|December 13, 2013|
An enactment of the California Legislature two years ago to revise the governance of limited liability companies takes effect on January 1, 2014. The Revised Uniform LLC Act (California Corporations Code §§17701.01-17713.13) replaces the Beverly-Killea LLC Act, which has governed limited liability companies since 1994. The new LLC Act will apply automatically to existing LLC’s; however, pre-January 1, 2014, actions by existing LLC’s will continue to be governed by the Beverly-Killea LLC Act. That said, as the new LLC Act will apply to them, certain features of existing LLC’s will, after January 1, 2014, be controlled by the new LLC Act unless the members effect changes.
Much of the Revised Uniform LLC Act ( “RULLCA”) is consistent with the Beverly-Killea LLC Act. LLC’s are formed by the filing with the California Secretary of State of articles of organization, and corporate governance is through the operating agreement entered into by the LLC’s members. Many provisions in the Beverly-Killea LLC Act, such as provisions related to information rights, mergers and conversions of LLC’s, and minority member rights, remain intact under the RULLCA. The RULLCA, however, provides more detailed requirements related to dissociation of members, more default provisions than the Beverly-Killea LLC Act, and provisions related to which sections of the RULLCA can and cannot be rendered ineffective by countering provisions of the LLC’s operating agreement. For example, the RULLCA’s provisions related to fiduciary obligations of managers (whether member-managers or manager-managers) may in many cases not be altered by the operating agreement.
In applying to LLC’s pre-existing January 1, 2014, the RULLCA can automatically modify an LLC’s form of governance; the RULLCA mandates that both the articles of organization and operating agreement expressly establish management by a manager, and an LLC which relies on the Beverly-Killea LLC Act mandate that the form of management be expressed only in the articles of organization can - unless its operating agreement is modified to provide for manager-management - unwittingly become a member-managed business through the default rules of the RULLCA. Similarly, as the RULLCA requires consent of all members for a sale of the LLC’s property or amendment of the operating agreement, the failure of an existing LLC’s operating agreement to specify that only the consent of the manager is required in connection with a sale of the LLC’s property or its silence on matters of amendment consent (relying, for example, on the Beverly-Killea LLC Act requirement that a majority vote of members is required for amendment of the LLC articles or operating agreement) may result in unanimous consent being required where the operating intent of the members was to have broader empowerment of the manager or majority, rather than unanimous, consent to actions. The RULLCA also:
(i) prohibits an operating agreement from “unreasonably reducing the duty of care,” but allows LLC’s to modify (but not eliminate) the duty of loyalty as it applies to a manager if the modification is clearly stated in the operating agreement and has the informed consent of the members,
(ii) mandates indemnification of a member in a member-managed LLC and a manager of a manager-managed LLC who complies with the duties set forth in the RULLCA but provides that an operating agreement may alter or eliminate the indemnification (putting it upon existing LLC’s to modify their operating agreements if there are concerns related to mandatory indemnification), and
(iii) requires operating agreement priority over articles of organization in the event of conflict (excluding only circumstances where third parties reasonably rely on the articles of organization); thus putting it upon existing LLC’s to modify their operating agreements if they have, for example, relied on statements in the articles and opted for silence in the operating agreement.
LLC managers and members of California LLC’s and foreign LLC’s qualified to do business in California should review their existing operating agreements and articles of organization in light of the new requirements of the RULLCA.