Possible Conflicts Under New California LLC Act

The California Revised Uniform Limited Liability Company Act (RULLCA) is effective on January 1, 2014, RULLCA.  It revises the rules for formation and operation of Limited Liability Companies (LLCs) in the state of California.   Last month’s article gave a basic overview of some of the key changes.

After attending various seminars on RULLCA and its potential impact on existing LLC operating agreements, a couple of salient points were mentioned.  For a member managed LLC where there are only two equal voting members or for a single member LLC, RULLCA many not have that much of an impact on the current LLC operating agreement.

In a manger managed LLC where there are more than two members, 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.

One of the simplest examples that I give to a manager of a manger managed LLC deals with the restrictions imposed on a manager before the manager can act upon behalf the LLC.  Usually the manager must obtain the member’s approval of a certain percentage before the manager can act.  Typically, some of the normal restrictions on a manager are as follows:

  1. Any act that would make it impossible to carry on the ordinary business of the LLC;
  2. The disposition of all or a substantial part of the LLC’s assets not in the ordinary course of business;
  3. The incurring of any debt not in the ordinary course of business;
  4. The incurring of any contractual obligation or the making of any capital expenditure with a total cost of more than $XXXXX.

In most of my LLC operating agreements a simple majority of the voting members have to give the manager their approval of the above-mentioned acts.  This prevents a small minority membership interest to deny certain action by the manager of the LLC when the majority of the members want them to occur.

However, under RULLCA, unless the LLC operating agreement states otherwise, it will require unanimous consent.  The problem occurs when the LLC operating agreement is not updated and signed by all the members that they still want the majority members approval prior to RULLCA.  There is supposed to be a technical correction in the future to deal with this situation where the manager follows the old LLC law rules but is bound by the RULLCA requirements.

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.