• New Legislation Defines the Fiduciary Duties of Individuals Who Operate and Manage Ohio LLCs
  • February 3, 2017 | Author: Bruce L. Waterhouse
  • Law Firm: Nicola, Gudbranson & Cooper, LLC - Cleveland Office
  • This is the second of two Legal Insights articles that examine the changes made to Ohio's corporation and limited liability company (LLC) law by Senate Bill 181, which became effective last July. The first article examined how the amendments affect the actions and legal exposure of officers of Ohio corporations through its changes to Ohio law regarding the fiduciary duties of good faith, loyalty and due care. This article looks at similar issues as they relate to members, managers and officers of Ohio LLCs.

    The specific changes to Ohio's LLC statute by S.B. 181 are very technical and, for that reason, may be of more interest to the attorneys who draft LLC operating agreements and the accountants who design each company's financial framework. However, S.B. 181 puts in place certain broad principles of importance to members, managers and officers of existing or new LLCs.

    Investors in and managers/officers of LLCs should be reminded that LLCs offer much greater flexibility in matters of financial structure and management when compared to corporations. While corporations are saddled with comparatively rigid rules requiring, for example, uniform shareholder rights across each class of shares and a shareholder/director/officer management hierarchy, Ohio's LLC statute allows the participants to select from a wider range of options in terms of an LLC's economic structure and its management framework. Each LLC defines its own structure through its operating agreement, which is an enforceable contract among the owners of the LLC as its "members," subject to certain minimum requirements specified in the LLC statute.

    "DEFAULT" FIDUCIARY DUTIES
    S.B. 181 expands upon the freedom-of-contract principles in Ohio's LLC statute by providing that the previous "default" fiduciary duties of loyalty and due care applicable to members, managers and officers of Ohio LLCs may be adjusted, or even fully eliminated, by written agreement. However, S.B. 181 left in place the previous statutory duty of good faith for managers and officers. In addition, S.B. 181 did not alter the previously existing restrictions on an LLC's ability to eliminate a member's obligations of good faith and fair dealing

    ABILITY TO ENGAGE IN A COMPETITIVE BUSINESS
    In another important change, S.B. 181 removes from the LLC statute a provision that barred a member of an LLC from competing with the company. This prohibition was taken from Ohio's general partnership law and inserted into the LLC statute as part of a recent amendment, but the prohibition was a concern to many passive LLC investor-members who also had invested in other, arguably competing, ventures.

    OFFICERS
    Not all LLCs have officers in addition to one or more manager(s), but for those that do the following new rules will apply:
    • S.B. 181 expressly authorizes an Ohio LLC to have officers and establishes essentially the same default fiduciary duties and liability standards to officers of Ohio LLCs as apply to officers of Ohio corporations (as discussed in the prior article).
    • In addition, additional "default" fiduciary duties will apply if the officer also is or represents a member of the LLC or also serves the LLC as a manager.
    "PIERCING THE CORPORATE VEIL"
    Another important provision of S.B. 181 extends to LLCs one of the protections given to corporations under Ohio's corporation statute. "Piercing the corporate veil" is a legal doctrine that allows courts, under very limited circumstances, to ignore the existence of a corporation and by allowing a claimant to hold the shareholders of the corporation financially responsible for the liabilities of the entity. That is, the court will refuse to restrict a claimant's recovery to the assets of the corporation itself, and will permit the claimant to reach the personal assets of the individual shareholders as well.

    Granting greater certainty in such situations, S.B. 181 amends the LLC statute to provide that an LLC's failure to observe corporate formalities, such as the failure to hold periodic meetings of the members or managers, may not be considered by a court when deciding whether to pierce the corporate veil.

    In light of the changes made by S.B. 181, an existing Ohio LLC may wish to review the fiduciary duties applicable to its members, managers and/or officers under current Ohio law, its operating agreement and any other relevant contracts, to assess whether the duties best fit the particular LLC and how they might be modified or eliminated based on S.B. 181.