New LLC Act May Curtail Authority Of Managers Of Pre-Existing LLCs

Posted on October 14, 2014 by Keith Paul Bishop

California's Revised Uniform Limited Liability Company Act (RULLCA) took effect on the first of this year.  The RULLCA repealed California's first LLC law - the Beverly-Killea Limited Liability Company Act.  The forced subjugation of pre-existing LLCs to the RULLCA is subject to constitutional question.  See Legislature Shuts The Barn Door After The Horse Has Bolted And Then Burns Down The Barn.  If the transition provisions of the RULLCA do survive constitutional challenge, the problems only begin to multiply for preexisting LLCs.

One issue may be that pre-existing LLCs may find that their managers' authority has been curtailed by statute.  Under the RULLCA, the consent of all members of a manager-managed LLC is required to:

  • Sell, lease, exchange, or otherwise dispose of all, or substantially all, of the limited liability company’s property, with or without the goodwill, outside the ordinary course of the limited liability company’s activities.
  • Approve a merger or conversion under Article 10 (commencing with Section 17710.01).
  • Undertake any other act outside the ordinary course of the limited liability company’s activities.
  • Amend the operating agreement.

Cal. Corp. Code § 17704.07(c).  The provisions of this statute may only be varied by a written operating agreement.  Cal. Corp. Code 17701.10(d).

The problem for some pre-existing LLCs is that their operating agreements were not drafted with these statutory consent rights in mind.  As a result, any manager action outside the ordinary course of the LLC's business may now require the consent of all members.

The problem is further compounded by the RULLCA's transition provisions.  the RULLCA repealed the prior law and provides that it governs all domestic LLCs existing on or after January 1, 2014.  RULLCA also provides that the title applies to "the acts or transactions by . . . managers . . . occurring, or contracts entered into by the limited liability company or by the members or managers of the limited liability company, on or after January 1, 2014".  Cal. Corp. Code § 17713.04(b).  However, the RULLCA further provides that the prior (albeit repealed) law governs "all acts or transaction by  . . . managers or contracts entered into by the limited liability company or by the members or managers of the limited liability company, prior to that date."  Id.   Thus, should a manager's action taken outside the ordinary course after January 1 be considered act or transaction by a manager subject to the RULLCA because it occurred after January 1 or should the prior law govern because the operating agreement was entered into prior to that date?