The Alabama LLC Act of 2014 was signed into law by Governor Bentley in March 2014, bringing with it many changes that you need to know. Although the Act went into effect on January 1, 2015, it only applies to LLCs formed after that date and previously formed LLCs that elect to have the new law apply to them. But beginning on January 1, 2017, the Act will apply to all LLCs, regardless of their date of formation. The drafting process of the Act extended over a period of five years, with the Advisory Committee of the Alabama Law Institute comparing the current Alabama LLC laws to the Revised Uniform Limited Liability Company Act, the ABA’s Revised Prototype Limited Liability Company Act, and the laws of other states including Texas, Virginia, Colorado, and Delaware.
Generally, the Act strives to give maximum effect to the principles of freedom of contract and to the enforceability of a limited liability company agreement. The Act has default provisions which may be overridden by an LLC agreement, meaning if an LLC agreement is silent on a matter discussed in the Act, the Act’s default provisions control. But some matters, such as the requirements in winding up and liquidating a dissolved LLC, the contractual covenant of good faith and fair dealing between parties to an LLC agreement, and the prohibition of limiting liability for breaching this covenant, may not be altered by an LLC agreement.
The Act has the ability to change many aspects of conducting business as an LLC, both within the company and in dealing with third parties as well. Some minor changes include modifying definitions of terms, lessening the requirements for the filing of the Certificate of Formation, and granting an LLC the ability to limit the inspection rights of members to access and use company information. But the Act also reflects major shifts in both what an LLC is allowed to do as a business and the governance structure of LLCs. For instance, the Act now allows an LLC to conduct any lawful activity, including non-profit activities, which was not allowed under the previous law. The Act also allows an LLC previously dissolved to be reinstated provided all of the current members consent and the reinstatement will not interfere with third parties’ rights. But the biggest change of all will affect each and every LLC in Alabama: not only must every LLC have a company agreement, but that agreement can be in writing, oral, or implied.
THE RISKY BUSINESS OF ORAL AND IMPLIED LLC AGREEMENTS
Oral LLC agreements and agreements implied by the conduct of the members can be problematic if LLC members either do not have a written LLC agreement or do not carefully draft the agreement. Under the Act, the requirement that each LLC must have a company agreement will always be met anytime activities and affairs of the LLC are carried on, as no such activities and affairs may be carried on without some agreement to provide authority to conduct such activities. This means if you do not put your LLC agreement in writing, you run the risk that the terms of the agreement may not be clearly stated or understood by all owners, or that such terms may fail to address important or relevant issues. The drafters also took the important step of allowing members to specify the manner in which an LLC agreement can be modified, meaning members can (and likely should) allow for only written modifications to LLC agreements.
But the drafters did not discuss a vitally important area of law that directly affects oral and implied LLC agreements: the statute of frauds. Under the statute of frauds, evidence of a contract or agreement that is not to be performed within one year of its making is not valid, unless the contract is in writing and signed by the party against whom the contract is to be enforced. So how does this affect LLC agreements under the Act? The Delaware courts and legislature encountered this exact situation in 2009, and provided one possible answer. In Olson v. Halvorsen, 986 A.2d 1150 (December 15, 2009), Olson attempted to convince the Delaware Supreme Court that Delaware LLC law overruled the statute of frauds and precluded its application to operating agreements, but the Delaware Supreme Court disagreed. According to the court, Delaware LLC law did not guarantee enforcement of all oral or implied LLC agreements. Rather, Delaware LLC law recognized that although an LLC agreement could be oral or implied, it still must comply with the statute of frauds and be in writing.
But that was not the end of the story. Last year, the Delaware legislature explicitly overruled Olson by amending its LLC Act to specify that LLC agreements are not subject to any statute of frauds. This shows a clear intent by one state legislature to strengthen its policy to protect oral and implied LLC agreements.
As it stands now, absent action by the state legislature, the Alabama courts could come to the same conclusion as the Delaware court in Olson, in effect making the addition of oral and implied LLC agreements under the new Act moot. Only time will tell – but until that time, be sure to protect your business and yourself by putting your LLC agreement in writing.