California enacted the Revised Uniform Limited Liability Company Act (“RULLCA” or “Act”) on January 1, 2014 which incorporated a few significant changes to the rules governing limited liability companies (“LLCs”). All acts and transactions of existing LLCs that occur on or after January 1, 2014 are controlled by RULLCA, particularly in situations where the LLC’s existing operating agreement is silent.
Although many of the code sections remain unchanged from the Beverly Killea Limited Liability Company Act (“Beverly Killea”), certain provisions in existing LLC operating agreements may now be in conflict with RULLCA. It is recommended that members and managers of existing LLCs be informed of the significant changes under the new laws, even though there is no legal obligation to amend existing operating agreements. Updating existing operating agreements with the Act’s provisions will prevent any confusion with Beverly Killea code sections over actions taken by the LLC after January 1, 2014. The most notable changes affecting existing operating agreements are addressed below.
Transfer Restrictions. Many operating agreement templates for existing LLCs contain provisions regarding transfers of economic interests and membership interests. The Act has replaced the term “Economic Interest” with “Transferable Interest” and “Assignee” with “Transferee.” Section 17706.02 provides that if a member transfers its entire “transferable interest” for any reason other than for (i) security purposes, or (ii) a charging order in effect under Section 17705.03 that has not been foreclosed, such a transfer could result in the expulsion of the member upon the unanimous vote of the non-transferring members. Existing operating agreements that likely do not address this issue could cause a member’s unwanted, and unexpected expulsion. The expelled or “dissociated” member loses all voting rights and the ability to participate in the management of the LLC. It is a good practice pointer for attorneys to expressly address this issue in any amendments, and to inform members and managers of this new provision under the Act.
Fiduciary Duties. Existing operating agreements may contain provisions which modify the fiduciary duties of the Manager, specifically with regards to a Manager (in a manager-managed LLC) being permitted to engage in competing activities or other circumstances that could potentially violate the duty of loyalty. RULLCA states that any modifications to the fiduciary duties in Sections 17701.10 and 17704.09 require the informed written consent of all the members in a written operating agreement. Thus, it is recommended that if an existing operating agreement contains modified provisions to a Manager’s fiduciary duties, that an amendment be drafted containing a written acknowledgement and consent of the Members to those modified provisions.
Liability. Members in a manager-managed LLC, and members in a member-managed LLC no longer have blanket liability protection, even if the operating agreement specifies otherwise. Members in a manager-managed LLC will be held liable for their own tortious conduct, if they knowingly receive improper distributions, and for alter ego liability. (Sections 17701.10(g), 17703.04, 17704.06) Thus, any provisions in an existing operating agreement authorizing a member or manager’s blanket protection from liability without exceptions under the Act should be amended.
The foregoing are a few of the significant issues that existing LLCs face in light of the new Act.
This article is for information purposes only and does not contain or convey legal advice. The information herein should not be relied upon in regard to any particular facts or circumstances without first consulting with a lawyer. For specific questions related to this article or your particular legal situation, please contact the Law Office of Ashley M. Peterson, and we would be happy to answer whatever legal questions you may have.