Utah has recently adopted a new statute for limited liability companies (LLCs). The new act has a number of changes that could affect your LLC. You should seriously consider updating your operating agreement. Here are a few of the potentially impactful provisions:
- Limitation on Freedom to Contract? The old statute specifically embraced the freedom to contract—the rights of private parties to agree as they see fit. The new statute no longer mentions that right, and numerous provisions in the new statute limit the right to contract (see 7 below for some of these). This raises a question as to whether terms in pre-existing operating agreements will be enforceable under the new act, and how this might affect new operating agreements as well.
- What Exactly is the Operating Agreement? The new act includes a wide range of things as part of the operating agreement. Texts between the parties, emails, conversations, and even course of dealings can all be considered part of the operating agreement (even if they are not in it). Add to this the fact that the operating agreement does not have to be signed to be binding, and you have a nightmare if a claim is ever filed in court just trying to understand what the parties agreed to. The company’s organizing documents should address this problem and attempt to nip it in the bud.
- Approval of All Members Sometimes Required. In some situations, such as amending the operating agreement or selling the company, an approval of all members is required. This means that a minority owner can effectively veto the company’s action, even if that owner owns less than 1% of the company (unlike a corporation, where a simple majority rules).
- New Act “Fills the Gaps.” The new act specifically is designed to fill in default provisions where an operating agreement is silent. In other words, if a term on a certain subject doesn’t appear in an operating agreement but one on that subject appears in the new act, it becomes binding on the company. This makes having a comprehensive operating agreement or familiarity with the act important.
- Duty of Loyalty. Most LLCs are small with few members or managers. It is not uncommon for a member or manager to “self-deal,” or, in other words, engage in a legal relationship with the company that goes beyond being a member or manager. For example, if a manager leases equipment or property to the company, lends money to the company, or licenses a patent or trademark to the company, those activities would be self-dealing. Despite it being common for those things to happen in an LLC, the statute forbids it (with an exception for fairness). It is advisable to establish what is fair or not in the operating agreement.
- Duty to Disclose. Before a vote or consent is needed, the company has to provide each of the members with all the information material to make a decision. In other words, no vote can be held or consent sought unless the company provides all material information. Not only is that an undue burden for many companies, but the legal implications are significant. Providing disclosures not only takes time, but it seems to require a certain amount of diligence to consider everything material before having the vote.
- Specific Limitations on Operating Agreement. The new statute identifies at least 14 areas where a term in an operating agreement is unenforceable, even though the parties agree to it. Among those: (1) the parties cannot choose to apply the laws of any other state; (2) the parties can only make limited adjustments to how the statute treats the duty of loyalty or the duty of care; (3) the parties cannot limit liability for bad faith, willful misconduct, or recklessness; (4) where members, managers, or former principals request access to company internal information, the operating agreement is prevented from limiting that access beyond a certain point, regardless of what the parties may agree to; (5) the parties cannot change some of the causes of dissolution set out in the statute; (6) the parties are limited in how they deal with self-dealing transactions; and (7) the parties are limited in altering fiduciary duties of principals. Whether advisable or not, the freedom of the parties to contract is limited in those areas, and others.
The information contained on this page and website is provided for educational purposes and to provide you with general legal information, but does not constitute specific legal advice for you or your situation. By reading or using this page and website, you understand and acknowledge that there is no attorney-client relationship between you and the owners of the website, except as may exist through a formal agreement. The information contained on this page and website should not be relied upon as legal advice and should not serve as a substitute for seeking competent legal advice from an attorney licensed to practice law in your state.