A new California law governing Limited Liability Companies (“LLCs”) took effect January 1, 2014. This new law automatically applies to existing LLCs. The new law, the California Revised Uniform Limited Liability Company Act (“RULLCA”), will replace existing California LLC law, which has been in place since 1994. RULLCA provides that any acts taken by an LLC, its members, or managers on or after January 1, 2014 will be governed by the new law. The following are a few examples of changes in the new law that you should be aware of, and which may require you to amend an existing operating agreement.
1. Conflicts between Existing Operating Agreements and New Law. The new law will apply to all existing and newly formed California LLCs and to all foreign LLCs that are registered to do business with the California Secretary of State. The new law does not require existing companies to file any new or special documents to come under its governance – it will apply automatically to existing LLCs. This means that any operating agreements drafted pursuant to the old law may not be in compliance with the new law and will need to be amended.
2. Conflicts between Operating Agreements and Articles of Organization. Contrary to the old law, the new law provides that if there is a conflict between the terms of an LLC’s operating agreement and its articles of organization, the operating agreement will control. Therefore, any existing LLC that has been relying on a statement in its articles must amend its operating agreement to eliminate the conflicting provision, or be subject to the change.
3. Designation of LLC as “Manager-Managed”. Under the old law, an LLC was by default member-managed unless the articles of organization stated otherwise. However, under the new law, an LLC is by default member-managed unless both the articles of organization and the operating agreement state otherwise. Thus, an existing manager-managed LLC that relies solely on its articles of organization to designate the LLC as manager-managed must amend its operating agreement accordingly if it wishes to avoid becoming a member-managed LLC by default.
4. Member Consent Requirements. Under the new law, unless expressly provided otherwise in the LLC’s operating agreement, the unanimous consent of the members is required to carry out any of the following acts: (i) selling, leasing, exchanging, or otherwise disposing of all, or substantially all, of the LLC’s property outside the ordinary course of business; (ii) entering into a merger or conversion; (iii) undertaking any act outside the ordinary course of the LLC’s activities and (iv) amending the operating agreement for the LLC. Under the old law, absent a lower voting threshold established in the LLC’s articles of organization or operating agreement, unanimous member approval was required only for amendments to the articles of organization and the operating agreement. Under the new law, if such decisions and actions are to require only the approval of the manger(s), or fewer than all of the members, the operating agreement must expressly so provide.
5. Dissociation Events. Something that is completely new under the new law is automatic dissociation events. Under the old law, dissociation did not exist. However, the new law provides that certain events automatically result in a member’s dissociation and change of status to that of a transferee (under which there is retention of economic rights but loss of rights to participate in management of the LLC or obtain information). Dissociation events under the new law include the following: (i) the death of a member who is an individual; (ii) if the LLC is managed by its members, the appointment of a guardian or conservator for an individual who is a member; (iii) if the LLC is member managed, a judicial order that a member who is an individual is incapable of performing the member’s duties; (iv) if the member is a trust, the trust’s entire interest in the LLC is distributed, and (v) if the LLC is member managed, a member becomes a debtor in bankruptcy. Under the new law, if any of these events occur the member is automatically dissociated. Further, a person who is both a member and a manager, and who becomes dissociated, is automatically removed as manager. If it is the intent of the LLC members that no such automatic dissociation or removal occur then the operating agreement should address this issue.
6. Fiduciary Duties. While the old law only provided that the fiduciary duties of a manager to the LLC and its members are those of a partner to a partnership, the new law clarifies, and perhaps broadens, a manager’s fiduciary duties to include the duties of loyalty and care. Under the new law, the duties of loyalty and care and any other fiduciary duty of a manager cannot be eliminated but may be modified to some extent by informed consent of the members in writing.
7. Indemnification. Unless the operating agreement provides otherwise, the new law requires the LLC to indemnify members of a member-managed LLC and manager of a manager-managed LLC as long as the person being indemnified has complied with his or her duties under the new law. The prior law permitted the LLC to indemnify any person but did not go as far as the new law to mandate indemnification. Accordingly, it is important for managers and members to consider whether any limitations or requirements should be placed on the mandatory indemnification under the new law.
There are significant substantive differences between the old law and the new law. The above list is just an example of some of these differences. It is important that you are aware of these changes and that you review your existing operating agreements to determine whether amendments or modifications are necessary.
Rad|Kro is well-versed in RULLCA and its ramifications. If you would like additional information on the new law or assistance with reviewing and modifying your existing LLC agreements, we’re here to help.