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COMPANY GOVERNANCE UNDER FLORIDA’S LIMITED LIABILITY COMPANY ACT - page 11 / 28

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2002]

FLORIDA’S LIMITED LIABILITY COMPANY ACT

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Second, both of the fiduciary duties in section 404—care and loy- alty—can be varied, within limits, by the partnership agreement. Under section 103, the duty of care cannot be “unreasonably re- duce[d]”42 and the duty of loyalty cannot be “eliminate[d].”43 However, the partnership agreement may “identify specific types or categories of activities that do not violate the duty of loyalty, if not manifestly unreasonable,”44 and may also set forth a mechanism for authorizing or ratifying specific transactions that otherwise would violate that duty. Over-broad categorical waivers are thus forbidden, but some categorical waivers are permitted, and the border between the two is deliberately hazy.45

reading, it is merely an evidentiary rule which requires something more than proof of a partner’s direct personal benefit to establish a violation of duty but does not legitimate the immediate pursuit of self interest. Under a broader reading, however, the section would mean that a partner is free to be selfish, subject only to the specific restrictions contained in 404(b)’s duty of loyalty. They conclude, with apparent regret, that the drafting history favors the broad reading and the “sea change” in partnership law implicit in it. Id. at 205.

I have used the pronoun “they” in the previous paragraph because the treatise has three authors and the commentary is labeled “Authors’ (plural) Comments.” It is, however, clear to me, and I would think to anyone familiar with their collected works, that this section was written by Professor Vestal, with whom neither of his coauthors agree on almost any- thing. Co-authorship, like politics, makes strange bedfellows.

42. R.U.P.A. § 103(b)(4). Given a standard of care limited to gross negligence, it is hard to imagine a reduction which would not be unreasonable. The Official Comments suggest that a pure heart/empty head standard might pass muster; on the other hand, ac- cording to the Comments, “absolving partners of intentional misconduct is probably unrea- sonable.” Official Comments to R.U.P.A. § 103(b)(4). Only probably?

One possible response to all this, at least for partners who want to get out of liability for violations of the duty of care altogether, might be to leave the standard in place but change the remedies for breach. After all, if a partner cannot be sued for damages, does it matter what the “duty” is? The relationship between duties and remedies is discussed more fully infra Section II.B.

  • 43.

    R.U.P.A. § 103(b)(3).

  • 44.

    Id. § 103(b)(3)(i).

  • 45.

    The Official Comments to subsections (b)(3) through (5) state: “It is intended that

the risk of judicial refusal to enforce manifestly unreasonable exculpatory clauses will dis- courage sharp practices while accommodating the legitimate needs of the parties in structuring their relationship.” Official Comments to R.U.P.A. § 103. It is not at all clear how this fits with the statement just a few paragraphs earlier in the Comments that “RUPA attempts to provide a standard that partners can rely upon in drafting exculpatory agreements.” Id.

I do not intend to expound at length here on the difference between a standard and a rule, and there is obviously a continuum of legal formulation which runs from the hope- lessly vague to the tediously specific. Nevertheless, as a general matter, the problem with standards, as opposed to rules, is that they cannot be relied on. It is for precisely this rea- son that the ABA’s Committee on Corporate Laws adopted a bright line test for directors’ conflict of interest transactions in Subchapter F of the Revised Model Business Corpora- tion Act (RMBCA):

An inevitable feature of any bright-line statute or regulation is that, no matter where the line may be set, some situations that fall outside the line will closely resemble other situations that fall inside it. Some observers find that outcome anomalous and argue that a bright-line approach is inferior to a statement of broad principles. But the legislative draftsman who chooses to suppress marginal anomalies by resorting to generalized statements of principle will pay a cost in terms of predictability. The choice between these two drafting approaches is a

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