Written By: Roger Brothers, Esq.
Buchman Provine Brothers Smith LLP
San Francisco, California
Governor Jerry Brown signed S.B. 323 on September 21, 2012, in order to enact the California Revised Uniform Limited Liability Company Act (the “RULLCA”) into law. The new law will not take effect until January 1, 2014, but will apply to all limited liability companies—both California-based and foreign—that are registered with the California Secretary of State as of that date. The new set of laws will be codified under Title 2.6 of the California Corporations Code at §§17701.01–17713.13, displacing the existing Corporations Code sections that govern LLCs (the Beverly-Killea Limited Liability Company Act, Corp C §§17000-17656 (“Beverly-Killea Act”)).
The RULLCA is based on the Revised Uniform Limited Liability Company Act adopted by the National Conference of Commissioners on Uniform State Laws, with modifications to include certain aspects of existing California law.
The purpose of the RULLCA is to clarify the issues that existed under the Beverly-Killea Act. The RULLCA will provide a wider breadth of default rules that will apply to all LLCs in situations where an operating agreement is silent as to a particular issue. The intended benefit of enacting the RULLCA was to coordinate California’s LLC laws with the LLC laws of other states, thereby making it easier for businesses to operate across state lines.
Although the RULLCA will have a substantive effect with respect to the manner in which LLCs are governed in California, existing LLCs will not be required to file any additional documents in order to comply with the new legislation.
Current law governing LLCs dictates that an LLC’s operating agreement serves as the foundation pursuant to which the LLC is operated. The
RULLCA provides detailed provisions specifying which RULLCA sections an LLC may supersede in its operating agreement and which provisions are precluded from being overridden.
Some notable features of the RULLCA include:
· The RULLCA more explicitly defines the consequences of an LLC member who chooses to dissociate from the LLC.
· The RULLCA states that LLCs will be presumed to be member-managed unless the operating agreement provides otherwise. The RULLCA maintains the option for LLCs to be either member-managed or manager-managed.
· The fiduciary duties of members and managers are more concretely defined by the RULLCA for LLCs operating under either manager-managed or member-managed structures.
· An LLC’s gross negligence standard for its duty of care remains unchanged.
· The RULLCA limits operating agreements with respect to the manner in which the fiduciary duties of members or managers of an LLC may be altered or diminished. The RULLCA also establishes limitations and restrictions for LLCs with regard to the indemnification of its members and managers from liability for money damages arising from breaches of duty.
· The RULLCA preserves the existing provisions governing LLC dissolutions, wherein minority members have the right to seek judicial dissolution of an LLC and majority members have the right to buy out the minority at fair value in order to continue operating an LLC.
· The RULLCA does not change existing provisions of the law that relate to interactions with the California Secretary of State’s office.
· The provisions governing mergers and conversions of LLCs and dissenter’s rights remain intact under the RULLCA, and the rights of LLC members to institute class actions and derivative actions also remain unchanged.
The RULLCA is not without its challenges. Detractors of the RULLCA cite at least one practical issue regarding the application of the new set of laws. The RULLCA states in Section 17713.04(a) that it will apply to all domestic LLCs existing on January 1, 2014, and to all actions taken by the managers or members of a limited liability company on or after that date. However, the next subdivision states that the RULLCA applies only to contracts entered into after January 1, 2014, and that prior law will continue to apply to contracts entered into before that date. The question left unanswered is, “which law governs if an operating agreement entered into before January 1, 2014, is amended after RULLCA’s effective date?” It is unclear whether only the amendment will be subject to the RULLCA, or if the amendment will drag the entire agreement into the new law.
LLC members and managers should ensure that they have a clear understanding of the extent to which the RULLCA will impact the governance of LLCs formed before and after January 1, 2014.