Florida Revised Limited Liability Company Act

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On May 3, 2013, the Florida House of Representatives unanimously passed the Florida Revised Limited Liability Act (the "New Florida Act") in the form of amended House Bill 1079. The companion bill, Senate Bill 1300, was unanimously passed by the Florida Senate in the prior week. Governor Scott is expected to sign the bill into law. The New Florida Act will be codified as Chapter 605 of the Florida Statutes.

WHEN DOES THE NEW FLORIDA ACT BECOME EFFECTIVE?

The New Florida Act becomes effective on January 1, 2014, and will apply to all limited liability companies, or LLCs, formed in the State of Florida on or after January 1, 2014. Calendar year 2014 will be a transition year in which Florida LLCs that were formed prior to January 1, 2014, may continue to operate under the existing Florida Limited Liability Company Act, as codified in Chapter 608, Florida Statutes (the "Existing Act"), until January 1, 2015. Alternatively, those Florida LLCs can elect to be governed by the New Florida Act by amending their governing documents accordingly. Effective January 1, 2015, however, the Existing Act will be repealed and all Florida LLCs, regardless of when formed, will be thereafter subject to the New Florida Act.

WHO WILL THE NEW FLORIDA ACT IMPACT?

Because the New Florida Act will eventually affect all Florida LLCs, the New Florida Act will impact all persons who are associated with Florida LLCs, such as members and managers, as well as persons who deal with Florida LLCs, such as lenders and other persons who contract with Florida LLCs.

HOW DOES THE NEW FLORIDA ACT AFFECT OUR LLC OPERATING AGREEMENT?

The New Florida Act is a "default statute" just like the Existing Act. This means that it provides a set of base rules governing Florida LLCs, but, except for certain provisions, the statutory rules can be superseded by the LLC operating agreement. Therefore, the operating agreement continues to be of critical importance in establishing the management and governance structure of the LLC and the rights and responsibilities of the members and managers. Although an LLC's operating agreement can supersede certain statutory provisions of the New Florida Act, changes made by the New Florida Act could materially affect an LLC's operating agreement and how certain provisions will be interpreted and enforced. It is important that your operating agreement be comprehensive and cover all matters in which a provision of the New Florida Act could apply. If it does not, the LLC could be subject to some of the "default provisions," which could be different than those contemplated by the members. You should consult with your legal advisor to carefully review and evaluate the impact of the New Florida Act on your operating agreement to determine whether amendments are necessary in order to avoid unintended results.

WHAT ARE SOME OF THE MATERIAL CHANGES TO BE IMPLEMENTED BY THE NEW FLORIDA ACT?

The New Florida Act makes a number of changes and additions to the current statutory law affecting Florida LLCs. Certain of those are as follows:

1. Expanded List of Non-Waivable Provisions

The New Florida Act expands the list of statutory rights and provisions that cannot be waived or altered by an LLC's governing documents or other agreement of the members. Thus, under the New Florida Act, the following will not be enforced, even if agreed to by the members or set forth in the LLC's governing documents: (i) any attempt to vary the right of a member to approve a merger, interest exchange or conversion in certain contexts; (ii) any attempt to relieve or exonerate a person from liability for conduct involving bad faith, willful or intentional conduct or a knowing violation of law; (iii) any attempt to eliminate the duty of loyalty or care; (iv) any attempt to eliminate the obligation of good faith and fair dealing; (v) any attempt to vary the power of a member to dissociate from the LLC; (vi) any attempt to unreasonably restrict the right of a member to maintain a direct action against another member, manager or the LLC to enforce the member's rights and otherwise protect the member's interests; (vii) any attempt to unreasonably restrict the right of a member to maintain a derivative action; (viii) any attempt to provide indemnification to a member or manager for (1) conduct involving bad faith, willful or intentional misconduct or a knowing violation of law, (2) a transaction from which the member or manager derived an improper personal benefit or (3) a breach of fiduciary duties; (ix) any attempt to vary an LLC's capacity to sue and be sued; (x) any attempt to vary the application of Florida law to the internal affairs of the LLC or the liability of a member or manager for debts, obligations or other liabilities of a Florida LLC; (xi) any attempt to vary the requirement, procedure or any other provisions of the New Florida Act pertaining to registered agents or the Florida Department of State (the "Department"); (xii) any attempt to vary the provision of the New Florida Act pertaining to signing and filing pursuant to judicial order; (xiii) any attempt to unreasonably restrict the duties of an LLC to maintain certain records or the right of members to access the LLC's records, (xiv) any attempt to vary the grounds for dissolution specified in the New Florida Act; (xv) any attempt to vary the requirements to wind up the LLC's business, activities and affairs as set forth in the New Florida Act; (xvi) any attempt to vary the provisions of the New Florida Act pertaining to special litigation committees; (xvii) any attempt to vary the required contents of a plan of merger, plan of interest exchange, plan of conversion or plan of domestication; and (xviii) except in certain specified circumstances, any attempt to restrict the rights under the New Florida Act of a person other than a member or manager. In order to avoid confusion and reliance by members on unenforceable provisions of an LLC's governing documents or other member agreements, LLCs should consider amending their operating agreements to eliminate or modify the affected provisions.

2. Elimination of the "Managing Member" Concept

Generally, there are two recognized forms of management structures for LLCs in the United States. One structure provides for the LLC to be managed by its members. The other structure provides for the LLC to be managed by one or more "managers," who can be members of the LLC or third parties. The Existing Act included a third option where the LLC could be managed by one or more "managing members." This third option has created some confusion over the years.

The New Florida Act eliminates the concept of a "managing member." This is one area in which an LLC's operating agreement may need to be amended to avoid commercial confusion or unintended consequences. Many Florida LLC's may view their managing member as the "manager" as contemplated by the New Florida Act. However, under the New Florida Act, an LLC that is managed by a "managing member" could be treated as a "member-managed" LLC starting on January 1, 2015. This would mean that many actions that previously could be unilaterally approved and taken by the "managing member" of the LLC may now require a vote and the approval of the members. In this situation, the LLC's management structure as agreed upon by the members could be overturned and "control" of the LLC could unintentionally pass to the members of the LLC generally. By way of example, assume that an existing Florida LLC has 10 members, each holding a 10 percent membership interest, and that one of the 10 members has been appointed to be the "managing member" with broad management authority. If this LLC is deemed under the New Florida Act to be member-managed, the member that was appointed as the "managing member" will hold a 10 percent voting interest in the LLC, along with each other member, and the vote of six of the 10 members may be required to take an action previously reserved to the former "managing member." In order to avoid this unintended result, a Florida LLC that currently is subject to "managing member" governance should consult with its legal advisor about revising its governing documents to adopt conforming language required by the New Florida Act to convert the LLC's managing member-management structure to manager-management.

3. The Power to Dissociate as a Member

Under the Existing Act, a member of a Florida LLC may not dissociate (i.e., withdraw or resign as a member) from the LLC prior to dissolution and winding up of the LLC unless the governing documents of the LLC expressly provide otherwise. The New Florida Act allows a member of a Florida LLC to dissociate at any time, rightfully or wrongfully, by express will. Additionally, after an LLC becomes subject to the New Florida Act, the LLC's governing documents cannot vary the power of a member to dissociate (this is a new non-waivable provision discussed in item 1 above). However, the governing documents can provide that any dissociation is a breach of the governing documents, and, therefore, "wrongful." A member who wrongfully dissociates is liable to the LLC and to the other members for damages caused by the dissociation. If a member dissociates from an LLC, (i) the member's right to participate as a member in the management and conduct of the LLC's activities and affairs terminates; (ii) if the LLC is member-managed, the member's fiduciary duties of loyalty and care to the LLC and its other members terminate; and (iii) the member retains the his or her right to receive distributions from the LLC (such member will thereafter hold a "transferable interest" as a "transferee" under the New Florida Act).

This new non-waivable power to dissociate is an important change in the law and can have implications in other areas. By way of illustration, a member's fiduciary duties of loyalty and care in a member-managed LLC may restrict the member from operating a business in competition with that of the LLC. However, once the LLC becomes subject to the New Florida Act, a member can dissociate from the LLC and therefore cease being subject to the fiduciary duties of a member. Therefore, absent the inclusion of carefully drafted language in the LLC's governing documents, a dissociated member can compete with the business of the LLC while maintaining a right to receive distributions from the LLC. In order to avoid this and other similar scenarios, you should consult with your legal advisors about amending applicable governing documents to provide for specific terms that would apply in connection with the dissociation of a member. Some of these terms may include rights of the LLC or other members to purchase the LLC interest of the dissociated member, continuing non-compete or non-solicitation obligations to which the dissociated member will be subject, or other rights or restrictions that would be triggered by a member's dissociation.

4. Member and Manager Liability for Inaccurately Filed Information

The New Florida Act imposes an obligation on members of member-managed LLCs and managers of manager-managed LLCs to maintain the accuracy of information contained in the articles of organization and to correct any information that becomes inaccurate. In certain circumstances, the failure to correct inaccurate information in the articles of organization and other LLC records submitted to the Department may expose members or managers to liability to third parties who suffer losses by relying on the information. This liability applies not just to Florida LLCs, but also to non-Florida LLCs that are authorized to transact business in the State of Florida. The LLC can limit such responsibility and potential liability only to certain members of a member-managed LLC by including a provision in the LLC's governing documents identifying the particular member(s) of the LLC that are responsible for maintaining the accuracy of information contained in records submitted to the Department. This may be particularly important to passive or non-operating members, and such members may wish to consult with their legal advisors about how to structure such a provision in the LLC's governing documents.

It is of utmost importance that an LLC's articles of organization and other records filed or submitted to the Department contain accurate information when the articles or other records are filed or submitted. We recommend that responsible members and managers of an LLC formed or authorized to transact business in the State of Florida confirm that such information is accurate as of the date the New Florida Act becomes effective with respect to such LLC and periodically thereafter to reduce the risk of exposure to personal liability, and to immediately file necessary documents to correct any information that is or becomes inaccurate.

5. New Statement of Authority Concept

The New Florida Act creates a new mechanism by which LLCs can provide constructive notice to third parties as to the authority (or limitation of authority) of a specified status or position in the LLC, or as to one or more individuals, to bind the LLC. Under the New Florida Act, such notice can be given by filing a Statement of Authority with the Department. Each Statement of Authority is effective for five years from the date of its most recent amendment, unless terminated earlier. A person who is named in a filed Statement of Authority granting that person authority may deliver to the Department for filing a statement of denial of the grant of authority. Florida LLCs will want to consult with their legal advisors to discuss the usefulness and implications of filing Statements of Authority under the New Florida Act.

6. Additional Appraisal Rights

The New Florida Act provides members with six additional events that trigger appraisal rights. Generally, appraisal rights are statutory rights to have a fair price for a member's interest in an LLC to be determined by judicial proceeding and the obligation of the acquiring company to repurchase such interests of the member exercising his/her appraisal rights at that price. Under the Existing Act, members of a Florida LLC are entitled to appraisal rights upon the consummation of a merger or conversion involving the LLC if the members possessed the right to vote on such transaction. The New Florida Act builds on those appraisal rights by adding the following as additional events that trigger appraisal rights: (i) consummation of a membership interest exchange where the member possessed the right to vote on the exchange (unless the member's interest is not subject to the exchange); (ii) consummation of a sale of substantially all of the assets of the LLC where the member possessed the right to vote on the sale (unless the sale is pursuant to court order or the sale is for cash pursuant to a plan under which all or substantially all of the net proceeds of the sale will be distributed to interest holders within one year of the date of the sale); (iii) amendment of the LLC's governing documents to reduce the interest of a particular member to a fraction of an interest if the LLC will be obligated to or will have the right to repurchase the fractional interest so created; (iv) amendment of the LLC's governing documents to alter or abolish the voting or other rights of a particular member in a manner that is adverse to the member's interest (except as such rights may be affected by voting or other rights of new interests then being authorized); (v) amendment of the LLC's governing documents the effect of which is to adversely affect the interest of a particular member by altering or abolishing the member's appraisal rights; or (vi) other event expressly authorized by the LLC's governing documents. An LLC will be able to modify, restrict or eliminate the appraisal rights of a member or group of members so long as such modification, restriction or elimination is set forth in the LLC's governing documents as approved by the affected member or group of members. LLCs should consult with their legal advisors to determine how to structure their governing documents to address issues related to appraisal rights and the events that trigger them. Members should also consult with their legal advisors regarding their appraisal rights and any proposed modification, restriction or elimination of them.

7. New Fairness Standards Evidentiary Burdens in Connection with Conflict of Interest Transactions

The Existing Act provides a safe harbor for so called "conflict of interest transactions" whereby a conflict of interest transaction will not be void or voidable so long as the transaction is (i) approved by the LLC's disinterested managers or members, provided they have knowledge or disclosure of the relationship or interest, or (ii) the contract or transaction is fair and reasonable to the LLC at the time it is authorized by the managers or members. The Existing Act, however, does not provide any standards to determine if a transaction is fair and reasonable nor does it indicate who has the burden of proving whether a transaction is fair and reasonable to the LLC if the transaction is challenged. The New Florida Act dispatches with the reasonableness prong in conflict of interest transactions and provides that a conflict of interest transaction will not be void or voidable if the transaction is fair to the LLC at the time it is authorized. The New Florida Act further provides some standards to evaluate the fairness of a conflict of interest transaction. Under the New Florida Act, a transaction is fair to the LLC if the transaction, as a whole, is beneficial to the LLC and its members, taking into appropriate account whether it is fair in terms of the member's or manager's dealings with the LLC in connection with the transaction and comparable to what might have been obtainable in an arm's length transaction. The New Florida Act also clarifies which party has the burden of proving fairness or lack of fairness in actions challenging the validity of a conflict of interest transaction. If the material facts of the transaction and the member's or manager's interest were disclosed to the managers or members who voted on the transaction, the person challenging the transaction has the burden of proving unfairness. If the material facts and the members or manager's interest were not disclosed, then the member or manager defending the transaction has the burden of proving that the transaction was fair to the LLC.

WHAT SHOULD I DO NOW?

If you are a member or manager of an existing Florida LLC, contact your legal advisors to set up an appointment to discuss the implications of the New Florida Act on your LLC. If you are contemplating forming a Florida LLC in calendar year 2013, it would be prudent to discuss with your legal advisor the implications of the New Florida Act when drafting the LLC's governing documents so as to avoid having to revise the governing documents prior to January 1, 2015. If you regularly deal with Florida LLCs, spend some time to acquaint yourself with the New Florida Act prior to January 1, 2014.