F&C Alternative Investments (Holdings) Ltd v Barthelemy & Anor

Members of a limited liability partnership do not owe general fiduciary duties to one another merely because they are members. Any fiduciary obligation depends on the responsibilities assumed under the statutory, contractual and factual framework.

Fiduciary duties arising within a commercial venture must accommodate its contractual allocation of powers, risks and interests. A contractual duty of utmost good faith permits regard to self-interest but requires honest dealing, fidelity to the common purpose and due regard to the parties’ legitimate interests.

Conduct which subverts agreed governance arrangements may constitute both gross misconduct under a contractual exit provision and unfairly prejudicial conduct under Companies Act 2006 section 994. A compliance investigation may also constitute unfair prejudice where serious procedural unfairness foreseeably leads to the removal of members from management.

Three related proceedings concerned a limited liability partnership conducting a fund-of-hedge-funds business. A corporate member held 60% of its capital, profits and votes. Two individual members each held 20%. Their detailed LLP agreement included put options exercisable where the corporate member breached the agreement through gross negligence or gross misconduct having a materially adverse effect.

The corporate member sought declarations that three sets of put option notices were invalid. The individual members counterclaimed for enforcement. They also petitioned under sections 994 to 996 of the Companies Act 2006, alleging unfair prejudice by the corporate member and its parent company. The corporate member brought a cross-petition alleging unfair prejudice by the individual members.

The central issues were the fiduciary and contractual obligations governing the LLP, the validity of the put option notices, responsibility for departures from the agreed governance arrangements, and the competing unfair prejudice claims.

1. The first and second put option notices were valid. The corporate member breached the agreement when its agent deliberately stopped the individual members’ contractual drawings and sought to transfer decisions reserved to the LLP board and management committee to a members’ meeting where it held 60% of the votes. That course repudiated the agreed governance structure and breached the duty of utmost good faith. Objectively, it amounted to gross misconduct and had a materially adverse effect when the first notices were served. Later payment did not invalidate rights which had already accrued.

2. The second notices were also justified. Although the corporate member initially retreated from its earlier position, its continuing conduct objectively showed inadequate respect for the LLP’s allocation of authority. The third notices were invalid because the regulatory report and withdrawal notifications were authorised by management committee members acting in good faith rather than by the corporate member in breach of the agreement.

3. LLP members do not owe general fiduciary duties to each other merely by reason of membership. The Limited Liability Partnerships Act 2000 creates a body corporate and leaves mutual rights and duties principally to agreement. Fiduciary duties depend on the responsibilities actually assumed. Members acting as agents may owe the usual duties concerning the transactions undertaken for the LLP.

4. Members of the LLP board, management committee and compensation committee owed fiduciary duties to the LLP. Their content was moulded by the agreement. The agreement contemplated conflicts between the individual members’ interests and the F&C group’s interests. Decision-makers could consider those interests but had to act for proper purposes, in good faith, and maintain a fair balance without wholly subordinating the LLP’s interests.

5. The duty of utmost good faith permitted the corporate member to protect its legitimate commercial interests. It nevertheless required honest commercial dealing, fidelity to the agreed common purpose and due regard to the LLP’s legitimate interests. It also required disclosure of a major change in marketing strategy, although the particular non-disclosure was not sufficiently serious to activate the put option.

6. The individual members established unfair prejudice under section 994 of the Companies Act 2006. The corporate member and its parent company were sufficiently implicated in a sustained pattern which bypassed the LLP’s governance structures and undermined the individual members’ management rights. The parent’s responsibility followed from the business reality of its authorisation, involvement and expected benefit.

7. The compliance investigation was seriously inadequate and unfair. Its report was improperly treated as final without a fair opportunity for the individual members to answer it before removal from management and reporting to the regulator. That serious procedural departure was capable of constituting unfair prejudice. The corporate member’s cross-petition was dismissed.