Recently, UCLA Law School Professor Stephen Bainbridge posted this response to the question of “How far will Delaware courts allow an agreement to permit self-dealing in an LLC?” How would this question be answered with respect to a Nevada limited liability company?
Like Delaware, Nevada explicitly favors both freedom of contract and enforceability when it comes to operating agreements. NRS 86.286(4)(b) unequivocally directs that an operating agreement “[m]ust be interpreted and construed to give the maximum effect to the principle of freedom of contract and enforceability”. Cf. Del. Code Ann., tit. 6, § 18-1101(b).
Unlike California but like Delaware, Nevada doesn’t prescribe statutorily the fiduciary duties, if any, of managers. Cf. California Corporations Code § 17153 (“The fiduciary duties a manager owes to the limited liability company and to its members are those of a partner to a partnership and to the partners of a partnership.”).
Like Delaware, Nevada deals separately with the duties of a manager or member and the liability of a manager or member. Cf. Del. Code Ann., tit. 6, § 18-1101(c) & (e). To the extent that a manager or member has duties, an operating agreement may expand, restrict or eliminate those duties except that an operating agreement may not eliminate the implied contractual covenant of good faith and fair dealing. NRS 86.286(5). Thus, the parties have a free hand with respect to the scope of the duties but may not permit a manager or member to engage in arbitrary, unfair acts that disadvantage other parties to the operating agreement. See Frantz v. Johnson, 116 Nev. 455, 465 n.4, 999 P.2d 351, 358 n.4 (2000) (“An implied covenant of good faith and fair dealing exists in every Nevada contract and essentially forbids arbitrary, unfair acts by one party that disadvantage the other.”).
When a breach occurs, Nevada permits the operating agreement to limit or eliminate any and all liabilities for breach of contract and breach of duties of a member, manager or other person to the LLC, to another member or manager, or to another person that is a party to or is otherwise bound by the operating agreement. However, an operating agreement may not limit or eliminate liability for any act or omission that constitutes “a bad faith violation of the implied contractual covenant of good faith and fair dealing”. NRS 86.286(7). This word choice (which can also be found in the Delaware statute) begs the question of whether there could ever be a good faith violation of the implied covenant of good faith.
The foregoing Nevada statutory provisions mirror Delaware’s and were added some five years after Delaware had clarified its own LLC law. See S.B. 350, 75th Leg. § 35 (Nev. 2009) and 74 Del. Laws, c. 275, §§ 13, 14 (2004). However, an important difference may nevertheless exist between the two states’ laws. Delaware expressly mandates the application of the rules of equity while Nevada’s LLC law does not. Del. Code Ann., tit. 6, § 18-1104. Chancellor Leo E. Strine, Jr. relied on this statutory mandate in concluding that default fiduciary duties do exist in the LLC context:
But unlike the corporate context, the rules of equity apply in the LLC context by statutory mandate, creating an even stronger justification for application of fiduciary duties grounded in equity to managers of LLCs to the extent that such duties have not been altered or eliminated under the relevant LLC agreement.
Auriga Capital Corp. v. Gatz Properties, LLC, 40 A.3d 839, 850 (Del. Ch. 2012) (emphasis in original, footnote omitted). Given the absence of a comparable provision in Nevada’s LLC law, the fundamental question is not whether fiduciary duties may be limited or eliminated, but whether they exist as a default standard.
For more on Nevada’s limited liability company law, see Bishop & Zucker on Nevada Corporations and Limited Liability Companies.
