Why LLC Managers and Investors Should Care About California's New LLC Law

This blog post is directed to owners and investors in California limited liability companies.

Effective as of January 1, 2014, California has enacted a new statute governing California LLCs -- dubbed the “California Revised Uniform Limited Liability Company Act” -- that contains a few key provisions that we think should be of concern to managers of, and investors in, California LLCs. 

The most important of the Act's provisions concerns voting rights and the authority of managers and/or officers running the LLC.  The Act expands the default voting rights of LLC members to require member consent to a range of corporate actions, including all actions “outside of the ordinary course of business,” unless the LLC’s operating agreement explicitly modifies or limits those voting rights. 

Member voting rights are typically among the most heavily negotiated provisions in an LLC's Operating Agreement.  Voting rights determine how the Company is managed and operated and can seriously impact the ability and discretion of company management to execute on strategic transactions in a timely and flexible way. This is especially the case when there is a divergence of views and personalities among the ownership base.  

Depending on the current language in an Operating Agreement, LLC managers or officers who previously may have operated with broad (or full) discretion may now be required to obtain the consent of investors/members before engaging in certain transactions.  The phrase “outside the ordinary course of business,” while common in business agreements, nevertheless invites further uncertainty over the scope of the Act's new voting requirements.

The new law also expands upon the impact of member "disassociation" (or withdrawal) events, the occurrence of which may result in a member losing membership rights and instead holding only the limited economic rights of an assignee. Dissociation events include the death, insolvency or incompetence of individual members.   These new provisions are likely to impact both voting and corporate governance matters within the LLC, as well as members’ estate and succession planning matters.

Other provisions in the new law impact, among other things, the scope of fiduciary duties of members and managers, an LLC’s obligations to indemnify members and managers, and the rights of transferees of LLC interests (i.e., people who purchase LLC interests from existing shareholders).

Bottom Line: Managers and investors in California LLCs (and those considering such investments) should have legal counsel review the current LLC Operating Agreements to determine the impact of the Act on corporate governance matters and the economic and non-economic rights of LLC members.  

Barbera Corporate Law helps visionaries build thriving companies.  We provides specialized corporate transactional legal counsel, with predictable flat-fee rate structures, to emerging technology and online businesses throughout California.