Delaware Court of Chancery Sustains Breach of Fiduciary Duty Claims Based on Terms of LLC Agreement

Why It Matters

The ruling signals that Delaware courts will closely scrutinize fiduciary‑duty waivers and discretionary clauses, raising compliance risk for private‑equity and venture‑capital firms that rely on LLC agreements to limit liability.

Key Takeaways

• Ambiguous fiduciary waivers likely invalid under Delaware law
• Dual‑fiduciary roles expose employers to aiding‑and‑abetting liability
• “Reasonable judgment” clauses require both subjective and objective proof
• “Sole discretion” does not shield against good‑faith breach claims
• Courts will enforce implied covenant despite contractual language

Pulse Analysis

The Delaware Chancery’s decision in Calumet Capital Partners v. Victory Park underscores a fundamental principle of Delaware corporate law: fiduciary duties cannot be casually erased by contract. Even when an LLC agreement contains a broad “protective provision,” courts will interpret any ambiguity in favor of preserving the duty, especially where fraud or willful misconduct is alleged. This approach reflects the state’s policy of protecting minority interests and maintaining the integrity of fiduciary relationships, a cornerstone for investors who depend on predictable governance standards.

For private‑equity and venture‑capital managers, the case raises a red flag about assigning employees to portfolio‑company boards. The court’s finding that Victory Park could be held liable for aiding and abetting its manager’s breach demonstrates that employers may be imputed knowledge of misconduct when their agents act on their behalf. This expands exposure beyond direct fiduciary breaches to include corporate‑level liability, prompting firms to reassess board‑placement strategies and implement stricter oversight mechanisms.

Practically, the ruling advises drafters to separate duty‑elimination language from exculpation clauses and to define “reasonable judgment” or “sole discretion” standards with concrete criteria. Including detailed decision‑making processes, documentation requirements, and objective benchmarks can help satisfy both subjective and objective tests the court applies. Moreover, parties should acknowledge that the implied covenant of good faith cannot be waived, even with “sole discretion” language, and should embed good‑faith obligations and dispute‑resolution mechanisms to mitigate the risk of future litigation.