- New Florida Limited Liability Act Is Effective
- July 9, 2014
- Law Firm: Berger Singerman LLP - Fort Lauderdale Office
The Florida Revised Limited Liability Act (the “New Florida LLC Act”) is now effective for all limited liability companies organized in Florida on or after January 1, 2014. A limited liability company organized in Florida prior to January 1, 2014 will continue to be governed by the old LLC Act until January 1, 2015 unless it affirmatively elects to be governed by the New Florida LLC Act. After January 1, 2015, all Florida limited liability companies will be governed by the New Florida LLC Act, regardless of when they were formed.
The New Florida LLC Act significantly changes the way Florida limited liability companies operate and are governed. Nonetheless it retains many of the provisions and characteristics of the old LLC Act. Like the old LLC Act, it gives the organizers of the limited liability company broad latitude in determining how the limited liability company will operate. That flexibility is one of the reasons many people choose to conduct business through a limited liability company. However, both the old LLC Act and the New Florida LLC Act are “default statutes.” This means that to the extent the organizers of the limited liability company don’t include specific provisions governing the way it manages its affairs in its articles of organization or operating agreement, the governing rules will be provided by the “default” provisions of the statute. Those default rules are meant to fill in any “gaps” in the operating agreement.
Before we examine what some of the new or modified “default” provisions in the New Florida LLC Act look like, it’s important to understand just what an “operating agreement” is under the New Florida LLC Act, and how it is different from the old LLC Act.
Expanded Definition of What Constitutes an Operating Agreement
The old LLC Act provided that an operating agreement was comprised of “written or oral” provisions adopted for the management of the limited liability company and setting forth the relationship among the members. The New Florida LLC Act significantly and deliberately broadens the definition of an operating agreement by:
- Making it clear that agreements among the members do not have to be designated as an operating agreement to be considered an operating agreement; and
- May be “oral, implied, in a record, or in any combination thereof.”
This is very broad language. It suggests that the operators of multi-member limited liability companies organized prior to January 1, 2004 should, at the least, review with counsel their organizational documents and course of conduct of their activities to determine whether they have inadvertently created an “implied” operating agreement that is inconsistent with their original intent. This language is of immediate concern if the operator is considering “opting in” to the New Florida LLC Act. It is also of concern to those not “opting in” but who will become subject to the act on January 1, 2015. Because of this broad language, operating agreements of newly-formed Florida LLCs should be carefully drafted to describe what does, and what does not, constitute its operating agreement. Older limited liability companies should consider adopting an amendment to their operating agreements if there is any ambiguity as to what constitutes their operating agreement.
Having determined what is, or may be, an operating agreement, let’s now look at some of the default provisions that apply under the New Florida LLC Act.
A Member’s Right to Dissociate
Under the New Florida LLC Act any member of the limited liability company, rightfully or wrongfully may dissociate from it at any time simply by withdrawing. Under the old LLC Act, a member could not dissociate prior to dissolution or winding up unless the operating agreement provided otherwise. Because this is a non-waivable default provision, members of limited liability companies formed before January 1, 2014 will automatically have a right to dissociate after January 1, 2015.
When a member dissociates:
- the members right to participate as a member in the management and conduct of the limited liability company terminates;
- the member’s fiduciary duties of loyalty and care to the limited liability company and the other members terminates with respect to matters arising after the dissociation provided the limited liability company is member managed; and
- the member continues to have a right to receive distributions from the limited liability company.
The ability to dissociate is problematical, especially for limited liability companies organized prior to January 1, 2004 which relied on the presumption that dissociation was not available to a member unless it was provided for in the operating agreement. For example, a member’s duty of loyalty and care may restrict that member from operating a competing business or require the member to bring business opportunities to the limited liability company for consideration. As another example, the limited liability may provide for capital calls on the members. A dissociated member has no such fiduciary duties or financial obligations after dissociation.
To deal with the issue of dissociation, the New Florida LLC Act provides that a member who wrongfully dissociates is liable for damages to the limited liability company and, subject to statutory exceptions, the other members for such wrongful dissociation. This should allow for the inclusion in any new operating agreement, or in the case of limited liability companies organized prior to January 1, 2104, in an amendment to the existing operating agreement, of specific provisions dealing with the unintended consequences of a wrongful dissociation through the inclusion of specific damage provisions or the inclusion of contractual as well as statutory obligations, like non-competition or non-solicitation.
The old LLC Act contained several “default” provisions that could be modified or changed by the operating agreement. The New Florida LLC Act adds a new “default” provision eliminating the concept of “Managing Member” and modifies the “default” provisions dealing with Admission of New Members, Amendments and Distributions.
Elimination of the concept of Managing Member
The New LLC Act provides that all new limited liability companies are either member-managed or manager- managed. Starting January 1, 2015, the rule will apply retroactively to all limited liability companies, including those organized prior to January 1, 2014. Unless the operating agreement specifically indicates that the limited liability company is manager- managed, it will be treated as member-managed under the New LLC Act.
The New LLC Act specifically states that the inclusion of the term “managing member” or “managing members” in the operating agreement is not, by itself, sufficient to make the limited liability company manager-managed. If the pre-January 1, 2014 limited liability company is not considered manager-managed, it is member-managed. Under the New Florida LLC Act, a member-managed limited liability company can only take actions that are approved by holders of majority of its members based on their right to participate in profits. With respect to limited liability companies organized prior to January 1, 2014 which purport to be managed by a “Managing Member,” the statutory requirement for member approval calls into question the managing member’s ability to enter into enforceable agreements and shifts control of the limited liability company from the managing member to the members as a whole.
In order to resolve the “managing member” issue, we strongly recommend that pre-January 1, 2014 limited liability companies managed by one or more “managing members” consider amending their operating agreements prior to January 1, 2015 to make it clear that they are manager-managed. Although it has been suggested that the newly broadened definition of “operating agreement” would allow the intention of the members to be “manager managed” to be implied from the general language of the pre-January 2014 operating agreement and the conduct of its members, there is no assurance that such an implication will be sufficient to give effect to the intention of the members.
Admission of New Members
The old LLC Act provided that new members could be admitted to the limited liability company by a majority in interest of the existing members. The New Florida LLC Act provides that they may be admitted only by unanimous consent.
The old LLC Act was ambiguous with respect to the vote required to amend the operating agreement or the articles of organization of the limited liability company. The New Florida LLC Act provides that amendments may only be made with the unanimous consent of the members.
The old LLC Act provided that if distributions were made on the basis of capital contributions, the relevant capital contribution would be reduced by the amount of capital returned. The New Florida LLC Act does not reduce the amount of the original capital contribution for purposes of calculating the amount of distribution to which each member is entitled.
Non-Waivable Default Provisions
The New Florida LLC Act lists seventeen of its “default” provisions which cannot be changed by the operating agreement or which only can be modified to a limited extent. We are only going to discuss a few of these. Note that these non-waivable provisions will apply to limited liability companies organized prior to January 1, 2004, as well as limited liability companies organized afterwards.
Duty of Loyalty and Care
An operating agreement may not eliminate a manager’s or a member’s duty of loyalty or care as specifically described in the New Florida LLC Act - except in cases in which it is not “manifestly unreasonable” the operating agreement may (1) alter or eliminate the aspects of the duty of loyalty specifically described another section of the New Florida LLC Act, (2) specify certain activities, such as participation in a competing business, that will not violate the duty of loyalty, and (3) alter the duty of care, but not authorize willful or intentional misconduct or a knowing violation of the law. Whether a provision in an operating agreement is “manifestly unreasonable” is specifically to be determined by a court as a matter of law.
Good Faith and Fair Dealing
An operating agreement may not eliminate a manager’s or a member’s obligation of good faith and fair dealing - neither of which is specifically described in the New Florida LLC Act - except the operating agreement may prescribe the standards by which the performance of the obligation is to be measured if the standards are not “manifestly unreasonable”. Again whether a standard is “manifestly unreasonable” is to be determined by a court as a matter of law.
Bad Faith, Willful Misconduct
An operating agreement may not relieve or exonerate a person for conduct involving bad faith, willful or intentional misconduct, of a knowing violation of the law.
Limitation on indemnification
An operating agreement may not provide for indemnification for a member or manager for, among other things, conduct involving bad faith, willfully or intentional misconduct or a knowing violation of the law or a breach of a member’s or manager’s duty or obligations of loyalty or care or good faith and fair dealing.
Approval Rights of Members
An operating agreement may not vary a member’s right to approve a merger, interest exchange or conversion.
Restrict Right to Bring Actions Against the Limited Liability Company
An operating agreement may not unreasonably restrict a member’s right to maintain a direct or derivative action against or on behalf of the limited liability company.
Special Litigation Committee
An operating agreement may not vary the provisions relating to the appointment of a special litigation committee of members or managers who are not made party to a derivative action - except the operating agreement may prohibit the limited liability company from appointing a special litigation committee.
Right to disassociate
An operating agreement may not vary the power of a person to disassociate, except the operating agreement may require notice of disassociation be of record.
Additional Appraisal Rights for Members
The old LLC Act provided members entitled to vote on a merger or conversion of a limited liability company with appraisal rights if they were entitled to vote upon the transaction.
The New Florida LLC Act provides members with appraisal rights upon the occurrence of the following events:
- Consummation of a membership interest exchange, provided the member had a right to vote upon the transaction and their interest is subject to the exchange.
- Consummation of the sale of substantially all of the assets of the limited liability company, provided the member had a right to vote upon the transaction, unless the sale is pursuant to a court order or is for cash under a plan by which the net proceeds are distributed to the members within one year of the date of the sale.
- An amendment to the governing documents of the limited liability company pursuant to which reduces the member’s interest to a fraction which may then be bought out by the limited liability company.
- An amendment to the governing documents of the limited liability company which adversely alters the rights of such member, except in connection with the issuance of or authorization of a new class of membership interests.
- An amendment to the governing documents of the limited liability company which adversely affects the members existing appraisal rights.
The operating agreement may indicate other events which would trigger appraisal rights. The operating agreement may also eliminate or modify appraisal rights. If new operating agreements do not contain appropriate language eliminating appraisal rights, or if operating agreements entered into prior to January 1, 2014 are not amended to eliminate them, each of the events described above will trigger appraisal rights.
Other Notable Provisions of the New Florida LLC Act
The New Florida LLC Act significantly changed the way Florida limited liability companies operate and are governed. For example, it includes new provisions regarding the inclusion of members with no economic interest in the limited liability company, the liability of members and managers for inaccurately filed information, the ability to file statements of authority putting third parties on constructive notice as to the ability of members or others to bind the limited liability company, new provisions relating to disputes over transaction involving conflicts of interest. The New Florida LLC Act did not change the rules regarding changing orders.
If you are responsible for a Florida limited liability company organized prior to January 1, 2014 you should contact your attorney to determine whether you should amend or restate its operating agreement in light of the New Florida LLC Act.
If you are considering organizing a new limited liability company in Florida, or if you have organized a limited liability company in Florida on or after January 1, 2014 without the advice of counsel, you should confer with counsel to determine which of the default provisions of the New Florida LLC Act that are subject to waiver or modification you want to apply to your limited liability company either in whole or as modified.
You should also be aware of your option to organize a limited liability in another jurisdiction and qualify the limited liability company to do business in Florida. The drafters of the New Florida LLC Act have indicated that it was their intention for the act to provide a middle ground between accommodating the needs of sophisticated business relationships among sophisticated investors and the day to day operations of a small business by one or more member/operators. If you are considering conducting business through a limited liability company, you need to consider whether this middle of the road approach is consistent with your objectives. For instance, Delaware may be a preferable jurisdiction for you because of its flexibility, greater body of case law, specialized judiciary (Court of Charcery) and allowance of complete waiver of fiduciary duties. In addition, the uncertainties created by the New Florida LLC Act’s expanding what constitutes an operating agreement and the prohibition against precluding a member from disassociating from the limited liability company may cause you to use a Delaware limited liability company which provides more certainty.