Major Changes to Washington’s LLC Act
[vc_row][vc_column][vc_column_text]Earlier this year, a new Washington Limited Liability Company Act was signed into law. Washington’s new LLC Act takes effect on January 1, 2016, and applies to all Washington LLCs, including those formed before the new Act’s effective date. The new Act represents a comprehensive reworking of the rules applicable to Washington LLCs. This Alert focuses on several aspects of the new Act of which managers and members of Washington LLCs should be aware respecting their existing LLC agreements.
Oral LLC Agreements Permitted
Under the old Act, LLC agreements generally had to be in writing. The new Act removes the writing requirement by providing that an LLC agreement may be “oral, implied, in a record, or in any combination.” However, an oral LLC agreement may not override the default laws of the Act, which are discussed further below. While oral LLC agreements are now permitted, we recommend that all LLC agreements be in writing. Additionally, in order to avoid unintentional amendments to written LLC agreements, we recommend that LLC agreements include a provision requiring that all amendments be made in writing.
Fiduciary Duties Owed by Managers and Managing Members
The new Act explicitly sets forth fiduciary duties for managers and managing members of an LLC. These include general duties of care and loyalty, which can be expanded or limited in the LLC agreement, subject to certain limitations. The basic duties that may not be abrogated, even by agreement, include the implied duty of good faith and fair dealing, the duty to avoid intentional misconduct and knowing violations of law, and the duty not to make distributions in violation of the LLC agreement or which would render the LLC unable to pay its debts as they become due.
The new Act clarifies the fiduciary duties that apply to managers and members. These duties may not be addressed by existing LLC agreements. The fiduciary duty of loyalty, in particular, is not covered in many LLC agreements. Members and managers of existing LLCs may wish to consider limiting the statutorily imposed fiduciary duties.
Member Voting Rules
One Member, One Vote Default – The default rules have also changed with respect to member voting. Under the old Act, if the LLC agreement did not provide voting rules, then the statute provided that the vote was tallied in accordance with the agreed value of each member’s recorded contributions to the LLC, as stated in the LLC’s records. Therefore, in the absence of a written LLC agreement, members contributing a majority of the agreed value could approve a matter. The new Act provides that every member has one vote unless the LLC agreement specifically provides otherwise. Many LLC agreements address voting rules comprehensively, and so the default rules do not arise. But if your LLC agreement is silent on this point, or does not address voting comprehensively, revisions should be made unless LLC members are comfortable with each member having a single vote, irrespective of the member’s equity interest in the LLC.
Unanimity Requirement – The new Act also lists a default set of actions requiring unanimous member approval. The list of covered items requiring unanimity includes amendments to the LLC agreement, admission of new members, sale of all or substantially all of the LLCs assets, and any other act outside the ordinary course of business. An LLC agreement may provide for different voting requirements if more flexibility is desired, but again, if the LLC agreement is silent, the unanimity rules will apply.
Increased Access to LLC Records
The old Act provided that an LLC must maintain a short list of common records which members had limited rights to review. Members had no statutory right to review non-listed items, such as accounting records and tax returns. The new Act significantly expands the list of records that an LLC must maintain and make available to members for review. The list of records that must be made available cannot be unreasonably restricted by the LLC agreement.
Most LLC agreements are silent on the topic of records or do not meet the records retention and access rules of the new Act. Existing agreements, especially for LLCs with a large number of members or a potential for dispute, should be amended to comply with the new laws.
Board as Manager
Whereas the old Act was silent on whether a board or committee could be a manager of an LLC, the new Act expressly permits a board or committee to serve as manager. If the members of an LLC wish to adopt a “board of directors” type of structure, the LLC agreement must be revised to designate a board as manager and to specify rules for electing board members, board member qualifications, terms, quorum requirements, and other administrative items associated with board management. Additionally, since the new Act provides that no individual board member will be an agent of the LLC merely by virtue of being a board member, the LLC agreement should specify who has the authority to act on behalf of the board.
Mergers and Dissenters’ Rights
The new Act requires separate approval of a merger by written consent of the members whenever members of an LLC are to be personally liable for the debts of the surviving entity. Additionally, under the old Act LLC members had the right to dissent from an LLC’s merger and obtain payment for the value of their interest in the LLC. These dissenters’ rights could not be eliminated by the LLC agreement. Under the new Act, dissenters’ rights may be waived by agreement.
For further information, questions regarding the implications of the new Act, or to request a review of your LLC Agreement, please contact your Karr Tuttle Campbell attorney.
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