Source: http://www.llclawmonitor.com/articles/revised-uniform-llc-act/
Timestamp: 2013-12-08 08:51:56
Document Index: 392405750

Matched Legal Cases: ['§ 17001', '§ 17701', '§ 17051', '§ 17704', '§ 17050', '§ 17702', '§ 17704', '§ 401', '§ 17153', '§ 17005', '§ 17704', '§ 17701', '§ 17713', '§ 17713']

Revised Uniform LLC Act : LLC Law Monitor
Home > Revised Uniform LLC Act > California's New LLC Act Is Coming Soon - Are You Ready?
Posted on September 17, 2013 by Doug Batey
California’s new LLC Act becomes effective on January 1, 2014. The new act, the Revised Uniform Limited Liability Company Act (RULLCA), will completely replace the current statute, the Beverly-Killea Limited Liability Company Act (Beverly-Killea).
RULLCA was signed into law by Governor Brown in September 2012. The new law is based in large part on NCCUSL’s Revised Uniform Limited Liability Company Act, which has now been adopted in eight states. The passage of RULLCA brings California’s LLC statute more in line with the LLC laws of other states, which should facilitate interstate transactions.
The substance of RULLCA is generally similar to Beverly-Killea, but there are a number of significant changes. I describe some of those below, but my list is not exhaustive.
Operating Agreement. Beverly-Killea defines an operating agreement as any written or oral agreement between an LLC’s members as to the affairs and the conduct of the LLC. Cal. Corp. Code § 17001(ab). RULLCA goes further by allowing an operating agreement to be written, oral, or implied. § 17701.02(s). The significance here is that, subject to the limits of Section 17701.10, an LLC’s operating agreement can override RULLCA’s default provisions.
Manager-managed. In both the old and the new statutes an LLC is member-managed unless the proper steps are taken to establish it as manager-managed, but RULLCA changes the requirements. Under Beverly-Killea an LLC is member-managed unless the articles of organization contain a statement that the LLC is to be managed by one or more managers. §§ 17051(a)(7), 17150. Under RULLCA an LLC is member-managed unless the LLC’s articles of organization and the operating agreement state that it is manager-managed. § 17704.07.
Shelf LLCs. Under Beverly-Killea an LLC exists when its articles of organization are filed, but it is not formed until the members enter into an operating agreement. § 17050. RULLCA, on the other hand, does not require the admission of members in order for an LLC to be formed: “A limited liability company is formed when the Secretary of State has filed the articles of organization.” § 17702.01(d).
Non-economic Member. Beverly-Killea assumes that members have economic rights. For example, its definition of a membership interest includes the member’s economic interest, such as the right to share in profits, losses, and distributions. RULLCA, in contrast, allows an LLC to include members that have no economic interest and make no capital contributions. § 17704.01(d). The NCCUSL comment on this section indicates that the purpose of this provision is to “accommodate business practices and also because a limited liability company need not have a business purpose.” NCCUSL, Revised Uniform Limited Liability Company Act, § 401(e) cmt.
Fiduciary Duties. RULLCA provides a more detailed description of the fiduciary duties of LLC managers and managing members than does Beverly-Killea, and constrains the ability of the operating agreement to eliminate or limit fiduciary duties.
Beverly-Killea incorporates by reference the fiduciary duties of a partner in a partnership: “The fiduciary duties a manager owes to the limited liability company and to its members are those of a partner to a partnership and to the partners of the partnership.” § 17153. The members may modify those duties, but only in a written operating agreement with the informed consent of the members. § 17005(d).
RULLCA instead sets out the fiduciary duties of managers and managing members in some detail, and limits or “cabins in” the fiduciary duties to the duty of care and the duty of loyalty. The limits are evident in the introductory sentence: “The fiduciary duties that a member owes to a member-managed [LLC] and the other members of the [LLC] are the duties of loyalty and care under subdivisions (b) and (c).” § 17704.09(a). The duty of loyalty is limited to enumerated activities, and the duty of care is limited to refraining from grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.
RULLCA limits the extent to which the members can modify the managers’ or managing members’ fiduciary duties. Any modification of the fiduciary duties can only be done by a written operating agreement. Neither the duty of care, the duty of loyalty, nor the contractual duty of good faith and fair dealing may be eliminated, and the duty of care may not be unreasonably reduced. § 17701.10.
There is one oddity in RULLCA’s fiduciary duty rules. Section 17704.09 comprehensively defines the fiduciary duties of LLC members and managers and appears to exclude any other fiduciary duties. But Section 17701.10(c)(4) says that an operating agreement may not eliminate “the duty of loyalty, the duty of care, or any other fiduciary duty.” (Emphasis added.) A California court may at some point have to resolve this inconsistency, unless it is first clarified by an amendment to the statute.
Effectiveness. RULLCA’s general rule is that it applies to all LLCs after January 1, 2014: “Except as otherwise specified in this title, this title shall apply to all domestic limited liability companies existing on or after January 1, 2014.” § 17713.04(a).
Sub-paragraph (b) provides that RULLCA applies only to acts or transactions by an LLC or its members or managers occurring, or contracts entered into by the LLC or its members, on or after January 1, 2014. § 17713.04(b). Those acts which take place before that date will be governed by Beverly-Killea. This section appears intended to cover issues such as the authority of a manager, breaches of fiduciary duty, and so on, that relate to actions occurring before RULLCA’s effective date.
There is an unfortunate ambiguity in RULLCA’s transition rules, however. As some commentators have pointed out, (1) sub-paragraph (b) states that Beverly-Killea governs all “contracts entered into by the [LLC] or by the members or managers of the [LLC]” prior to January 1, 2014, and (2) an LLC’s operating agreement is a contract between the members. From this they posit that RULLCA was intended to apply only to operating agreements entered into after January 1, 2014.
That would be a surprising result, given that RULLCA consistently uses the defined term “operating agreement” when it refers to the member agreement that governs an LLC. It would also be a poor result from a public policy standpoint, because then all pre-existing LLCs would continue to be governed indefinitely by Beverly-Killea, unless and until they amend or restate their operating agreement or otherwise opt in to the new statute. That is probably not what the drafters of this section and the legislature intended, but predicting how a California court would resolve the issue is a risky business.
Comment. RULLCA makes a variety of other changes to California’s LLC statute. As the end of the year approaches, California’s business lawyers will be reviewing the new law and attending legal education seminars to bring themselves up to speed on the new Act. I expect many will be alerting their clients about the new law and recommending that they review their operating agreements for consistency with RULLCA.
Tags: Beverly-Killea, Fiduciary Duties, NCCUSL, Revised Uniform LLC Act, non-economic member, operating agreement, shelf LLCs
Posted on June 4, 2013 by Doug Batey
The Florida legislature recently passed unanimously a new limited liability company statute (the New Act), and Governor Scott is expected to sign the bill shortly. The New Act is based substantially on the Revised Uniform Limited Liability Company Act (RULLCA), but with some variations. RULLCA is a uniform law recommended by the National Conference of Commissioners on Uniform State Laws (NCCUSL).
RULLCA was released by NCCUSL in 2006, but until last September only five states had adopted it: Idaho, Iowa, Nebraska, Utah, and Wyoming. In September 2012 New Jersey and California became the first major commercial states to adopt RULLCA. I described the adoptions by California and New Jersey here.
Upon signing by the Governor, Florida’s New Act will be effective January 1, 2014, and will apply to all LLCs formed thereafter. LLCs formed prior to that date are not subject to the New Act until January 1, 2015, unless they elect to be governed by the New Act during the transition period.
The New Act is a major update to Florida’s LLC law, and the changes are numerous. The Bill Summary, prepared by the Senate’s Judiciary Committee, summarizes many of the most significant changes. Florida lawyers Gregory Marks, here, and Charles Rubin, here, have also provided useful summaries of the many changes made by the New Act.
RULLCA has been criticized by commentators and has not been widely adopted. But with Florida’s adoption (even with some significant deviations from RULLCA) and last year’s passage by California and New Jersey, it appears that momentum among the states is increasing.