Starting January 1, 2015, all new and existing limited liability companies formed in Florida must comply with the Revised Limited Liability Company Act, Fl. Stat. § 605 (the “Act”). While the Act is based on the Revised Uniform Limited Liability Company Act of 2006, as amended in 2011, promulgated by the Uniform Law Commission, the Act is different in many respects.
Among other things, the Act eliminated the often misused or misunderstood concept of “managing member”. Unless specifically formed as a manager-managed LLC, the general default rule is that an LLC is member-managed, and all members retain statutory apparent authority to bind the LLC. A statement of authority (“SOA”) with respect to the status of a member or manager or with respect to a position or office of a person in the LLC may be filed with the corporate records in the Florida Department of State and may describe the authority, or limitations on the authority, of all persons having such status or holding such position. A certified copy of an effective SOA may be recorded in the recorder’s office for recording transfers of real property, including “interests in real property” such as mortgages, easements, leases, etc. to provide constructive notice. When so recorded, the SOA is conclusive in favor of a person who gives value in reliance on the SOA, without knowledge to the contrary. If a certified copy of an effective limitation on a grant of authority is recorded in the office for recording transfers of real property, all third persons are deemed to know of the limitation.
Each manager and member of a Florida LLC, owes fiduciary duties of loyalty and care to the LLC and its members. The Act describes the duty of loyalty as: accounting to the LLC and holding as trustee in the conduct or winding up of company’s activities and affairs, the use of the LLC’s property or the appropriation of a corporate opportunity; refraining from dealing with the LLC as, or on behalf of, a person having an interest adverse to the LLC; and refraining from competing with the LLC before its dissolution. The duty of care is limited to refraining from engaging in grossly negligent or reckless conduct, willful or intentional misconduct, or a knowing violation of law, either in the conduct, or the winding up, of the LLC’s activities and affairs.
Another important change is that members are not required to have any economic interest in an LLC, which permits a member to have voting or management rights without being entitled to any distributions. This is useful in commercial mortgage financings which require special purpose LLCs with springing members who are admitted as members without a capital contribution required and who vote on certain prescribed matters.
The Act lists 17 “non-waivable” statutory provisions (increased from six provisions) that cannot be changed in the operating agreement or otherwise. Specifically, Fl. Stat. § 605.0105(3) provides that an operating agreement may not do any of the following:
- Vary a limited liability company’s capacity under § 605.0109 to sue and be sued in its own name.
- Vary the law applicable under § 605.0104.
- Vary the requirement, procedure, or other provision of this chapter pertaining to:
- Registered agents; or
- The department, including provisions pertaining to records authorized or required to be delivered to the department for filing under this chapter.
- Vary the provisions of § 605.0204.
- Eliminate the duty of loyalty or the duty of care under § 605.04091, except as otherwise provided in subsection (4).
- Eliminate the obligation of good faith and fair dealing under § 605.04091, but the operating agreement may prescribe the standards by which the performance of the obligation is to be measured if the standards are not manifestly unreasonable.
- Relieve or exonerate a person from liability for conduct involving bad faith, willful or intentional misconduct, or a knowing violation of law.
- Unreasonably restrict the duties and rights stated in § 605.0410, but the operating agreement may impose reasonable restrictions on the availability and use of information obtained under that section and may define appropriate remedies, including liquidated damages, for a breach of a reasonable restriction on use.
- Vary the grounds for dissolution specified in § 605.0702.
- Vary the requirement to wind up the company’s business, activities, and affairs as specified in § 605.0709(1), (2)(a), and (5).
- Unreasonably restrict the right of a member to maintain an action under §§ 605.0801-605.0806.
- Vary the provisions of § 605.0804, but the operating agreement may provide that the company may not appoint a special litigation committee. However, the operating agreement may not prevent a court from appointing a special litigation committee.
- Vary the right of a member to approve a merger, interest exchange, or conversion under § 605.1023(1)(b), § 605.1033(1)(b), or § 605.1043(1)(b), respectively.
- Vary the required contents of plan of merger under § 605.1022, a plan of interest exchange under § 605.1032, a plan of conversion under § 605.1042, or a plan of domestication under § 605.1052.
- Except as otherwise provided in §§ 605.0106 and 605.0107(2) , restrict the rights under this chapter of a person other than a member or manager.
- Provide for indemnification for a member or manager under § 605.0408 for any of the following:
- Conduct involving bad faith, willful or intentional misconduct, or a knowing violation of law.
- A transaction from which the member or manager derived an improper personal benefit.
- A circumstance under which the liability provisions of § 605.0406 are applicable.
- A breach of duties or obligations under § 605.04091, taking into account a restriction, an expansion, or an elimination of such duties and obligations provided for in the operating agreement to the extent allowed by subsection (4).
A deadlock sale provision can be included in the LLC’s operating agreement to control over a judicial dissolution action brought based on member or manager deadlock. This provides a mechanism to avoid the costly and uncertain litigation seeking judicial dissolution. Except for such a deadlock sale provision, the operating agreement cannot vary the grounds for judicial dissolution.
Another significant change in the Act to the dissolution procedure is the statutory election to purchase instead of dissolving provision, which authorizes an LLC or its members to purchase the interest of a member in a proceeding seeking judicial dissolution at fair value. The parties may agree on a fair value and terms for purchase of the interest, or if they cannot agree, one party may petition the court to determine fair value and the terms for payment, which may include payment of the fair value over time in installments. A court’s determination of fair value binds all parties. The valuation of fair value must not reflect any discount for lack of marketability or minority status. The Act requires that a court preserve proportionate ownership in the LLC. Once filed with the court, an election to purchase is irrevocable, subject only to equitable remedies.
In the case of appraisal rights, the Act added five additional events that lead to members having appraisal rights:
- an interest exchange in which a member of the LLC whose interest is subject to the exchange possessed the right to vote upon it;
- a sale of substantially all of the assets of the LLC when the member possessed the right to vote upon the sale unless pursuant to a court order or for cash, substantially all of which must be distributed to members within one year;
- a squeeze out amendment to the operating agreement or articles of organization of the LLC reducing the member’s interest to a fractional amount which the LLC will be obligated or have the right to repurchase;
- an amendment to the operating agreement or articles of the LLC that alters or abolishes voting, or other rights, in a manner adverse to a member; or
- an amendment to the organic rules of an entity that alters or abolishes the appraisal rights in the LLC statute in a manner adverse to a member.
Equally important, the Act also authorizes the operating agreement of an LLC to provide statutory appraisal rights to other transactions or events. These are some of the highlights of the changes to the LLCs that the Act provides.