California's Revised Uniform Limited Liability Company Act

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The California Revised Uniform Limited Liability Company Act (RULLCA) was signed into law by Governor Jerry Brown in September 2012. Intended to come into effect on January 1, 2014, RULLCA replaces the Beverly-Killea Limited Liability Company Act, and significantly revises the rules for formation and operation of Limited Liability Companies (LLCs) in the state of California. Most importantly, RULLCA applies retroactively to existing LLCs. There is no ability for existing California LLCs to “opt out” of RULLCA; it will apply and potentially “rewrite” substantive provisions of existing California LLC operating agreements. It, therefore, is important that the operating agreements of existing California LLCs now be reviewed with RULLCA in mind to identify provisions that will either be out of compliance with RULLCA or which may need revision prior to 2014 if RULLCA is not revised or repealed prior to its implementation.

Key changes to be aware of include RULLCA’s clarification of the treatment of fiduciary duties in an LLC’s operating agreement and identification of when those duties may be altered or eliminated. RULLCA limits the parties who may be indemnified in an operating agreement to managers and members acting in those respective capacities, and mandates the indemnification of those parties. RULLCA also defines the conditions for dissociation of a member from the LLC, including circumstances in which a member may withdraw from an LLC and the resulting impacts on the member as well as on the LLC. RULLCA enacts new provisions governing LLC capitalization. It should also be noted that RULLCA, as enacted, like the Beverly-Killea Limited Liability Company Act, maintains no provision for series LLCs.

A review of RULLCA is necessary to determine what existing operating agreement provisions covering these areas, among others, will be impacted and what possible alternatives to RULLCA may need to be considered, including reestablishment of the LLC in a jurisdiction permitting more flexibility in what may be provided in an LLC operating agreement.

As a default statute, RULLCA provides flexibility if LLC members have not expressly agreed in writing on an issue. Under the new Act, an operating agreement may continue to be in written or oral format, but now may be either in a record or implied, or in a combination thereof. Given this flexibility, LLCs should carefully consider how issues affecting the LLC are memorialized and implemented. The benefits of a single written agreement which documents the intents of the members and details of LLC operation should not be dismissed. A single document would be highly desirable in the event of a future dispute, in contrast to an amalgamation of “records” which are claimed to constitute the “operating agreement,” which can be a result under RULLCA. RULLCA also gives priority to an LLC’s operating agreement over its articles of organization in conflicts between the documents as to members, dissociated members, transferees and managers, while the articles of organization prevail with respect to all other persons to the extent that such persons are reasonably relying on the articles of organization. Any inconsistencies between those documents that presently exist should be identified and addressed. As described in detail in the Act, some RULLCA sections can be overridden by an LLC’s operating agreement and legal review can assist in identifying proper compliance and desired variances for existing LLCs.

For both existing and new LLCs, review of agreements and other documents of record to ensure compliance with RULLCA and conformance between LLC documents will be key to compliance with the requirements, and the nuances, of the new Act.

For further information, please contact Bob Copeland (858-720-7407 rcopeland@sheppardmullin.com), or Ryan Connor (858-720-8920 rconnor@sheppardmullin.com).

 

Topics:  Fiduciary Duty, LLC, Operating Agreements, RULLCA

Published In: Business Organization Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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