Under RULLCA Operating Agreements Have Limits

At the beginning of this year, the California Revised Uniform Limited Liability Company Act (RULLCA) took effect. (See RULLCA Brings New LLC Laws to California in 2014.) This post discusses how under RULLCA operating agreements for LLCs have a wide variety of limits.

RULLCA operating agreements‘ limits are addressed in Corporations Code Section 17701.10. Unfortunately, that section’s discussion of mandatory provisions is pretty difficult to understand for the following reasons.

• It is quite long and includes three levels of subsections.
• It rarely makes points directly. Instead, it refers extensively to other sections of the Corporations Code.
• It largely addresses what may not be done, rather than what must be done.
• It has numerous exceptions, and exceptions to exceptions.

As a result, this post discusses RULLCA operating agreement limits in general terms. A detailed analysis of the issues discussed below would be far too long for a blog post.

RULLCA Operating Agreements and Court Matters

An operating agreement may not:

• Vary the LLC’s right to sue or be sued.
• Vary the court’s power to order the signing of certain documents or their filing with the Secretary of State.
• Vary applicability of California law to certain matters.
• Vary the power of a court to decree dissolution, or requirements for dissolution, under certain circumstances.
• “Unreasonably” (not defined) restrict members’ rights to bring certain types of lawsuits.

RULLCA Operating Agreements and Fiduciary Duties

Corporations Code Section 17704.09 addresses fiduciary duties. That section specifies the duties in some detail. Generally, those duties are as follows.

• Managers and managing members owe the LLC and its members the duties of loyalty and care.
• Managers and all members must discharge duties and exercise rights consistent with the obligation of good faith and fair dealing.

Early on, Section 17701.10 states that these obligations may not be eliminated. Later, however, that section permits varying fiduciary duties, but with a variety imprecise limitations. For example:

• The operating agreement may identify activities that do not violate members’ duty of loyalty if they are “not manifestly unreasonable.”
• Members’ duty of care may be reduced if it is not reduced “unreasonably”.
• The operating agreement may prescribe standards for the obligation of good faith and fair dealing so long as “the standards are not manifestly unreasonable.”
• Mangers’ fiduciary duties may be modified only with the members’ “informed consent.”

Miscellany

Various other restrictions in Section 17701.10 pertain to:

• Maintaining information about the LLC and making it available to members.
• Conversions and mergers of LLCs.
• Restricting the rights of persons other than members and managers.
• Ensuring that multiple membership classes are permitted.

In summary, while LLCs offer a great deal of flexibility, under RULLCA operating agreements’ flexibility is not unlimited.

Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.