Be Prepared - the New Florida LLC Act is Coming Soon

On May 3, 2013, as the last piece of legislation to be enacted this session, the Florida House of Representatives unanimously passed the new Florida Revised Limited Liability Company Act (the "New Florida LLC Act"), a companion bill of which also passed the Florida Senate unanimously a week earlier. Governor Scott is expected to sign the bill into law without any opposition. When signed, the New Florida LLC Act, which will become new Chapter 605 of the Florida Statutes, will be effective for every limited liability company (LLC) formed in Florida on or after July 1, 2014.

For Florida LLCs existing as of July 1, 2014, the New Florida LLC Act can become effective on an elective basis between July 1, 2014 and January 1, 2015, and the New Florida LLC Act will apply on a mandatory basis to all LLCs effective as of January 1, 2015. The New Florida LLC Act may materially affect the provisions in your existing and future Florida LLC operating agreements. Thus, an understanding of the changes it will bring to LLC governance and operations is critical.

The New Florida LLC Act is the result of a four and a half year project by a committee of the Florida Bar Business Law Section and is the biggest revision to the Florida LLC Act since Florida became the second state in the U.S. to adopt LLC legislation in 1982. The New Florida LLC Act will look nothing like the existing Florida LLC Act, Chapter 608 of the Florida Statutes (the "Existing Florida LLC Act"). It is based primarily on the Uniform Law Commission's 2006 Revised Uniform Limited Liability Company Act (as last amended in 2011) ("RULLCA"), a form of which has been adopted to date by seven states and the District of Columbia and currently is being studied or in the process of being adopted by numerous other states. To improve the New Florida LLC Act, in addition to RULLCA, the drafting committee incorporated desirable provisions from the Existing Florida LLC Act, the ABA Revised Prototype LLC Act, the Revised Model Corporation Business Act, the Revised Uniform Partnership Act and the LLC statutes ("LLC Acts") of Delaware and other influential states.

The New Florida LLC Act vs. the Operating Agreement: Expansion of Non-Waivable Provisions. The New Florida LLC Act, like all LLC Acts, is a "default statute," meaning it provides baseline rules for LLCs to operate and be managed. The LLC's operating agreement may establish different provisions than those provided by the statute and thereby override the statutory default rules, except to the extent the statute expressly prohibits an operating agreement from altering specific statutory default rules (the so-called "non-waivable" provisions). Most sophisticated companies entering into LLCs will have detailed, negotiated operating agreements that are intended to cover the most important statutory areas. Unfortunately, even the savviest venturers can, at times, end up in an active LLC before the members execute a comprehensive operating agreement, or the operating agreement may not address every default rule, particularly those that are enacted after the operating agreement is signed. In those cases, the members may become bound by provisions of the LLC statute that may be very different than the terms contemplated or desired. Compared with the Existing Florida LLC Act, the New Florida LLC Act expands from six items to sixteen, the list of non-waivable provisions that cannot be varied through the operating agreement.

Additional non-waivable LLC provisions in Florida now will include, without limitation, the inability for an LLC to relieve any person from liability if that person acted in bad faith or committed willful or intentional misconduct or a knowing violation of law; the inability to indemnify a member or manager from such bad conduct or conduct that results in an improper personal benefit; the ability of the LLC to sue and be sued in its own name; the inability to change Florida as the governing law of a Florida LLC; the manner of execution of records under judicial orders; certain dissolution provisions; the inability to unreasonably restrict the right of a member to maintain a cause of action against the LLC; the ability of a court to appoint a special litigation committee; the inability to vary the statutorily-required contents of a plan of merger, plan of interest exchange, plan of conversion or plan of domestication; and, with limited exceptions, the inability to restrict the rights of a third person (other than a member or manager of the LLC); and certain provisions dealing with registered agents and the Florida Department of State. A review and understanding of the New Florida LLC Act non-waivable provisions will be a key factor in your analyzing the effect that the New Florida LLC Act has on existing and newly formed Florida LLCs and their members.

Florida Eliminates the Managing Member Form of Management. LLC Acts in the United States generally provide for two types of management paradigms for an LLC - either it can be managed by its members or managed by one or more "managers" (who may be a member or third party). Under the Existing Florida LLC Act, Florida has a somewhat unique third category of management, the "managing member," which has caused a great deal of confusion over the years. While having an LLC that is managed by a managing member in Florida under the Existing Florida LLC Act is a form of a member-managed LLC, some mistakenly believe the managing member to be a "manager" under Florida LLC law and treat it as such for purposes of the operating agreement and the Existing Florida LLC Act. Whether an LLC is member-managed or manager-managed is a material difference because under Florida law (both under the Existing Florida LLC Act and the New Florida LLC Act), every member of a member-managed LLC and every manager in a manager-managed LLC has statutory authority to bind the LLC with third parties. Accordingly, to eliminate this confusion and make Florida's LLC Act the same as in other states, the New Florida LLC Act eliminates the concept of the managing member as a separate management category.

To assist third parties in understanding the actual authority (or lack thereof) of an LLC's members, managers, officers and agents, the New Florida LLC Act includes a RULLCA provision that is new to Florida law for LLCs (but currently is in place for Florida partnerships). This provision will permit an LLC to file a statement of authority with the Florida Department of State to set forth and put third parties on notice of the authority (or restrictions on the authority) of persons who may act on behalf the LLC.

Other Changes in Florida's New LLC Act. Several changes in the New Florida LLC Act will make it easier for companies to do business as Florida LLCs. For example, the New Florida LLC Act now will permit a non-economic member (i.e., a member that has no obligation to contribute capital or have an economic stake in the LLC). This was not allowed under the Existing Florida LLC Act. The ability to have a non-economic member should facilitate debt financing transactions as some lenders want the ability to appoint a special non-economic member to the LLC to protect against voluntary bankruptcy filings or for similar purposes. The New Florida LLC Act also follows Delaware by adding the ability of a non-United States entity to "domesticate" inbounds as a Florida LLC. This should promote foreign investment in Florida as, unlike the effects of a merger or conversion, the non-United States entity that domesticates in Florida is permitted to retain its status as foreign entity in its jurisdiction of formation while it simultaneously exists as a Florida LLC. The New Florida LLC Act also now provides for an "interest exchange" (the acquisition of the interests in an entity) as a means of combining with another entity. Some new provisions can be a trap for the unwary. For example, a number of additional transactions were added to those that trigger appraisal rights. A venturer needs to know of and understand these new appraisal triggers, as they are waivable and may not be desired. Finally, the New Florida LLC Act and a new provision in Section 48 of the Florida Statutes will now provide specific service of process rules for LLCs. This fixes a long-time glitch under Florida law, which previously provided that LLCs were served in litigation in the same the manner as partnerships. Note that these are but a sampling of the changes to the Existing Florida LLC Act that resulted from the New Florida LLC Act.

What Did Not Change in Florida. While the organization of the New Florida LLC Act is very different than that of the Existing Florida LLC Act, some provisions under existing Florida law were not revised through the New Florida LLC Act. For example, the handling of fiduciary duties in Florida has not substantively changed. Unlike Delaware's LLC Act, the New Florida LLC Act will not permit the complete elimination of fiduciary duties, which, in Florida, are limited to the duty of care (the standard of care that is imposed on LLC's management) and the duty of loyalty (the duties of management not to compete with or usurp opportunities from the LLC, not to self-deal or have conflicts of interest with the LLC and to account for received profits, property and benefits). Consistent with the Existing Florida LLC Act, these duties can be modified or restricted so long as such revisions are not "manifestly unreasonable." The New Florida LLC Act also left intact the charging order provisions that were adopted in 2011 in §608.433 of the Existing Florida LLC Act after the 2010 Florida Supreme Court's controversial decision in Shaun Olmstead et al. v. Federal Trade Commission. Accordingly, under the New Florida LLC Act, judgment creditors of the sole member of a single member LLC in Florida continue to have had the statutory right, under certain circumstances, to foreclose on the sole member's LLC interest and are not limited to obtaining a charging order. Moreover, Florida did not adopt series LLCs (permitting numerous cells or series under the umbrella of a single LLC) or shelf LLCs (LLCs that are formed prior to the admission of members).

Conclusion. If your company currently is a member or manager of a Florida LLC, or plans to form or enter into a new Florida LLC, it is crucial to understand the New Florida LLC Act, both the waivable and non-waivable provisions. The operating agreement of the LLC needs to be comprehensive and set forth the agreements of the parties as to all materials matters to avoid unintended statutory default rules from overriding your expectations. We strongly advise that your company have its current Florida operating agreements carefully reviewed in light of the New Florida LLC Act to determine whether revisions are needed to avoid unexpected consequences.