Highlights of CA s New Limited Liability Company Act

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2 Highlights of CA s New LLC Act: Silence May Not Be Golden Presented by: Kim W. Scala Archer Norris, Partner November 13, 2013

3 Status of the Statutory Scheme Regulating LLCs Current Law ( Old Act ) Beverly-Killea Limited Liability Company Act Title 2.5 of the California Corporations Code Repealed January 1, 2014 RULLCA ( New Act ) California Revised Uniform Limited Liability Company Act Title 2.6 of the California Corporations Code Operative January 1, 2014 (the Effective Date )

4 Similarities Between the Old Act and the New Act LLC is a distinct entity from its members Members generally have limited liability Formed when articles are filed Operating agreement is the foundational contract among members LLC may exist for any lawful purpose except as specified Retains member-managed and manager managed constructs Default is that all members manage May not eliminate the duty of loyalty Most definitions are unchanged

5 Applicability of the New Act Pursuant to : The New Act applies: To all domestic LLCs existing on or after January 1, 2014 (the Effective Date) To all foreign LLCs registered with the Secretary of State prior to, on or after the Effective Date (unless cancelled) To all actions taken by the managers or members of a LLC on or after the Effective Date.

6 Applicability of the New Act The New Act applies: Only to the acts or transactions by a LLC, the members or managers occurring, or contracts entered into by the LLC, members or managers, on or after the Effective Date. The prior law governs all acts or transactions by a LLC, members or managers occurring, or contracts entered into, prior to that date. Any vote or consent by the managers or members of a LLC prior to the Effective Date, shall be governed by prior law.

7 Formula for Confusion, Lack of Agreement and Disputes NEW DEFAULT PROVISIONS + ADDITIONAL MANDATORY PROVISIONS POTENTIAL FOR UNINTENDED CONSEQUENCES AND DISPUTES * *Recommended solution: review the Operating Agreement and confirm understanding and agreement of all members (and manager, if applicable)

8 Highlights of Changes to Default and Mandatory Provisions Conflict between articles or organization and the operating agreement Default rights of members Indemnification Reimbursement Fiduciary duties Dissociation Amending the operating agreement Transferees Prohibitions

9 Conflict Between Articles and Operating Agreement Old Act articles of organization control New Act operating agreement prevails as to members, dissociated members, transferees, and managers the record prevails as to other persons to the extent they reasonably rely on the record.

10 Default Rights of Members See Establishing a manager- managed LLC: Old Act Unless the articles provide that management is vested in manager(s), an LLC is managed by the members. New Act - Both operating agreement and articles must establish that an LLC is manager-managed or the LLC is member-managed

11 Default Rights of Members Management in member-managed LLC: A difference arising among members as to a matter: In the ordinary course of business majority of members decide Outside the ordinary course of business consent of all members is required Management in a manager-managed LLC: Each manager has equal rights A difference arising among managers in the ordinary course of the activities of the LLC - to be decided by majority vote

12 Default Rights of Members A difference relating to acts outside the ordinary course of activities not covered The consent of members is required to do the following: Sell, lease, exchange, or otherwise dispose of all/substantially all of the LLC s property Approve a merger or conversion Undertake any other act outside the ordinary course of the LLC s activities Amend the operating agreement. Dissociation of a member who is also a manager removes the person as a manager.

13 Indemnification and Reimbursement Old Law- Operating agreement may provide for indemnification, except for breach of fiduciary duties New Law An LLC shall reimburse for payment made and indemnify for any debt or liability incurred by member/manager in the course of management, provided such person complied with fiduciary duties.

14 Fiduciary Duties Old Act - Fiduciary duties of manager or, in member-manager LLC, a member, may only be modified with the informed consent of the members New Act - Specifies the fiduciary duties owed by member in a member-managed LLC to LLC and other members

15 Fiduciary Duties Duty of loyalty To account to LLC and hold as trustee for it any property or profit or benefit in the conduct of LLC activity, including the appropriation of an LLC opportunity To refrain from dealing with an LLC in the conduct of the LLC s activities on behalf of a party having an adverse interest to an LLC To refrain from competing with an LLC in the conduct of its activities Duty of care to LLC Is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct or a knowing violation of the law

16 Dissociation Old Act Articles or OA may provide that a member may withdraw, resign, or retire from LLC or that the member shall not have the right to withdraw. Unless explicitly provided, withdrawn member shall not be entitled to payment for the member's interest in the LLC, and the withdrawn member shall have only the right of a holder of an economic interest.

17 Dissociation New Act Introduces the concept of dissociation and devotes an entire chapter (Chapter 6) to member dissociation. A member has the power to dissociate at any time by withdrawing, unless the OA explicitly provides otherwise. Provides for automatic dissociation, in certain situations Details what happens on dissociation: Person s right to participate as a member in the management and conduct of the LLC terminate If member-managed, the person s fiduciary duties as a member end

18 Amending the Operating Agreement (a) Makes explicit that an operating agreement may specify that its amendment requires the approval of a person that is not a party to the OA or the satisfaction of a condition (and an amendment that doesn t include the required approval or satisfaction of the condition is ineffective.)

19 Transferees Old Act Limited assignment provisions New Act Expanded provisions (b) Makes explicit that LLC and members obligations to a transferee or dissociated member are governed by the OA and provides that an amendment to OA made after a person becomes a transferee or dissociated member is effective with regard to any debt, obligation, or other liability of the LLC or its members to the person in the person's capacity as a transferee or dissociated member.

20 Prohibitions Old Act very few Alter definitions contained in the Act Eliminate requirement that articles may not be amended by less than majority vote Eliminate right of members to assert that an operating agreement provision terminating the member s interest or return of capital contribution was unreasonable Eliminate right to vote on dissolution Restrict members right to receive certain information and inspect records

21 Prohibitions New Act see An operating agreement may not: Alter definitions contained in the Act Reduce the percentage of members required to approve amendment of the articles to less than a majority Eliminate fiduciary duty of manager/member or vary the duty of loyalty or duty of care, except as specifically provided Eliminate obligation of good faith and fair dealing Unreasonably restrict members rights to inspect books and records Vary the power of a court to decree dissolution Restrict members rights to approve merger or conversion, except as specifically provided Eliminate the right of an LLC to sue and be sued Eliminate the right to bring a class action Vary obligation of aggrieved party to petition court re: records Vary members rights re: dissociation except as provided

22 Partner Kim W. Scala An MBA and seasoned businesswoman, Kim Scala brings an insider s creativity and understanding to her business law practice. She negotiates complex real estate, financing and commercial transactions for sophisticated clients and advises medium-sized clients and emerging growth businesses in a wide range of corporate and general business matters and agreements. My business background informs my passion for pursuing creative possibilities rather than focusing on problems. Helping my clients achieve their goals not limiting them is how I define excellence in business law. Phone: kscala@archernorris.com