On January 1, 2016, the Utah Revised Uniform Limited Liability Company Act (the “New Act”), will affect ALL Utah LLCs, even those formed prior to the New Act’s adoption. The New Act is surprising because it doesn’t simply revise portions of the prior act to correct identified problems and shortcomings, choosing to wholesale replace the prior version. Utah lawmakers didn’t even bother looking to the act in Delaware, a principal state for business organization law, for guidance.
The New Act has a number of default positions that deviate from the prior act and may result in some unpleasant surprises for members and managers of Utah LLCs unless those positions are “overridden” by an LLC’s operating agreement–an agreement entered into by an LLC’s owners (members) with rules, regulations, and provisions for the LLC’s governance. Operating agreements should address at least the following default provisions of the New Act:
- Oral operating agreements. The New Act permits oral operating agreements, which may not be fully developed or discussed by the parties. To avoid being subject to an oral operating agreement, an LLC’s written operating agreement should provide it is the only operating agreement.
- Per capita member voting. If an operating agreement doesn’t exist or is silent regarding voting, each member vote is equal under the New Act – so even if a member contributes nearly all of the capital, that member’s vote still counts equally with each other member.
- Required unanimity could result in minority member blocking. Under the New Act, any action outside an LLC’s ordinary course of activities and affairs requires unanimous member consent. If a company has not previously taken an action, even something routine such as member distributions, it may not be ordinary and require member unanimity. Unanimous approval is also required to approve mergers or amend the operating agreement.
- Equal manager voting. In a manager-managed entity, each manager has equal rights.
- Management default. A company is member-managed unless otherwise expressly stated in the operating agreement.
- Fiduciary duties and business opportunities. The New Act imposes arguably stricter fiduciary standards and requirements than the prior act, including standards related to competition.
The above list is just a sample of the default positions imposed by the New Act. Although the New Act will likely benefit closely-held entities and impose stricter standards of governance on management, investor-driven entities may find these default provisions to be inconsistent with the expectations of those investors.
We suggest that you review your existing Operating Agreement to evaluate whether it addresses the uncertainties under the New Act. We are available to assist you with this and are offering to conduct a review of the voting and governance provisions for a fixed fee engagement.
Please contact Shane Hanna if you have any questions or would like additional information.
