By Michael S. Fauver, Partner
December 2013
A new California law governing the operation of limited liability companies (“LLCs”) takes effect January 1, 2014. It replaces California’s existing law and may adversely affect California LLCs. To avoid potential disputes among members and/or managers, the members of California LLCs should review, and where appropriate amend, their operating agreements.
REVISED LIMITED LIABILITY COMPANY ACT
The new law, called the “California Revised Uniform Limited Liability Company Act” (or “RULLCA”) replaces the Beverly-Killea Limited Liability Act, which has been in place since 1994. The 1994 law will continue to govern all contracts, including operating agreements, entered into by an LLC, its members or managers, prior to 2014, as well as any vote or consent by members or managers prior to that date.
However, the new law also provides that any acts taken by a LLC, its members, or managers on or after January 1, 2014, will be governed by RULLCA, rather than the 1994 law. This could result in unintended and significant changes to the rights and obligations of the members and managers.
To protect against potential disputes and litigation, members of existing California LLCs should review their operating agreements to determine the potential impact that RULLCA may have and should make appropriate amendments prior to January 1, 2014. In addition, you should be aware of some of the more significant changes under RULLCA, detailed below:
Default Rules – RULLCA greatly increases the number of default rules for LLCs and pre-2014 operating agreements may not have addressed all of the new or modified rules. Because of how the new law is worded, members are at risk that these new default rules will apply unless they make appropriate updates to their current agreements.
Management Authority – The consent rights of members are greatly expanded under RULLCA. Depending on the current operating agreement’s language, RULLCA may effectively limit the authority of a manager to take future actions the manager could have taken prior to 2014.
Expulsion – RULLCA makes it clear members can now be expelled for certain acts pursuant to the provisions of the operating agreement (e.g., on a majority vote of the remaining members).
Impact of Operating Agreement Amendments on Transferees – Under the 1994 law, a “transferee” of a membership interest (previously called an “assignee”) doesn’t become a member unless they are admitted — thus limiting their rights as a member to solely receiving distributions associated with the membership interest. Under RULLCA, LLC members may now amend an operating agreement, without approval of the transferee, to modify, reduce or eliminate obligations owed to transferees (though this right may be tempered by the limitations of good faith and fair dealing).
Fiduciary Duties – RULLCA makes it clear that non-managing members in a manager-managed LLC do not owe fiduciary duties to the other members.
Limitations of Liability – RULLCA provides that an operating agreement may eliminate or waive a member or manager’s liability to the LLC except for (1) a breach of the duty of loyalty, (2) improper financial benefit, (3) an excess distribution, (4) intentional infliction of harm on the LLC or a member, or (5) an intentional violation of law.
Indemnification – The 1994 law provided an LLC may, but is not required to, indemnify those individuals acting on behalf of the LLC. Pre-2014 operating agreements deal with this in a variety of ways, including requiring manager or member approval or only allowing for it under certain circumstances. Under the new default rules, an LLC is required to indemnify members of member-managed LLCs and managers of manager-managed LLCs, so long as the member or manager has complied with their statutory duties.
Transfers in Violation – RULLCA provides that transfers in violation of a restriction in the operating agreement can be made ineffective as to any person who has notice of the restriction.
Please let us know if you would like assistance reviewing your current operating agreements to ensure your rights and obligations are not going to be adversely impacted by this new law.
Michael S. Fauver, Partner
MFauver@BFASLaw.com
(Direct) 805.966.7499
This Advisor is one of a series of business, real estate, employment and tax advisories prepared by the attorneys at Buynak, Fauver, Archbald & Spray, LLP. This Advisor is not exhaustive, nor is it legal advice. You should discuss your particular situation with us or with your own attorney. Our legal representation is only undertaken through a written engagement letter and not by the distribution of this Advisor.
