Don’t Ignore the RULLCA Time Bomb
On January 1, 2014, the California Revised Uniform Limited Liability Company Act (“RULLCA”) came into effect. Many LLCs organized or operated in California have failed to take account of the drastic changes imposed by RULLCA. The failure to address these changes may represent a ticking time bomb for these businesses. This article does not purport to cover all of the RULLCA-related threats that LLCs operating in California face.
One danger imposed by RULLCA is its default requirement of unanimity for certain actions. That is, if an LLC’s operating agreement does not contain language to the contrary, RULLCA requires that ALL OF AN LLC’s MEMBERS approve: (i) any action outside the ordinary course of the LLC’s business, (ii) the sale or LEASE of substantially all of the LLC’s property in some cases, and (iii) the amendment of the LLC’s operating agreement.
One of the potential horrors of RULLCA can be illustrated by the following fact pattern:
An LLC is formed to purchase, reposition and then cash-flow a commercial property. After a number of years of leasing out various storefronts (or offices) to individual tenants, the LLC receives a very favorable offer from a buyer (or large tenant) for the entire property.
Common sense would seem to dictate that the manager of the LLC could assess the offer and then sell the property with the approval of a majority of the members. However, if the LLC’s operating agreement does not contain the necessary language, the LLC may be forced to obtain the unanimous approval of its members. Therefore, a single passive member with less than a 1% ownership interest could block the transaction. (NOTE: Under a different fact pattern, a less than 1% passive member could also prevent a start-up company from engaging in a crucial change to its business that is necessary to avoid bankruptcy.)
And just when the LLC manager thinks it couldn’t get any worse, things could devolve further. RULLCA imposes a duty of care upon LLC managers. Because a simple amendment to the company’s operating agreement could have prevented this tyranny of a minority owner, a manager who knows, or should know, of the dangers of RULLCA and who does not take these simple steps to alleviate these dangers could potentially be accused of having violated his or her duty of care.
Finally, just because an LLC was formed outside of California (e.g., Delaware), doesn’t mean that the LLC is free and clear of the obligations of RULLCA. Although RULLCA states that the law of the state of formation governs: the organization of the LLC, its internal affairs, the authority of its members and managers, and the liability of a member as member and a manager as manager for the debts, obligations, or other liabilities of the limited liability company. RULLCA also states that it applies to foreign LLCs that are registered in California. It is unclear to what matters RULLCA would be applicable with respect to a foreign LLC registered in California. However, the risk of RULLCA applying to some aspect of your foreign LLC can be minimized, if not eliminated, with appropriate language in your LLC’s operating agreement.
If you conduct your business through an LLC in the State of California, Mr. Badyal is available to help you address these issues. You can reach him by phone at 619-500-4540 or by email at email@example.com.