On January 1, 2014, California’s existing limited liability company act, known as the Beverly-Killea Limited Liability Company Act, will be replaced by the California Revised Uniform Limited Liability Company Act (the “Revised Act”). The Revised Act applies to both existing LLCs and LLCs formed in California after January 1, 2014. Generally speaking, the Revised Act does not drastically change how limited liability companies (“LLCs”) are formed in California; however, there are some substantive changes that will affect how LLCs are operated which may require changes to an existing LLC’s operating agreement.
New Default Rules
The Revised Act provides for more “default” rules that will apply to all LLCs in cases where an operating agreement is silent on a particular issue. For example, the Revised Act states that LLCs will bepresumed to be member-managed unless the operating agreement expressly provides otherwise (the owners of the LLC are responsible for managing the company in a member-managed LLC, whereas a manager-managed LLC is operated by managers who are appointed by the members to run the company). Similarly, in the event an LLC is manager-managed, unless the operating agreement specifically provides otherwise, the “default” rules of the Revised Act state that the consent of all members of a LLC is required to do any of the following:
· Sell, lease, exchange, or otherwise dispose of all, or substantially all, of the LLC’s property, with or without the goodwill, outside of the ordinary course of the LLC’s activities;
· Approve a merger or conversion under the Revised Act;
· Undertake any other act outside the ordinary course of the LLC’s activities; or
· Amend the operating agreement.
The Revised Act does provide that there are certain matters which an LLC may not modify in its operating agreement, however, in most cases under the Revised Act, the “default” rules can be varied by the terms of the written operating agreement. For this reason, it is imperative that a LLC pay close attention to the terms of the Revised Act so that its operating agreement expressly addresses the issues of management and member consent, among other matters, so that the operating agreement accurately reflects the intent of the members and potential conflict among the members is avoided.
Other Key Changes
Other important changes under the Revised Act include (1) more clearly defined fiduciary duties of members and managers; (2) the right to modify (but not eliminate) a manager’s duty of loyalty to the company, provided the modification is clearly stated in a company’s operating agreement and the company obtains the informed consent of the members; (3) 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 Revised Act; (4) the ability alter or eliminate mandatory indemnification in the operating agreement; (5) the right limit or eliminate completely a member or manager’s liability to the LLC and other members for money damages, except in certain circumstances such as (among other things) a breach of the duty of loyalty or intentional violations of criminal law.
Thus, while existing LLCs will not be required to file any additional documents in order to comply with the Revised Act, the current operating agreements of these LLCs may not address certain matters that are now subject to the “default” rules of the Revised Act.
If you have an existing California LLC and operating agreement, we highly recommend that you review your operating agreement with an attorney to determine what changes, if any, are necessary to ensure that your company will be compliant with the Revised Act when it goes into effect January 1, 2014.
