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Updated California LLC Law Changes Default Rules and Adds Flexibility to Fiduciary Duties

February 05, 2014

Posted in Business Litigation, Business Start Ups, Corporate Law, Limited Liability Company Law, Partnership Law

2013_03_23__5015st of 2014 by the new California Revised Uniform Limited Liability Company Act (RULLCA). The new provisions of RULLCA significantly alter the default and mandatory rules that previously governed California based LLCs. Although many of the provisions are similar to the previous act, in many cases the new provisions are more robust. These new provisions may become the source of member disputes so members should review the following changes to ensure that these provisions will not conflict with their expectations.

Management and Consent Requirements

RULLCA requires that both the articles of organization and the operating agreement contain a statement establishing the LLC as a manager-managed LLC. Prior to this only the articles of incorporation required a statement establishing the LLC as manager-managed. This new default gives minority members more power, and it also means that minority members can assert veto power over the decisions of a manager by claiming that the decision was not made in the ordinary course of business. Defining ordinary course of business in the operating agreement is strongly recommended because that term is undefined in RULLCA.

Additionally, minority members will have veto power over the will of the majority in votes to amend the operating agreement. Under the prior law if an operating agreement was silent regarding the voting threshold only a majority of LLC interest was required to pass an amendment.

Limits on Managerial Powers

Under RULLCA managers will be expressly forbidden to undertake several acts without approval of all members or express authority via the operating agreement. This includes the ability to sell, lease, or exchange all or substantially all of the LLC’s assets.

Fiduciary Duties

RULLCA defines the duty of loyalty as the duty to account, the duty to refrain from self-dealing, and the duty to refrain from competing. These duties are not itself new, but RULLCA allows an operating agreement to alter the scope of the duty of loyalty by designating certain acts as not violating the duty. However, the duty of loyalty may not be eliminated via the list, and the standards may not be so low that the duty of loyalty becomes manifestly unreasonable.

Similarly, the duty of care may also be modified by the operating agreement under RULLCA, so long as the modifications do not unreasonably reduce or eliminate the duty of care.

Reimbursement and Indemnification

RULLCA requires that members or managers be reimbursed for expenses they incur on behalf of the LLC so long as the expense did not violate the member or managers’ fiduciary duty. The same goes for indemnification, if a member or manager incurred liabilities while acting on behalf of the LLC, the LLC must indemnify the member or manager. However, the LLC may limit the extent of reimbursement and indemnification through their operating agreements.

Effective Date of the Act

Only acts taken after January 1st, 2014 are governed by RULLCA, acts made by an LLC before this are governed by the previous Act. LLCs do not need to take any action to opt in or out of the Act.

LLC and Business Disputes

If you would like to learn more about the RULLCA contact the Law Offices of Tony T. Liu at (714) 415-2007. We provide consulting and litigation services for LLC and other business entity matters.