Will Your Vote Count? Member and Manager Voting under Arizona’s New LLC Act
Arizona's new Limited Liability Company Act (the "New Act"), which goes into effect for all Arizona LLCs on September 1, 2020, and already governs limited liability companies (each an "LLC") formed on or after September 1, 2019, sets forth default provisions regarding member and manager voting that may impact you and your LLC. This article specifically focuses on voting in manager-managed LLCs.
It is vitally important that your LLC has a written Operating Agreement that specifies the voting requirements for managers and members to make certain decisions for the LLC. Otherwise, the New Act's default rules will apply and may have unintended consequences for you and your LLC, particularly if your LLC has a disproportionate ownership structure.
Under the New Act, the manager of the LLC makes any decisions that fall within the ordinary course of the LLC's activities. In addition, the manager, or a majority vote of the managers if the LLC has more than one manager, makes decisions regarding the following:
- Matters that are outside of the LLC's ordinary activities and affairs, but are within the scope of the LLC purpose. Prior to the New Act, it was common for the formation documents or Operating Agreement of many LLCs to state the purpose of the LLC as "any legal purpose." However, narrowing the purpose of the LLC beyond this broad definition can serve as a limit on the power of a manager by only allowing the manager to make decisions regarding transactions and activities that fall within the stated purpose. Decisions that are outside of the scope of the stated purpose of the LLC would require the LLC members to unanimously agree;
- Matters where it is known that the managers do not agree;
- Whether to make distributions before the LLC is dissolved and wound up; and
- Whether to advance a member's or manager's defense expenses for claims arising because of the person's capacity as a member or manager of the LLC.
Several types of votes under the New Act require the approval of a "majority in interest of the members," including adding or removing a manager and voting to dissolve the LLC. If your LLC has membership interests that are not evenly distributed, it is crucial that the LLC has an Operating Agreement defining voting rights because the New Act contains inconsistent language allowing each member to have an equal vote, despite a disproportionate membership interest. For example, if one LLC member owns a 90% membership interest and the other LLC member owns a 10% membership interest, the New Act's language provides that, unless otherwise agreed, the members have equal voting rights.
The New Act requires all members to agree in a wide variety of circumstances. Unless your LLC Operating Agreement states differently, the LLC members must unanimously agree to the following:
- Transactions that violate the Operating Agreement, including those outside the purpose of the LLC;
- Amending the Operating Agreement;
- Changing the management structure of an LLC from member-managed to manager-managed, or from manager-managed to member-managed;
- Issuing a transferable interest in the LLC;
- Admitting a new member to the LLC;
- Changing the obligation of an LLC member to make a contribution to the LLC;
- Indemnifying a member or manager for violating the Operating Agreement or a fiduciary duty;
- Authorizing or ratifying the action of a manager or a member that is in violation of the duty of loyalty;
- Rescinding the dissolution of the LLC; and
- Approving a plan to merge, convert, domesticate, or divide the LLC, or have the LLC acquired by another entity.
The default voting rules under the New Act, described in this article, may be overridden by an Operating Agreement in which the members and managers agree to modify the approval needed for certain LLC actions. These important approval decisions may impact both you and your LLC.
The default voting rules are one way the New Act may impact you and your LLC. However, the New Act implemented many changes to member voting rights that existed under the prior law. We recommend that you create a written Operating Agreement or review your existing Operating Agreement to ensure that the default rules related to voting rights of members under New Act do not have any unintentional impact on you or your LLC. Our team is available to discuss how the default voting rights under New Act may impact your LLC and guide you through any needed decisions.
About the Authors: Beth S. Cohn is a State Bar of Arizona certified tax specialist, CPA and business attorney and shareholder at the Phoenix law firm of Jaburg Wilk. Lisa Paine, Nichole Wilk, and Stephanie Fierro and are all partners of the firm in the corporate transactions and business planning group. They assist clients with various business matters including entity formation.