[co-author: Mary Colleen Fowler*]
Arizona Governor Doug Ducey signed SB 1353 into law on April 10, 2018, repealing Arizona’s previous LLC laws and replacing them with the new Arizona Limited Liability Company Act—colloquially known as ALLCA. ALLCA becomes effective September 1, 2019 for Arizona LLCs created on or after September 1, 2019 and it will govern existing LLCs laws that affirmatively opt in under ALLCA. Arizona’s previous LLC provisions will govern LLCs created before September 1, 2019 until September 1, 2020. After September 1, 2020, ALLCA will govern all LLCs.
In creating ALLCA, the drafting committee closely followed the language of the Revised Uniform Limited Liability Company Act (RULLCA)—which many states have adopted, including Arizona—but also determined that many of the previous LLC laws and procedures should be kept and minimally changed. Through ALLCA, the drafting committee, which was composed of members of the Business Law Section of the State Bar of Arizona, sought to create uniformity and fill in gaps left by the previous LLC laws regarding the relationships between and among members, managers and limited liability companies.
ALLCA’s primary takeaways include:
- A clear list of items that the LLC operating agreement cannot change;
- A non-exhaustive list of items that the operating agreement can change;
- A clarification of a manager’s or member’s fiduciary duties to LLCs, including a duty of loyalty, duty of care and a duty of good faith and fair dealing;
- A framework for indemnification and reimbursement of members;
- A “majority in interest” voting structure;
- A designation of four types of LLC relationships, including: (1) members and manager, (2) dissociated members, (3) legal representatives and (4) transferees, including how each type can access information;
- A two-prong voting system concerning dissolution;
- A statutory framework for derivative actions; and
- A framework for foreign protected series LLCs to operate in harmony with Arizona public policy.
Although ALLCA creates new default LLC rules, an LLC can affirmatively alter some of the default rules in its operating agreement. For example, the operating agreement may:
- Expand, limit or eliminate the manager’s (or member’s) fiduciary duties of the LLC (with notable exceptions that the operating agreement cannot eliminate the duty of good faith and fair dealing or the duty to refrain from willful or intentional misconduct);
- Reinstate a per capita voting structure instead of a “majority in interest” structure, including the matter of dissolution; or
- Expand or restrict the information rights of the different relationships within the LLC, such as placing restrictions on the transferees’ and dissociated members’ information rights.
As ALLCA begins to take effect, lawyers and business owners should pay close attention to the LLC’s operating agreement (or lack thereof) specifically looking at how the operating agreement addresses fiduciary duties, indemnification and reimbursement, voting rights, information rights, dissociation and dissolution. Most of the time, the operating agreement will govern the company, its members and managers, and ALLCA’s default rules will not interfere with the operating agreement, even if the operating agreement is contrary to ALLCA’s provisions. However, where the operating agreement is silent, ALLCA will govern, even if it is contrary to the desires of the LLC’s members or managers.
Business owners and lawyers may consider the short action list below when evaluating the impact of ALLCA on an LLC.
ACTION ITEM CHECKLIST FOR LAWYERS & BUSINESS OWNERS
- Operating Agreement
- Does the LLC have a written operating agreement?
- If not, is the LLC comfortable with ALLCA’s default rules, specifically the creation of fiduciary duties?
- Are the roles and expectations of members or managers clearly defined?
- Voting Rights
- Do specific circumstances require increased or decreased voting thresholds?
- When will the LLC use per capita versus majority in interest voting?
- What, if any, expectations should transferees have?
- Information Rights
- Who qualifies as a legal representative?
- What is the process to obtain information? Should there be an extended response time for the LLC?
- Does the Operating Agreement outline what type of information the four categories of LLC relationships have access to? What information is “just and reasonable” for a member and manager to receive?
- Does the agreement include restriction on transferees and dissociated members?
- Dissolution
- What voting thresholds apply to the different causes of dissolution?
- Does the LLC need to delete a cause of dissolution (e.g. unlawful activity, breach of fiduciary duty, etc.)?
* Mary Colleen Fowler is a summer associate in Snell & Wilmer’s Phoenix office, working under the supervision of Tony Caldwell. She is anticipated to graduate from The University of Kansas School of Law in May 2020.
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