Illustrative Form of Multi-Member Operating Agreement
Updated through June 2013 © 2013 Herrick K. Lidstone, Jr.
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(e) When entering into related party transactions, the Managers will provide
notice of such transactions (including the economic terms thereof) to the Members, although the
failure to provide such notice does not invalidate any such transaction. Upon the request of any
Member, the Manager will provide information to such Member about the calculation of the
reimbursement or payments between the Company and the related party. Upon the request of
any Member, the Manager will provide such Member a copy of any written agreement for such
related party transactions.
5.8 Elimination of Fiduciary Duties.
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(a) To the fullest extent permitted by the Colorado Act, no Member or
Manager has fiduciary
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duties
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with respect to the Company or any other Member, Assignee, or
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An operating agreement is a contract, and as such incorporates an implied duty of good faith and fair
dealing. See, e.g., RESTATEMENT (SECOND) OF CONTRACTS § 205 (“every contract imposes upon each party
a duty of good faith and fair dealing in its performance and its enforcement.”). Under the Revised Uniform Limited
Liability Company Act, § 110(c)(5), an operating agreement may not eliminate the obligation of good faith and fair
dealing, set forth expressly in that Act in § 409(d), but the operating agreement may prescribe the standard by which
the performance of the obligation of good faith and fair dealing will be measured. RULLC § 110(d)(5). Similarly,
see C.R.S. § 7-80-108 and § 7-80-404. There is, however, significant distinction as to the meaning of “good faith.”
For example, in Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006), the Delaware Supreme Court determined that good
faith is a “subsidiary element” of the duty of loyalty. The scope of what constitutes good faith or the absence of bad
faith is recognized as being murky at best. In the Disney decision the Delaware Chancery court acknowledged that it
likely is impossible to articulate a broad enough definition to capture the “universe of acts that would constitute bad
faith.” In Re The Walt Disney Company Derivative Litigation, 907 A.2d 693, 755. See also The Committee on
Corporate Laws, Changes in the Revised Model Business Corporation Act --- Amendment Pertaining to the Liability
of Directors, 45 BUS. LAW. 695, 697 (1990). The phrase “acts or omissions not in good faith” is “easily susceptible
to widely differing interpretations, especially retroactively” and was determined to be too imprecise a standard or
duty to be barred from being waived in a corporation’s certificate of incorporation. Instead, the breadth of what
might constitute non-waivable bad faith has been narrowed under the Model Business Corporation Act to include
acts or omissions (i) with respect to which the director derives a financial benefit to which he or she is not entitled or
(ii) that are either intentionally criminal or intentionally designed to harm the corporation. The Disney decision
refers to the case law in this area as a “fog of . . . hazy jurisprudence,” but “[t]o act in good faith, a director must act
at all times with an honesty of purpose and in the best interests and welfare of the corporation,” which includes not
intentionally disregarding his or her duties as a fiduciary. Be aware that “good faith” may be a fiduciary obligation
while “good faith and fair dealing” is a rule of contract.
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The application of fiduciary duties derives from 18
th
century English real property law where “it emerged as
a means of moderating the tension between current and future interests in land.” Helfman, “Origins of Fiduciary
Duty,” 41 Real Property, Probate and Trust Journal 651 (ABA) (Fall 2006). In Bishop of Winchester v. Knight, 24
Eng. Rep. 447 (Ch. 1717), the tenant leased property and then proceeded to mine copper instead of conducting the
traditional farming operations. The Lord Chancellor said: “the tenant is a sort of a fiduciary to the lord, and it is a
breach of the trust which the law reposes in the tenant, for him to take away the property of the lord.” The jury
found for the bishop on the ground that it “could not find that the customary tenant without the license of the lord,
might by custom dig and open new copper-mines . . . so that . . . neither the tenant without the license of the lord, nor
the lord without the consent of the tenant, could dig in these copper-mines, being new mines.” Justice Cardozo
described fiduciary duty as follows: “Joint adventurers, like copartners, owe to one another, while the enterprise
continues, the duty of finest loyalty. Many forms of conduct permissible in a workaday world for those acting at