21 January 2009

Broadest Liability Waiver Ever

A recent bankruptcy case calls attention to a limited liablity company that, under Delaware law, has exempted its manager (the LLC equivalent of a CEO) from all legal responsibility to the Company whatsoever, even intentional acts designed to harm the Company (e.g. civil liability for intentional theft).

While it is relatively common to relieve business entity officers and managers for liability for mere negligence, to permit them to rely entirely on certain kinds of third party opinions, and to permit conflicts of interest with a business in isolated transactions negotiated at the outset (usually accompanied by exclusion of the individual from the transactions involved), a complete and total waiver of liability is almost unheard of, and would be invalid in most jurisdictions.

The case also raised the question of who could have ethically drafted the law. While Delaware corporate law permits broad waivers, a lawyer for an entity's client is ethically required to place the interests of the entity (in the abstract) above the interests of any particular person affiliated with the entity, even senior management in extreme cases. I find it hard to see any credible argument that an omnibus waiver of all liability from senior management could ever be in the best interests of the entity.

One also wonders if an entity with such a broad waiver of liability is, in any meaningful sense, really still a limited liability company. There is a fair argument that, at this extreme, that the company has become a mere alter ego of its manager and that it is, a de facto sole proprietorship. If so, the limited liability protection should not, in fairness, be recognized by the courts and the manager should have personal liability to third parties for all of his acts as manager.

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