The California Revised Uniform Limited Liability Company Law, generally referred to as RULLCA, goes into effect January 1, 2014. It completely replaces the current law which has been in place since 1994 and was known as the Beverly-Killea Limited Liability Company Act. Thus California Corporations Code §§ 17000 through 17656 have been replaced with §§ 17701.01 through 17713.13. The new law applies to all existing California LLC’s and foreign LLC’s registered with the California Secretary of State as of the effective date. The new law is a modified version of the Revised Uniform Limited Liability Act put forth by the National Conference on Uniform State Laws in 2006. The legislative intent was to bring California law into conformity with the laws of the other states, thereby arguably facilitating the operation of multi-state businesses as well as to reflect case law developments since Beverly Killea was originally adopted. However, it should be noted that as California was one of the first states to so act and the new law contains many opportunities for confusion to arise, care and attention should be given to the new environment which will come into effect with the coming New Year.
Selected Items Worthy of Immediate Note
Amendments to Operating Agreement May Call Into Question Authority of Managers
As there are no “opt-in” or “opt-out” provisions, there is no requirement that any new filings be made with the Secretary of State with respect to existing registered LLCs. Nor is there a requirement that operating agreements be amended. However, the new law applies to operating agreements entered into on or after January 1, 2014 as well as to actions taken by managers or members subsequent to that date. It is thus unclear whether an amendment, made subsequent to January 1, 2014, to a pre-existing operating agreement, will cause the entire operating agreement to become subject to the new law rather than just the specific amendment. This can pose some significant potential traps for the unwary.
Under the prior law, the unanimous consent of all members was required only with respect to certain limited actions unless otherwise stated in the operating agreement. Under RULLCA, the consent of all members in a manager-managed LLC is required with respect to each of the following acts which may not have previously been the case:
- sell, lease, exchange or dispose of all, or substantially all, of the limited liability company’s property, with our without the goodwill, outside the ordinary course of the limited liability company’s activities;
- approve a merger or conversion of the LLC;
- undertake any act outside the ordinary course of the limited liability company’s activities; or
- amend the operating agreement.
While it may have been the practice in many industry sectors for existing operating agreements to have provided for great flexibility in these areas, this will no longer be the case for entities whose operating agreements may be deemed to have come under the purview of these new provisions and for new entities. Managers might find that actions previously taken which were thought to be properly authorized are being questioned if the operating agreement had been amended in any manner and approval of all members had not been obtained.
Duty of Care
Significant amendments have also been made with respect to the duty of care, loyalty and other aspects of the fiduciary duty owed by managers and there is a lack of clarity as to what may or may not be modified in the operating agreement relating to such duties. It is noted that the California approach varies significantly from the Delaware model in this area.
Foreign LLCs registered in California are also subject to the RULLCA with very little specificity as to what may or may not be subject to California provisions. Section 17708.01 of the RULLCA states that the law of the state or other jurisdiction under which a foreign LLC is formed governs all of the following: i) the organization of the LLC, its internal affairs, and the authority of its members and managers; and ii) the liability of a member as member and a manager as manager for the debts, obligations or other liabilities of the LLC. The foregoing leaves much room for interpretation such as, for example, just what constitutes an “internal affair?”
The foregoing are merely limited highlights of issues that should be considered as the RULLCA comes into effect. This would be a good time to review existing agreements and procedures with counsel regarding adapting to the new post RULLCA environment in 2014.