MEMORANDUM - REVISED UNIFORM LLC ACT
In January, 2014, Beverly-Killea Limited Liability Company Act California codified as Corporations Code §§17000-17705 will be replaced by the California Revised Uniform LLC Act (‘RULLCA”). The new act will be codified as New Title 2.6 of the California Corporation Code, as §§17701.01 to 17713.06.
As of January 1, 2014, RULLCA will automatically apply to all existing limited liability companies (“LLCs”) formed in the State of California, as well as to all foreign LLCs operating in the state and previously registered with the Secretary of State, without any “opt in” or “opt out” option or obligation.
RULLCA retains a lot of the original act’s provisions, but does modify several important rules regarding California LLCs, which are listed below. Each owner of a California LLC should review his or her operating agreement (preferably, with the help of a business lawyer) to make sure the change in the law will not affect his or her LLC negatively, and should seriously consider amending his or her LLC’s operating agreement if the change in fact does affect the LLC in a way that does not benefit the owner.
RULLCA retains the manager-managed and member-managed constructs as options. However, it now requires that a company’s articles of organization and operating agreement expressly establish management by a manager or managers. If the management option is written only in the Articles of Organization, the operating agreement should be revised to provide it. If the operating agreement remains silent regarding the management, RULLCA default rule will apply, and an LLC will be presumed to be member-managed.
Consent of the members
- Sell, lease, exchange or otherwise dispose of all, or substantially all of the LLC’s property, with or without the goodwill, outside the ordinary course of the LLC’s activity;
- Approve a merger or conversion;
- Undertake any other act outside the ordinary course of the LLC’s activity; and
- Amend the operating agreement.
RULLCA provides that the unanimous consent of all of the members of an LLC is required to:
If an operating agreement is silent about the consent requirement, and an owner of an LLC wants it to be less than unanimous for the above-referenced actions, the agreement should be modified to specifically address the member-consent requirement. Otherwise, pursuant to RULLCA, unanimous consent will be required in order for an LLC and its management to take any of the above-described actions.
The concept of a fiduciary duty of a manager will now include the duty of loyalty, the duty of care, and “any other fiduciary duty”. LLCs will be allowed to change, but not suppress, the managers’ duty of loyalty. However, RULLCA requires that any such modification be clearly stated in the operating agreement, with the informed consent of all the members.
RULLCA also provides mandatory indemnification of any member of an LLC who complies with the duties set forth therein. An LLC’s operating agreement may alter or eliminate a member or a manager’s liability to said LLC and to other members for money damages; provided, however, that a manager’s or member’s liability cannot be restricted for breaches of duty of loyalty, receipts of a financial benefit to which said party is not entitled, excess distributions, intentional inflictions of harm or intentional violations of criminal law.
Priority of the Operating agreement
Under RULLCA, an LLC’s operating agreement has a priority over its articles of organization in the event of conflicting provisions, except where third parties have reasonably relied on the articles of organization.
Member without economic interest
Under RULLCA, a person will be allowed to become a member of an LLC even if the person does not have an economic of transferable interest therein.
LLCs will now be authorized to give third parties (such as a creditor or an investor) the right to have consent over any modification of an LLC’s operating agreement.
- It is unlawful to carry on said LLC’s activities while said person remains a member of the LLC;
- There has been a transfer of all of the person’s transferable interest in the LLC, other than a transfer for security purposes or a charging order in effect under §17705.03 which has not been foreclosed;
- The person is a corporation and, within 90 days after the LLC notifies the person that it will be expelled as a member because the person has filed a certificate of dissolution or its charter has been revoked or its right to conduct business has been suspended by the jurisdiction of its incorporation and the certificate of dissolution has not been revoked or its charter or right to conduct business has not been reinstated; or
- The person is an LLC or partnership that has been dissolved and whose business is being wound up.
RULLCA’s new provisions provide that a member of an LLC can be expelled upon the unanimous consent of the other members for the following reasons:
Moreover, RULLCA modifies the requirements, and subsequent effects, of dissociation on a member, which now will be equivalent to the requirements, and subsequent effects, dissociation of a limited partner from a California Limited Partnership, as described in the California Revised Uniform Limited Partnership Act.
Ability to pre-file a Certificate of Organization
An LLC can be organized without having any members, but it is not formed until the person becoming a member files another form stating that said LLC has one (or more) member.
Power to bind
RULLCA suppresses the statutorily-developed apparent authority for LLCs: “a member is not an agent of the LLC solely by reason of being a member”. However, other California state and common laws clarify the power-to-bind issues as it relates to an agent of an LLC.
- Vary an LLC’s capacity;
- Vary the applicable law;
- Vary the power of the court;
- Eliminate the duty of loyalty, the duty of care, or any other fiduciary duty;
- Eliminate the contractual obligation of good faith and fair dealing;
- Unreasonably restrict the duties and rights of information;
- Vary the power of a court to decree dissolution;
- Except as otherwise provided in the Act, vary the requirements regarding winding up of the company’s affairs;
- Unreasonably restrict the right of a member to maintain an action;
- Restrict the right to approve a merger, conversion, or domestication to a member that will have personal liability with respect to a surviving, converted or domesticated organization;
- Restrict the rights under §17701.12(b) : “The obligations of a limited liability company and its members to a person in the person’s capacity as a transferee or dissociated member” of a person other than a member or a manager;
- Vary any provision under Article 10 (Mergers and Conversions) or Article 12 (Series Provisions);
- Eliminate the duty of loyalty of members and managers – but the operating agreement may identify specific types or categories of activities that do not violate the duty of loyalty, and specify the number or percentage of members which may authorize or ratify after full disclosure to all members of all material facts, a specific act or transaction that otherwise would not violate the duty of loyalty.
The following are items that an operating agreement cannot do under the new RULLCA provisions:
RULLCA’s default rules provide for mandatory indemnification of any member in a member-managed LLC and any manager of a manager-managed LLC who complies with the duties set forth in the Act. However, RULLCA provides that an operating agreement may alter or eliminate such indemnification and may limit or eliminate completely a member or manager’s liability to the LLC and other members for money damages, except with respect to: breaches of the duty of loyalty; receipt by such party of a financial benefit to which such party was not entitled; liability for excess distributions; intentional inflictions of harm (on a person or the LLC); or intentional violations of criminal law.