By: Tate Taylor and Gary Teblum
In 2013, the Florida Legislature adopted the Revised Florida Limited Liability Act. The Revised LLC Act restates the Florida laws governing LLCs in an entirely new Chapter 605, which succeeds the prior LLC Act found in Chapter 608. A complete review of the Revised LLC Act is beyond the scope of this alert, but set forth in this article is a summary of some of its more significant provisions.
Effective Date of the Revised LLC Act
The effective date of the Revised LLC Act was January 1, 2014, and the Revised LLC Act applies to Florida LLCs created on or after that date. Until January 1, 2015, LLCs in existence prior to January 1, 2014, may continue to operate under the prior statute or may elect instead to be subject to the Revised LLC Act. However, effective January 1, 2015, all Florida LLCs must comply with the requirements of the Revised LLC Act.
Default Provisions; Matters Not Waivable by Operating Agreement
The Revised LLC Act is a default statute; for the most part, it governs only if the matter is not addressed in an LLC’s operating agreement. However, the Revised LLC Act includes a lengthy list of matters that may not be altered by an LLC’s operating agreement. Among other “nonwaivables” under the Revised LLC Act, an operating agreement may not:
- Entirely eliminate the duty of care or the duty of loyalty (although limitations that are not “manifestly unreasonable” are permitted);
- Eliminate the obligation of good faith and fair dealing;
- Relieve or exonerate a person from liability for conduct involving bad faith, willful or intentional misconduct or a knowing violation of the law; or
- Provide for the indemnification of a member or manager for an improper distribution of funds.
ACTION ITEMS: Two important actions that should be taken prior to December 31, 2014 by every Florida LLC formed prior to 2014 are:
- Review the list of nonwaivables and evaluate whether any provision in the LLC’s existing operating agreement is in conflict with any item on the list.
- Review the LLC’s existing operating agreement to identify those waivable items that are addressed in the default provisions of the Revised LLC Act but are not addressed in the LLC’s operating agreement. For each of these items, evaluate whether there is a desire to override the default provision by entering into an amendment to the operating agreement.
Management
Member-Managed Versus Manager-Managed. Consistent with the prior LLC Act, the Revised LLC Act contemplates that a Florida LLC may be either “member-managed” or “manager-managed.” The former is the default; the latter is available only where the LLC’s articles of organization or its operating agreement provides that the LLC is to be manager-managed.
Default Voting Rights for Members in a Member-Managed LLC. In a member-managed Florida LLC, the default under the Revised LLC Act is that each member votes in accordance with the member’s then-current percentage of the profits interests in the LLC and that decisions of the members require the consent by members holding a majority of the then-current interests in the profits of the Florida LLC. Consent may be obtained either by an affirmative vote or a written consent, although notice of any action by written consent must be provided within 10 days to all members who did not consent.
Concept of “Managing Member” Eliminated. The Revised LLC Act eliminates the concept of a “managing member” after January 1, 2015. At that time, depending on other language in the operating agreement, Florida LLCs operating with one or more “managing members” are likely to be considered as member-managed, which may result in conflict between the operating agreements of such LLCs and the default provisions of the Revised LLC Act related to voting and management.
ACTION ITEM: To avoid ambiguity, Florida LLCs which have operating agreements that currently utilize the “managing-member” terminology should be amended to eliminate any use of that term and to clearly identify whether the LLC intends to be member-managed or manager-managed.
Default Voting Rights for Members in a Manager-Managed LLC. As to manager-managed Florida LLCs, the Revised LLC Act provides for a default rule that each member’s vote is proportionate to that member’s then-current percentage of the profits interests in the LLC, the same as is the case for member-managed LLCs.
Voting on Specified Matters. Under the Revised LLC Act, the affirmative vote or consent of all members is required in order to amend the articles of organization or the operating agreement, but these default voting provisions may be modified in the Florida LLC’s articles or operating agreement. In addition, all members have the right to vote on dissolutions and mergers. Also, the Revised LLC Act does not prohibit the articles of organization or the operating agreement from allowing actions to be taken by a vote of less than a majority in interest in the Florida LLC.
Standards of Care for Members and Managers
The Revised LLC Act imposes fiduciary duties of loyalty and care that are “cabined” in the sense that they constitute the only default fiduciary duties applicable to members of a member-managed Florida LLC and to managers of a manager-managed Florida LLC. The operating agreement can, however, provide for broader fiduciary duties. Furthermore, the operating agreement may provide for a carve-back on the default fiduciary duties, but only to the extent that such alterations are not manifestly unreasonable. In contrast to what is permitted in Delaware and certain other states, the Revised LLC Act does not permit these default fiduciary duties of loyalty and care to be eliminated entirely.
“Olmstead Patch” Retained
The Revised LLC Act retains the so-called “Olmstead patch” provisions adopted in 2011 that (i) make a charging order the “sole and exclusive” remedy available to a judgment creditor seeking to satisfy a judgment from the judgment debtor’s interest in a Florida LLC which has more than one member, and (ii) which establish the way in which remedies, in addition to the charging order remedy, can be exercised by a judgment creditor seeking to satisfy a judgment from the judgment debtor’s interest in a Florida LLC that is a single-member LLC.
Dissociation of Members
The Revised LLC Act provides that a person is “dissociated” (i.e., effectively a withdrawal from the limited liability company, which can be rightful or wrongful and which can be voluntary or involuntary, resulting in that member no longer having any right to participate in management and retaining only economic rights) as a member of a Florida LLC upon the occurrence of one of fourteen events. In addition to these fourteen events, a member has the right to dissociate at any time by withdrawing by “express will,” but such dissociation will be characterized as either rightful or wrongful. A dissociation by “express will” is wrongful if it violates the operating agreement or, under certain circumstances, occurs prior to the winding up of the company. A person who wrongfully dissociates from a Florida LLC is liable for damages caused by the wrongful dissociation.
Derivative Action
Under the Revised LLC Act, the provisions concerning derivative actions with respect to Florida LLCs have been changed by eliminating what is often referred to as the “universal demand” standard and instead providing for the ability to avoid making a demand if the member can show that the demand would be futile. In addition, even if demand would not be futile, a member can accelerate the waiting period after making a demand in circumstances where irreparable injury would result to the LLC by waiting the normal waiting period.
Merger, Interest Exchange, Conversion and Domestication
The Revised LLC Act deals with the important issue of business combinations involving LLCs in a comprehensive and completely reorganized fashion. Four combination modalities are authorized. The first two are the traditional concepts of merger and conversion found in the existing LLC Act. The third option is the concept of an interest exchange, which has been available for many years in the corporate law context under the Florida Business Corporation Act. The fourth option is the in-bound domestication of non-U.S. entities that wish to operate as domestic LLCs in Florida, a concept that currently is available under Delaware law.
Appraisal Rights
As under prior law, the Revised LLC Act provides for so-called “appraisal rights” that permit payment of fair value of that member’s membership interest in certain circumstances related to the merger, conversion or other organic changes in the Florida LLC. Under the Revised LLC Act, however, a Florida LLC may modify, restrict or even entirely eliminate appraisal rights either in its articles of organization or operating agreement, provided each member whose appraisal rights are affected consents.
Summary
The January 1, 2015, effective date of the Revised LLC Act is quickly approaching. Members and managers of existing Florida LLCs should consult with their advisors to determine how the Revised LLC Act will impact their companies and in particular to consider amending the respective LLC’s operating agreement to comply with the Revised LLC Act.
