- Do you currently operate a Florida limited liability company (“LLC”) as a member-managed entity?
- Does your LLC operating agreement contain provisions addressing the “appraisal rights” of members?
- Does your LLC operating agreement contain provisions addressing the withdrawal of a member from the LLC?
We assist many clients in the formation of their businesses here at Johnson, Pope, Bokor, Ruppel & Burns, LLP. A large percentage of the businesses our Business Planning Group represents are in the form of limited liability companies (“LLCs”). On April 30, 2013, Senate Bill 1300, the Florida Revised Limited Liability Act, was unanimously passed by the Florida Senate. On May 3, 2013, the Florida House of Representatives unanimously passed the Florida Revised Limited Liability Act in the form of amended House Bill 1079. Governor Scott signed the bill into law on June 14, 2013.
Effective January 1, 2014, Florida Statutes Section 605 (“Section 605”) governs LLCs in Florida and applies to all LLCs formed in the State of Florida on or after January 1, 2014. Calendar year 2014 will be a transition year in which LLCs that were formed prior to January 1, 2014 may continue to operate under the existing Florida Limited Liability Company Act, as codified in Florida Statutes Section 608 (“Section 608”) until January 1, 2015. Alternatively, those LLCs can elect to be governed currently by Section 605 by amending their governing documents accordingly. However, on January 1, 2015, Section 608 will be repealed, and all Florida LLCs, regardless of when formed, will be thereafter subject to Section 605.
Section 605 introduced many significant changes to established Florida LLC laws governing the operation of LLCs, irrespective of the Section 605 effective date. This means that every LLC in Florida will be affected. A few of the most significant changes in this article are highlighted below.
In the past, it was fairly common for LLCs to designate a “Managing Member” who was a member who had the exclusive authority to act on behalf of the LLC. Under this type of management arrangement, other LLC members would have no managerial authority, implied or actual. Section 605 changes this form of management and does not recognize the “managing member” concept and, instead, will recognize only “Member Management”, where each member has the management and decision-making authority, or “Manager Management”, where decision-making authority is delegated to one or more individuals without the requirement of that manager being a member of the LLC. Going forward, it is imperative that any LLC with a “Member Manager” structure be changed to one of the other recognized management structures. Most LLCs will likely incorporate the “Manager Managed” form. Although it is unlikely that the operations and management of the LLC will change, documentation will need to be revised to reflect such changes.
Generally, an “appraisal right” is the right given to a minority interest holder of an LLC to protect against the majority interest holder from eliminating or substantially changing the minority interest holder’s rights. Under Section 608, “appraisal rights” are statutory rights of an LLC member to force a judicial proceeding to determine the fair price of such LLC member’s interest in the LLC. This procedure also obligates the LLC to repurchase such interests of the member exercising his or her appraisal rights at the judicially-determined price. Therefore, if you are involved with a LLC, you must read your operating agreement. Under Section 608, members of a Florida LLC were entitled to appraisal rights upon the consummation of a merger or conversion involving the LLC if the members possessed the right to vote on such transaction.
Section 605 has expanded the list of specific actions that trigger “appraisal rights” of the LLC members and entitles each member to payment of fair market value for his or her membership interest. Under Section 605, “appraisal rights” are triggered in the following instances (i) upon an interest exchange or an asset sale; (ii) when an LLC’s operating agreement is amended in a manner that reduces a member’s interest when the LLC has an obligation to repurchase that interest; (iii) when a member’s voting or other rights are changed in a manner adverse to a member’s interests; and (iv) when an LLC attempts to change or abolish a member’s appraisal rights. These appraisal rights can be waived by all members of the LLC if such waiver is specifically stated in the LLC operating agreement. In order to avoid or limit these appraisal rights, the LLC operating agreement must be amended to specifically eliminate these appraisal rights.
Dissociation and Dissolution
Section 605 modifies provisions related to dissociation of members and dissolution of LLCs. Section 605 provides that a member may dissociate at any time by withdrawing by “express will” regardless of whether this is allowed by the operating agreement. Section 608 states that a member could not dissociate at all prior to dissolution or winding up, unless authorized in the articles of organization or operating agreement,. Section 605 also introduces the concept of a “wrongful dissociation” in violation of the operating agreement. If a member dissociates from an LLC prior to winding up: (i) the member’s right to participate as a member in the management and conduct of the LLC’s activities and affairs terminates; (ii) if the LLC is member-managed, the member’s fiduciary duties of loyalty and care to the LLC and its other members terminate; and (iii) the member retains the his or her right to receive distributions from the LLC. A member who wrongfully dissociates is liable to the LLC and to the other members for damages caused by the dissociation, and the LLC may have the right to damages against a member who wrongfully dissociates.
Section 605 modifies default events causing dissolution, including: (i) the occurrence of an event described in the operating agreement; (ii) the consent of all members; (iii) the passage of 90 days without a member; (iv) the entry of a decree of judicial dissolution; or (v) the filing of a statement of administrative dissolution by the Department.
Section 605 prohibits having a provision in the LLC operating agreement which eliminates the fiduciary duties of the members to the LLC, even if agreed to by the members or is set forth in the LLC’s governing documents. The duties owed by the members to the LLC are that of loyalty and care. Section. 605 defines the default duty of care as “limited to refraining from engaging in grossly negligent or reckless conduct, willful or intentional misconduct, or a knowing violation of law.” Section 605 will not enforce the following provisions limiting the members’ duties involving: (i) any attempt to relieve or exonerate a person from liability for conduct involving bad faith, willful or intentional conduct or a knowing violation of law; (ii) any attempt to eliminate the duty of loyalty or care; or (iii) any attempt to provide indemnification to a member or manager for (1) conduct involving bad faith, willful or intentional misconduct or a knowing violation of law; (2) a transaction from which the member or manager derived an improper personal benefit; or (3) a breach of fiduciary duties. Although the duty of loyalty and care cannot be eliminated, both duties can be limited through the LLC operating agreement.
Section 605 has many other default rules that can be changed in the LLC operating agreement. Your operating agreement may need to be amended prior to January 1, 2015. If you would like to discuss any of the changes to Section 605, please feel free to call and schedule an appointment with our Business Planning Group.