After a long 25-year tenure, Arizona’s Limited Liability Company Act will be retiring soon, to be updated by a comprehensive new law, signed by Governor Ducey this last legislative session. I had the distinct pleasure of working alongside a small group of Arizona business lawyers over the past handful of years in drafting the new LLC law.
Generally, the new Arizona LLC Act is based upon the Revised Uniform Limited Liability Act produced by the Uniform Laws Commission. Uniform laws are advantageous because they provide a wider body of case law as relevant precedent, considering that the underlying statutory language among the adopting states is the same. They also help reduce the amount of litigation, as potential litigants see the results of how judges decide issues in other states who have adopted the Uniform LLC Act. Uniform laws also allow us to participate in a greater wealth of commentary by lawyers and academics from around the country.
There are many innovations in the new Act. Here are a few:
- Centralized list of what statutory default rules can, and cannot, be changed in an Operating Agreement
- New default rules for member voting
- Statutory indemnification rights for managers
- Standards for fiduciary duties and duty of good faith and fair dealing
- Dissolution procedures for managing creditor claims
- Flexible remedies in derivative actions and institution of Special Litigation Committees to evaluate such claims
- Clarification on treatment of foreign protected series LLCs
The new Act will govern LLCs formed after September 1, 2019, as well as those existing companies who opt-in, and will govern all LLCs after September 1, 2020.
Although your existing Operating Agreements may largely be compliant with the new Act, be mindful that the new Act will impose its default rules to fill any gaps for issues you have not addressed. For example, if you are currently silent on fiduciary duties in your Agreement, then the members and managers in your company will be subject to the statutory recitation of the duty of care and fiduciary duty of loyalty, effective September 1, 2020. Likewise, if you have not considered and expressly denied the opportunity to appoint a special litigation committee to evaluate derivative claims by members, then managers will have that tool available to them.
In sum, the new Act provides a more complete set of default rules for those companies without Operating Agreements, as well as those with very basic agreements that miss out on many issues.
It’s time to dust off your old agreement — or prepare one — so that you are confident that your company continues to operate and be governed as you intended.