The New Arizona Limited Liability Company Act (the “New LLC Act”) will impact all Arizona limited liability companies this year. The Arizona Limited Liability Company Act was recently amended. For any Arizona LLC formed on or after September 1, 2019, the New LLC Act is already effective. And, beginning on September 1, 2020, all existing Arizona LLCs will be subject to the New LLC Act. That means action must be taken now to avoid unintentionally being subject to the default rules under the New LLC Act even if the LLC has an Operating Agreement.
Under the old Arizona law, LLC governance was controlled by both the old statutes and the operating agreement. And, under the new law, an existing Operating Agreement is still valid. However, if the operating agreement is silent with respect to any default provision under the New LLC Act, the new default rules will apply. While there are several default rules that cannot be changed, there are many more that can be. Some of the differences between the old law and the New LLC Act are significant. Some top considerations are:
Beware of the Oral Agreement
Be careful of what is said when agreeing to form an LLC. If a party can prove that a discussion regarding LLC management occurred and resulted in consensus, that oral agreement may now be the LLC’s Operating Agreement. Under the New LLC Act, it is not yet clear whether an oral agreement can modify an existing written Operating Agreement. Arguably, it can. Written Operating Agreements should specifically require that any oral agreements must be approved and documented in writing to eliminate future controversy.
Written Operating Agreement
Remember the New LLC Act only applies to the extent that the LLC does not have a valid Operating Agreement or the Operating Agreement is silent regarding an issue covered by the New LLC Act. For example, under the New LLC Act, even in a manager-managed LLC, the unanimous vote of all the Members may be required under some circumstances. It is now vitally important that Arizona LLCs have a written Operating Agreement to override some of these provisions.
The New LLC Act imposes default fiduciary duties on Members and Managers. The duties owed to the LLC and its members include the duty of loyalty and the duty of care. The application of these default fiduciary duties is different depending upon whether the LLC is member-managed or manager-managed. Regardless, the New LLC Act statutorily requires that members and managers exercise good faith and fair dealing in fulfilling their duties. And, while some fiduciary duties can be modified, limited, or even waived, the LLC cannot vary or eliminate the obligation of good faith and fair dealing.
Technically, Arizona LLCs that were formed prior to September 1, 2019 have until September 1, 2020 before the New LLC Act impacts them. However, we recommend not waiting until the deadline. A carefully negotiated and drafted Operating Agreement can take time to prepare. Amending or creating an Operating Agreement now may be in the best interest of the LLC.
In future articles we will address fiduciary duties in more detail, provisions and/or requirements for handling conflict of interest transactions, what provisions may warrant changes and what provisions in the New LLC Act cannot be changed.