Bumping Along the Bottom: Abandoned Principles and Failed Fiduciary Standards in Uniform Partnership and LLC Statutes

Abstract

Over the last decade or so, the National Conference of Commissioners on Uniform State Laws (NCCUSL) has promulgated the Uniform Partnership Act (1997), the Uniform Limited Partnership Act (2001), and the Uniform Limited Liability Company Act (1996). One or more of these Uniform Acts have been adopted in many states and are certain to garner additional adoptions in the coming years. All of the Acts contain similar fiduciary duty provisions that are applicable to the managers of the entities. The provisions have to a significant degree turned out to be unsatisfactory. In order to illuminate the failings of the Acts' fiduciary provisions and justify prescriptions that are proposed in the article, the author first articulates a number of principles, all of which rest on the morally and economically attractive notion of consent. These principles are simple, well-known and widely accepted and are congenial both to Kantian moral theory and utilitarianism. Using these principles, the article demonstrates that the fiduciary duties of care and loyalty in Uniform Acts are excessively pro-management and are seemingly designed to promote managers' pecuniary interests in achieving an inefficient and unfair bargain with the entity's investors regarding managers' fiduciary duties. The statutory standards themselves are overly lax and limited, offering inadequate protection for the legitimate interests and priced expectations of investors regarding the care and loyalty that they are due from their managers. The opt out provisions in the Acts enable mangers to exacerbate this bad situation by further exploiting informational asymmetries and thus capturing for themselves additional pecuniary gains by constructing an even more inefficient and unfair bargains with their investors. Public choice theory provides an explanation for the inefficient and pro-management nature of the fiduciary duty provisions in the Uniform Acts. Managers as a group have been able to bend the fiduciary standards in the Uniform Acts to suit their preferences for inefficiency, because they have best been able to overcome their collective action problems. The article argues that in order to achieve efficient and fair outcomes the fiduciary duties applicable to managers of unincorporated business entities must be materially strengthened. The gross negligence duty of care must be jettisoned in favor of a tougher negligence standard, and a broadly articulated duty of loyalty obligation should be substituted for the unduly limited loyalty duty now in the Uniform Acts. The opt out rights must be refashioned to enhance the likelihood that parties to the opt out are fully informed, and the opt out right should be further limited by imposing a higher mandatory floor on managers' fiduciary duties.