Changing From a Corporation to an LLC Can Erase Legal Rules That Protect Minority Owners

Changing from a corporation to an LLC can erase legal rules that protect minority owners. A recent Delaware case shows when that move can backfire.

In a corporation, those in control — directors, officers, a controlling shareholder — owe the other stockholders fiduciary duties that, across the U.S., generally cannot be contracted away.

LLCs work differently. In many states — Delaware most prominently — an LLC's operating agreement can shrink those duties by contract, even to zero.

That difference drives Peña v. MacArthur Group, a 2025 Delaware Court of Chancery decision.

The allegations: the company's founder, CEO, and majority owner, with its CFO, had been spending corporate funds on themselves. The corporation then merged into an LLC whose operating agreement wiped out all fiduciary duties going forward. Stockholders were told it was for tax benefits.

After appraisal discovery exposed the self-dealing, an outside stockholder sued. The conversion, he argued, was no housekeeping: it gave the CEO and CFO something the other owners did not — a liability shield for their own future self-dealing. Delaware courts call a benefit that goes to some, but not all, owners a "non-ratable benefit."

Without one, the business judgment rule applies — courts won't second-guess the board's call — and the case usually ends early. Here, the plaintiff adequately alleged a non-ratable benefit, so entire fairness applied instead — putting on the insiders the demanding burden of proving the deal was fair in price and process.

You might think swapping a corporation's mandatory fiduciary duties for an LLC's — which can be zero — is unfair on its face. Not in Delaware: in Maffei v. Palkon, the Delaware Supreme Court held that the speculative chance of dodging a future lawsuit is not, by itself, "material" enough to make eliminating these duties non-ratable. The benefit must be real — tied to conduct actually taken or likely to occur.

That is what put this case over the line: the court found it adequately alleged the CEO and CFO meant to keep self-dealing — misconduct already underway, not a clean-slate move on a clear day.

So the claim survived the motion to dismiss against the controller and the CFO.

That matters more than it sounds. Once entire fairness is required, pleading-stage dismissal is rare — the inquiry is too fact-specific to resolve without discovery, so the case heads to trial or settlement. Clearing the motion strips the defendants of their cheapest exit, and since most survivors settle, a plaintiff-favorable outcome grows far more likely. Not a merits ruling, but a real shift in leverage.

For owners and their advisors: a company's legal form is a real protection, not a formality — and so is any move to change it. When someone proposes to "convert," "reorganize," or "clean up" the structure, read the new agreement's fiduciary-duty and exculpation terms closely — and maybe ask what the insiders have been up to lately.

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