Overview of Changes to Arizona's LLC Act
In 1992 Arizona's enacted limited liability company law became effective. Quite progressive at the time, the act combined some of the best parts of corporation and partnership law. However, over the year fractures in the act became apparent. Problem provisions cried for change.
Beginning in 2010, and often meeting twice a month over the next seven years, an Arizona State Bar committee presented a work product that in 2018 was introduced to Arizona's legislature. Governor Ducey signed the act into law on April 10, 2018, thereby updating Arizona’s existing LLC law.
The new law (RULLCA) became effective last month (on Aug. 31, 2019). Designed to be implemented in stages, the RULLCA will apply to Arizona LLCs formed on or after Sept. 1, 2019 but will not apply to existing (and some other LLCs) until Sept. 1, 2020. Any LLC company formed, converted or domesticated before Sept. 1, 2019 may elect voluntarily to be subject to the New Act by amending its operating agreement accordingly. A.R.S. § 29-3110.
With few exceptions, the agreement between the members (known as the "Operating Agreement") still constitutes the final rules and will govern the company and the relationship of its members and managers. This is true even if the provisions of the operating agreement differ from the default rules set forth in the RULLCA. A.R.S. §§ 29-3105(A), (C).
The Operating Agreement can be written, oral or even implied. Consequently, there will almost always be some agreement among the members about their relationship that can be considered an operating agreement. But this implies that there will almost certainly be some disagreement as well. This may result in litigation. In the event that the Operating Agreement is not written, the members will need to prove what their original agreement was and perhaps if and how it was changed. A.R.S. § 29-3102(17) The best practice will be to formalize the Operating Agreement in writing.
The new RULLCA provides that existing LLCs’ operating agreements, so long as their provisions were valid under the old act at the time of the operating agreement’s execution, will remain valid under the new legislation. A.R.S. § 29-3110(D). Regardless, the Operating Agreements for existing LLCs should be reviewed to determine whether the provisions of the RULLCA addresses issues that are contrary to the expectations or existing policies of the members of the companies. This may be of particular important in areas involving the fiduciary duties of the members or managers. A.R.S. § § 29-3105(C)-(E)
SOME KEY ASPECTS OF THE NEW LLC ACT:
- The new statute applies to limited liability companies formed, converted or domesticated on or after Sept. 1, 2019, and all other LLCs on Sept. 1, 2020.
- Retains current procedures for formation and filing, mergers, conversions and other entity transactions, rights of creditors, distributions and many other matters.
- On certain itemized issues, an operating agreement cannot override the new act’s rules. A.R.S. § 29-3105.
- Codifies duties of managers and members and indemnification and reimbursement rights.
- Clarifies rules regarding member voting and expulsion, information rights, derivative actions, dissolution and registering of foreign “series” companies.
[Note: This is part 1 of series of articles regarding changes to Arizona's Limited Liability Company Law]
IF YOU OPERATE AN EXISTING LLC
Members and managers of existing LLCs should take this opportunity to review existing operating agreements, particularly provisions on fiduciary duties, in light of the new law, and make appropriate changes.