ALABAMA LIMITED LIABILITY COMPANY LAW OF 2014 September 9, 2015 Robert J. Riccio, J.D., LL.M., CPA Hand Arendall LLC (251) 694-6216 P.O. Box 123 Mobile, Alabama 36601 IN GENERAL Result of a five year project by the Alabama Law Institute First substantive change since 1997 Effective dates: o Mandatory for LLC s formed on or after Jan. 1, 2015 o Elective for LLC s formed before that date Although all amendments/restatements after Jan. 1, 2015 must conform o Applies to all LLCs as of Jan. 1, 2017 Prior LLC Law repealed in its entirety LEGAL SOURCES OF ORIGIN: Six different uniform/model acts: o RUPA, RULPA, ULPA, RULLCA, RPLLCA, RMBCA Four different states: o Delaware o Colorado o Texas o Virginia Plus, concepts and terminology from Alabama general and limited partnership laws CERTIFICATE OF FORMATION (10A-5A-2.01) Certificate of Formation replaces Articles of Organization o Do not use after Articles of Organization after Dec. 31, 2014 Certificate is intended as a notice filing only o Only function is to serve as notice to the state and third parties that the LLC exists and how to contact it o No substantive provisions are contemplated, nor are they recommended to be included, in the certificate include at your own risk o Certificate no longer controls or binds anyone or anything, and it does not trump LLC agreement (formerly the Operating Agreement) If there is a conflict, the LLC agreement governs as between members, certificate governs as to 3rd parties, but only to the extent they actual rely All substantive matters should be included in the LLC agreement o Reflective of the drafters intent that the business agreement of the parties, as it may evolve over time, should control - 1 -
Local filing is retained Certificate of formation requirements in Chapter 5A now override the requirements in Chapter 1 o Essentially only four things required: 1) Name 2) Registered agent 3) Registered office 4) Statement that there is at least one member o No longer required: 1) Type of entity 2) Purposes of the entity 3) Name and address of the organizer (although still signed by an organizer) 4) Any other provision commonly found in the Articles, e.g., indemnification, admission of members, dissolution PURPOSES (10A-5A-1.04) May carry on any lawful activity, whether or not for profit o Can be used for purposes other than carrying on a business (e.g., holding title to property and estate planning) o Previously spoke in terms of business, whether or not for profit o Now refers to activities and affairs instead of business Explicitly states the intent to authorize use for nonprofit activities and affairs o THIS DOES NOT MEAN AN LLC CAN BE A 501(c)(3)!!! LIMITED LIABILITY COMPANY AGREEMENT (10A-5A-1.08) Every company MUST have an LLC agreement (10A-5A-2.01) o Oral operating agreements are permitted o Implied operating agreements are permitted In multi-member LLCs, a written LLC agreement now becomes crucial o Otherwise no way to know what the terms of the agreement actually are o Most statutory default rules can be overridden by oral or implied agreement, however, a few still have writing requirements But even if there is a writing that requires written amendments, under Alabama law such agreements can nevertheless be modified orally in certain situations o i.e., the writing requirement can be waived by the party it was intended to protect so the oral modification serves as proof of both the modification and the waiver See Ex Parte Coleman 861 So. 2d 1080 (Ala. 2003) o This will be an issue, therefore, in any LLC with only two members o Almost certain to lead to additional litigation among LLC members o Moving from the certainty of a written agreement to the uncertainty of he said she said testimony The LLC is bound by and may enforce the LLC agreement regardless of whether it is a party to the agreement (applies to both single and multi-member LLC s) In single-member LLC s, statute makes clear that an LLC agreement is not unenforceable by reason of there being only one person who is a party to the agreement (10A-5A-1.02) o Often times you will see SMLLC agreements signed individually as the sole - 2 -
member and on behalf of the company as the sole member that is no longer necessary Since there is no requirement that a member have a financial interest or governance interest, and no requirement that they contribute to the LLC, you could have someone (e.g., an attorney) serve as an organizer in the truest sense, in that they are merely establishing the legal existence of the entity and nothing further LLC agreement can penalize members who do not fulfill their obligations under the agreement o Although this is often done under current law, the new law gives specific examples of permissible penalties, some of which previously may have been questionable: reducing or eliminating the member or transferee s proportionate interest subordinating the member's or transferee's transferable interest to nondefaulting members or transferees forcing a sale of the transferable interest, forfeiting the transferable interest, lending by other members or transferees of the amount necessary to meet the defaulting member's or transferee's commitment, fixing the value of the defaulting member's or transferee's transferable interest by appraisal or by formula and redemption at that value, or other penalty or consequence. However, there is a list of things that cannot be changed by the LLC agreement, which include, among others: o Agreements to make a capital contribution must be in writing o Cannot waive liability or the limitations period for making improper distributions o Vary the list of permissible activities that can be undertaken during winding up o Requirements for professional LLCs MEMBERS (10A-5A-4.01) Currently to be a member you must have at least some governance rights o Now membership requires neither governance rights nor financial rights The term financial rights has been replaced by the term transferable interest and defined as the right to receive distributions o Members are not required to make or be obligated to make a capital contributions o Plus, membership carries with it no statutory authority or power to bind the LLC In other words, a person is admitted as a member under any terms and conditions that may be provided in the LLC agreement o This appears to provide authority to use a springing member similar to what is found under Delaware law Note that until a transferee is admitted as a member voluntarily, the transferee has no obligations of a member, and is only charged with those obligations he has knowledge at the time of admission (10A-5A-5.02) o In other words liability may not be involuntarily imposed on a transferee by admitting the transferee without consent - 3 -
PROFITS AND LOSSES (10A-5A-4.05) There are no more profits and losses, just distributions o It was unclear what that term meant anyways tax income, accounting income, something else cash distributions are really all that matters Current law defaults to sharing profits and losses in proportion to contributions to the extent made and not returned o That left an open question in regard to non-cash contributions o New default is that members share equally in distributions CLAWBACK OF DISTRIBUTIONS (10A-5A-4.06) Restrictions Under current law, distribution may not be made unless, after the distribution is made, the assets of the LLC are sufficient to cover all of the LLC s liabilities o New distribution restrictions are much more detailed o Assets must still exceed liabilities But nonrecourse liabilities are excluded, And the value of assets encumbered by nonrecourse liabilities are only included to the extent such value exceeds the related nonrecourse liability Clawback a member who receives a distribution and knew it violated this provision at the time of the distribution, is liable to the LLC o Members without such knowledge are not liable o 2 year statute of limitations for liability under this section Knowledge and Notice is now defined (10A-5A-1.03) o Note that a member s knowledge, notice or receipt of a notification in his capacity as a member is not imputed to the LLC solely by virtue of that person being a member o If the member is also an agent of the LLC, such as an officer, then knowledge could potentially be imputed via the laws of agency MANAGEMENT (10A-5A-4.07) Not required to publicly declare member managed vs manager managed o Can switch back and forth o Can even designate some other governance structure altogether Because of that, there no longer a reference to management at all, and instead its referred to as direction and oversight Default: o Member managed o Majority rule for decisions in the ordinary course o Unanimous for decisions outside the ordinary course o All voting is per capita o Duty of loyalty and duty of care for persons charged with direction and oversight No statutory authority to bind (10A-5A-3.02) o No apparent authority for carrying on in the usual way o Must rely on agreement and the law of agency o Intended to give members more freedom to agree on appropriate governance structures - 4 -
RIGHT TO RELY ON OTHERS (10A-5A-1.08) Typically officers, directors, managers can rely on the reports of others (surveys, title reports, financial statements, etc) so long as they exercise good faith and ordinary care LLC agreement may now supersede those requirements, although implied covenant of good faith and fair dealing still applies ELIMINATION OF FIDUCIARY DUTIES (10A-5A-1.08) Fiduciary duties can be expanded, restricted, or eliminated by a written LLC agreement o Applies to both members and managers Only two exceptions: o The implied contractual covenant of good faith and fair dealing cannot be waived o Duty not to disclose or use information to the detriment of the LLC or other members cannot be waived WAIVER OF BREACH OF CONTRACT LIABILITY (10A-5A-1.08) The LLC Agreement can eliminate any and all liabilities for breach of contract of a member to the company or of a member to another member Only exception is that you cannot eliminate or limit liability for bad faith This means the LLC agreement can essentially be rendered meaningless with the exception of the continued duty of good faith and fair dealing DUTY OF GOOD FAITH AND FAIR DEALING (10A-5A-1.08) There is now a statutory duty of good faith and fair dealing o Which means there will now be claims for bad faith Not previously recognized outside the insured/insurer context However, it will be a contractual claim, not a new type of tort claim Derived from Delaware laws, and the committee intends for Delaware law to provide guidance o See Gerber v. Enterprise Products Holdings, LLC, 67 A.3d 400 (Del. 2013) ACCESS TO BOOKS AND RECORDS (10A-5A-4.09) Right to inspect books and records does not apply to a transferee Personal representatives of the estate of a deceased member has all the rights of a current member New provision was added to allow dissociated members limited rights to information o 30 days written notice required (vs. 10 days for a member) o Any reasonable location specified by LLC (vs. any place where records are located) o Sought in good faith and for a proper purpose (vs. any proper purpose) o Information must pertain to period during which person was a member and was material to such persons rights and duties Penalty is now 10% of FMV of transferable interest (just financial rights), as opposed to 10% of membership interests, which included both financial and governance rights LLC may charge reasonable costs of labor and material for copying (old did not define) LLC agreement may impose reasonable restrictions and conditions on access to and use - 5 -
of this information o This includes ability to designate certain information as confidential and impose nondisclosure and safeguarding obligations o Can even keep certain confidential information from the members (e.g., trade secrets) DISSOCIATION (10A-5A-6.01) The term dissociation is now used instead of cessation of membership o Conforms to GP/LP statues o Essentially the same as current law, i.e., no right to participate, may only receive distributions Standard triggers, e.g., death/incapacity/bankruptcy, entity terminates Clarifies the following: o Transfer of entire transferable interest to another member automatic dissociation o Transfer of entire transferable interest to a non-member dissociation only when transferee becomes a member o LLC agreement can limit the power to dissociate EVENTS OF DISSOLUTION (10A-5A-7.01) Essentially the same (i.e., as stated in LLC agreement, consent of all members, no remaining members, judicial decree) o But articles of dissolution (now a statement of dissolution) is now optional as opposed to mandatory o And a member may petition the circuit court for judicial supervision of the winding up process upon showing good cause REINSTATEMENT (10A-5A-7.07) You can now bring an LLC back from the dead, with retroactive effect as if it never died o Only exception to retroactive effect is if someone acted in reliance on the dissolution Another side effect of notice filing o No requirement to file a certificate of dissolution o If certificate of dissolution is not filed, no one will know the LLC has dissolved and SOS will likely still show that the LLC exists o However, if there is an unintended technical termination, this can fix the problem Consent requirements to reinstate o Another thing that would be good to address in the LLC agreement o Default will be the consents necessary to dissolve under the LLC agreement o Or failing that the consents necessary to dissolve under the statute Need a certificate of reinstatement If the LLC name is available then the LLC can use that name again if it is not available the LLC will become ABC, LLC, Reinstated o If no certificate of dissolution is filed, however, the name will likely be available since no one will know it dissolved, particularly the SOS - 6 -
PROCEDURAL RULES FOR DIRECT AND DERIVATIVE ACTIONS (10A-5A-9.01) Derivative actions are provided for under the current LLC Law The new law also provides procedural rules for direct actions o Appears to be a codification of the current rules of Civil Procedure and case law interpreting that rule CHARGING ORDER PROTECTIONS (10A-5A-5.03) Same charging order protections, but now LLC must receive notice of the charging order before having to honor it New mechanism by which LLC can essentially interplead the funds into court to avoid issues of overpayment or underpayment of the underlying debt Are SMLLC s protected? o Unclear, but 10A-5A-5.03(f) seems to suggest that they are o Plus, the adoption of a series LLC statutes would indicate such protections are not against public policy o Yet if that is what the drafters intended, they could have simply stated as much similar to what Delaware has done (See Del. Code Ann. tit. 6, 18-703(d)) o This may imply they either they did not intend that protection or wanted to simply leave it to the courts to decide on a case by case basis INDEMNIFICATION (10A-5A-4.10) Old statutory restrictions are gone Default rule is completely wide open, with the intention of providing more flexibility Accordingly, the issue of indemnification needs to be addressed in the LLC agreement SERIES LLCS (ARTICLE 11) Ability to use series LLCs has now been added, but a discussion of those provisions is beyond the scope of this discussion TRANSITION RULES (ARTICLE 12) For LLC s formed under previous law: o No requirement to amend or restate its formation documents o Operating Agreement is deemed to be the LLC Agreement o Articles of Organization are deemed to be the Certificate of Formation Substance of the articles/certificate are treated as if included in the LLC agreement If the articles/certificate of an LLC formed under previous law is amended/restated after Jan. 1, 2015: o It must comply with the new LLC Law o If it conflicts with LLC agreement: LLC agreement governs as between members and transferees, and Articles/certificate governs with respect to 3rd parties to the extent they reasonably relied NOTE: Although changes to governing documents are not required, if not updated then reliance on the statutory defaults may be necessary since certain concepts under previous law will become meaningless and certain new concepts have been introduced - 7 -