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Reducing Fiduciary Duties in Oregon LLCs - LBH 042611

Reducing Fiduciary Duties in Oregon LLCs - LBH 042611

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Freedom of contract is one of the principal principles in the law of limited liability companies. That is, limited liability companies were legislatively created to enable the equity owners of such companies to contractually define their relationship vis-à-vis their company and each other to the fullest extent reasonably possible. The limited liability company operating agreement provides the vehicle for the exercise of that freedom. Unfortunately, such freedom can make trust more expensive where the members aren’t careful in drafting an operating agreement which affords protection of their interests from self dealing by other members or managers.
Freedom of contract is one of the principal principles in the law of limited liability companies. That is, limited liability companies were legislatively created to enable the equity owners of such companies to contractually define their relationship vis-à-vis their company and each other to the fullest extent reasonably possible. The limited liability company operating agreement provides the vehicle for the exercise of that freedom. Unfortunately, such freedom can make trust more expensive where the members aren’t careful in drafting an operating agreement which affords protection of their interests from self dealing by other members or managers.

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Categories:Types, Business/Law
Published by: Hunt and Associates, PC on Apr 26, 2011
Copyright:Traditional Copyright: All rights reserved

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Reducing Fiduciary Duties in Oregon LLCs: How Far Can You Go?
Freedom of contract is one of the principal principles in the law of limited liability companies.That is, limited liability companies were legislatively created to enable the equity owners of suchcompanies to contractually define their relationship vis-à-vis their company and each other to thefullest extent reasonably possible. The limited liability company operating agreement providesthe vehicle for the exercise of that freedom. Unfortunately, such freedom can make trust moreexpensive where the members aren¶t careful in drafting an operating agreement which affords protection of their interests from self dealing by other members or managers.Freedom of contract for limited liability companies encompasses the fiduciary duties which amember or manager owes to the company itself and to the members or managers of thecompany. Although certain fiduciary duties such as the duty of loyalty can¶t be whollyeliminated from an Oregon limited liability company, they can be contractually narrowed toeffectively permit conduct which would otherwise be a breach of that duty and a basis for liability in the context of a partnership, corporation or joint venture.In
Synectic Ventures I, LLC v. EVI Corp.,
241
Or App 550 (
2
0
11)
the Oregon Court of Appealsexplored how far the parties to a limited liability company operating agreement can go towardslimiting a manager¶s duties of loyalty, due care and fair dealing in the operating agreement.In
Synectic Ventures
the manager of the plaintiff limited liability company, Berkman, was also adirector, officer and investor in the defendant corporation. The plaintiff¶s operating agreementspecifically allowed its members and their affiliates to engage in business and invest in other  business ventures ³of every nature and description´ without ³obligation to account to theCompany for such business or investments or for business or investment opportunities.´ Morespecifically, the plaintiff¶s operating agreement also stated that:³The Members acknowledge that each Member may own securitiesissued by or participate in the management of companies in whichthe Company may invest and that neither the other Members nor the Company shall have any claim or cause of action against suchMember arising from such ownership or participation.´
Synectic
, along with other investment companies which Berkman managed, had loaned over $3million to the defendant corporation subject to a loan agreement which required the defendant torepay the loan in full on December 3
1
,
2
00
4
 
unless
defendant received additional investments of at least $
1
million prior to that deadline in which event the defendant could, at its option, convertthe debt to equity in the form of defendant¶s stock. Before the deadline, Berkman signed anagreement on plaintiff¶s behalf with the defendant extending the repayment date for another year.A year later, before the extended deadline, Berkman caused another company he managed toinvest the $
1
million in defendant after which the defendant ostensibly converted the plaintiff¶sloan into shares of defendant¶s stock. Defendant¶s avoidance of default to the plaintiff was,

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