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California Revised Uniform Liability Company Act (RULLCA)

posted in Corporate formation, Corporate Governance, Fiduciary Duty, LLC by

Effective as of January 1, 2014, the California Revised Uniform Liability Company

Act (RULLCA), a new law which reflects developments in LLC law in recent years, displaced the previous California law governing LLCs (i.e. the Beverly-Killea Limited Liability Company Act). RULLCA now governs all California LLCs, regardless of when the LLC was formed, and all foreign LLCs registered with the California Secretary of State after the law’s enactment. Although much remains the same, RULLCA did make some substantive changes that LLC members should be aware of.

General Changes Under RULLCA

The purpose of RULLCA was to bring California LLC law more in line with the LLC laws of other states, allowing for easier multi-state business operations. To achieve this, RULLCA not only clarified many issues that existed in the previous LLC law, but also included a more robust set of default rules, which apply if the LLC operating agreement (the foundational contract among LLC members) is silent on a particular issue. Additionally, RULLCA provides more detail regarding the consequences of withdrawal of a member from an LLC and establishes that conflicting language in the articles of organization (an LLC is formed on filing articles of organization with the Secretary of State) is now overridden by the language in the operating agreement (a complete reversal of the previous rule). Some of the more specific areas of change under RULLCA relate to fiduciary duties and indemnification, which will be discussed in more detail below.

Fiduciary Duties

RULLCA contains much more specific language regarding fiduciary duties than the prior law on LLCs. It explicitly states that certain duties owed by the managers or members of the LCC to the other members cannot be eliminated or unreasonably modified, including the duty of care, duty of loyalty, and duty of good faith. It clarifies the extent to which the operating agreement can define, alter, or even eliminate (in limited circumstances) other aspects of fiduciary duty, though such changes are subject to a number of defined limitations including being subject to a “not manifestly unreasonable” standard. Therefore, parties desiring to modify fiduciary duties should clearly define those duties and specifically authorize certain activities that may otherwise be viewed as a breach of fiduciary duties, like engaging in competitive activities for example. Most important, the RULLCA provides that any variation of fiduciary duties must be approved “with the informed consent of the members.” Under RULLCA, a specific definition of informed consent is not given, but it is noted that mere assent to the operating agreement is not sufficient.

Indemnification

The previous law on LLCs merely permitted, if so desired, the articles of organization or the written operating agreement to provide for indemnification of any person acting on behalf of the LLC.  The RULLCA’s default rule now requires mandatory indemnification of members or managers of an LLC. This default rule will remain in place unless the operating agreement explicitly overrides this provision. However, an operating agreement may not alter or eliminate such indemnification and a member or manager’s liability to the LLC with respect to: breaches of the duty of loyalty; receipt by such party of a financial benefit to which such party was not entitled; liability for excess distributions; intentional infliction of harm (on a person or the LLC); or intentional violations of criminal law.

Conclusion

As RULLCA applies to all California LLCs, any members of an LLC in the state should be apprised of these updated rules and be particularly aware of the areas where there has been significant, substantive changes in the law (e.g. fiduciary duties, indemnification, withdrawal, conflict between language in the articles of organization and the operating agreement, etc.)

If you are interested in learning more about RULLCA and how it may affect you, then please contact Larry Horwitz at lhorwitz@horwitzarmstrong.com.

01 Jun, 15

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