From Volume 86, Number 4 (May 2013)
You are approached by a dear friend who says, “I have a terrific business concept—diamond mining in Siberia. Just a pickaxe, divining rod, and some elbow grease. It’s going to be terrific. The problem is, I need a little bit of cash to get it off the ground. Any interest? I can offer you a share of the company.” Although you know little about Siberia or investing, you decide to invest. He sends you a sixty-five-page LLC operating agreement for Sub-Zero Mining, LLC (“it’s mostly boilerplate”), which you review briefly and sign. You send it back to him, along with a check for your investment.
Six months later, having heard nothing from your friend, you run into him, and he is driving a brand-new sports car. You ask him, “How did the mining in Siberia go?”
“It was terrific,” your friend explains. “I have more money than I know what to do with!”
Naturally, you ask for your share.
“Oh no,” explains your friend. “You see, when I arrived, I realized that it would be too costly to share profits with you. I had the money to do it myself, so I started Arctic Mining LLC, and I was on my way!” When you ask how he could possibly think it was okay to start a new mining company without your consent, he explains that on page thirty-four of Sub-Zero’s operating agreement, it clearly states that all relationships will be at “arms’ length terms and conditions,” which he says means he owed no fiduciary duties (the fundamental duties of diligence or loyalty) to you as an investor and was free to create, without your permission, a competing company.