumen to readily foresee the potential pitfalls. Perhaps a combination of those skills is not as rare as I might think?

In my little microcosm, I field calls routinely by small equity investors “looking before they leap” in what I, above, refer to as traditional entities. Then, suddenly, they find out something has gone awry and “want you to un-bake the cake.” In the DAO situation, it would seem to be amorphous. The old “Hotel California” situation where “you can enter anytime you like… but you can never leave.”

I am meeting with a sophisticated professional in the near future who “got the State forms and put his entity together.” Now, in hindsight, he has “organizer’s remorse.” Except for time and filing fees, luckily, it is easily remedied. But, in this organizer’s profession, “he shoulda known better.” I question, in the DAO situation, that the “run of the mill” investor’s “shoulda known better.”

I must confess, I do not find myself so concerned about “limiting” an unsophisticated person’s investment opportunities. I see little distinction between ready accessibility to entry into entity of choice and a hypothetical fireworks stand that sells firecrackers, cherry bombs and sticks of dynamite to “all comers.” In trained hands, each product can be entertaining and constructive (explosive targets can be fun, too). But the need for a “gateway gauntlet” to access might be prudent

Posted by: Tom N. | Jul 9, 2023 7:25:12 AM

Thanks for the clarification, Tom. I understand a bit better what you mean. There is a lot there on which I might comment, but for now I may just let this lie. I do want you to think about a few questions in anticipation of our next chat, however.

What is a sophisticated investor?
Do you think agents should owe fiduciary duties to their principals (and if so, when and why)?
How does the concept of fiduciary duty relate to sophistication, if at all, as you define it?

I look forward to talking to you about your answers to these and other related questions.

Posted by: joanheminway | Jul 9, 2023 1:09:32 PM

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