Recent Changes to Arizona's New LLC Law
[Note: This is part 2 of series of articles regarding changes to Arizona's Limited Liability Company Law]
The RULLCA offered many improvements and clarifications to the Old Act, and the New Act retains the language of RULLCA as much as possible. Despite that, there are a number of areas in which the drafting committee of the New Act determined that Arizona’s existing law and procedures should be retained, and those sections of the Old Act were changed minimally, if at all.
SUBJECTS FOR WHICH EXISTING ARIZONA LAW HAS BEEN RETAINED
The language in the New Act dealing with LLC formation and filings to be made by them is essentially unchanged. For example, the document forming an LLC is still called the Articles of Organization. It must still state whether the company is manager-managed or member-managed, and it must still list the names and addresses of the managers and certain members. This is the same as in the Old Act.
One notable change under the New Act is that the operational address of the company no longer must be in Arizona, and need not be a street address but can be a post office box (the concept of “known place of business” has been replaced with “principal address”). A.R.S. § 29-3201. The statutory agent in Arizona must still be listed with a street address, however. Whether separate publication is required will depend on the statutory agent’s address, not the company’s address. The remaining provisions relating to executing and filing of documents, as well as penalties for improper or fraudulent filing, are essentially the same in the New Act as in the Old Act. See, e.g., A.R.S. §29-3201 - 29-3206.
SUBJECTS THE OPERATING AGREEMENT CANNOT CHANGE
A.R.S. § 29-3105 lists the items that cannot be changed by the operating agreement, which include:
- being governed by the law of a jurisdiction other than Arizona.
- varying the company’s capacity to sue and be sued in its own name.
- varying any provision related to statutory agents or the Arizona Corporation Commission.
- varying judicial order signing and filing requirements.
- eliminating the contractual obligation of good faith and fair dealing or the duty to refrain from willful or intentional misconduct.
- limiting or eliminating a person’s liability for violation of the contractual obligation of good faith and fair dealing or conduct involving willful or intentional misconduct.
- unreasonably restricting the duties and rights of members and managers to obtain information about the company (but reasonable restrictions are permissible).
- varying the default causes of dissolution (but additional triggers for dissolution are permissible).
- unreasonably restricting the right of a member to maintain a derivative action, but the operating agreement may require a member to plead and prove an actual or threatened injury not suffered by the company.
- varying the requirements for special litigation committees, unless the operating agreement provides that the company does not have a special litigation committee.
- varying the required contents of a plan of merger, interest exchange, conversion, domestication or division.
- restricting the rights of persons other than a member or manager (with a few exceptions).
- reducing or eliminating distribution restrictions.
SUBJECTS THE OPERATING AGREEMENT MAY CHANGE
Sections 105(D)-(E) of the New Act set forth a number of provisions that are specifically permitted in an operating agreement. While it may be redundant to set these out—as any provisions not specifically prohibited from being in an operating agreement are permitted the committee thought it important to make sure there was no question that these provisions are permissible. These provisions include:
- expanding, limiting or eliminating the duty of care, duty of loyalty or any other fiduciary duty of a member or manager to the company or anyone bound by the operating agreement, except for elimination of the duty of good faith and fair dealing or the duty to refrain from willful or intentional misconduct.
- expanding, limiting or eliminating liability of a member or manager for breach of the operating agreement, or breach of duties, including the duties of care and loyalty, except for elimination of liability for breaches of the duty of good faith and fair dealing or the duty to refrain from willful or intentional misconduct.
- specifying a method by which specific acts thatwould otherwise be breaches of fiduciary or other duties could be authorized or ratified.
- specifying a method by which damages from specific acts that would otherwise be breaches of fiduciary or other duties could be indemnified or reimbursed.
- defining the fiduciary duties of a member or manager to be the same as the fiduciary duties of a director, officer or shareholder of an Arizona corporation.
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.