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Florida Revised LLC Act – New Year, New Law Governing Florida LLC’s

On June 14, 2013, the Florida Revised Limited Liability Act (the “Revised Act”) was signed into law by Governor Rick Scott. The Revised Act became effective January 1, 2014 and can be found in Chapter 605 of the Florida Statutes.

The Revised Act is mandatory for all LLCs formed or registered to do business in Florida beginning January 1, 2014. Florida LLCs formed prior to this date will continue to be governed by Chapter 608, Florida Statutes; however, all Florida LLCs will be subject to the Revised Act on January 1, 2015. Hence, Florida LLCs formed prior to January 1, 2014 may be governed by the Revised Act at their discretion between January 1, 2014 and January 1, 2015. However, all Florida LLCs, whenever formed, will be governed by the Revised Act beginning January 1, 2015.

The Revised Act changes or clarifies existing law and governs all aspects of Florida LLCs, including formation and organization, defined terms, the operating agreement, and liabilities and duties of members and managers, to name a few. The purpose of this article is to highlight some of the key differences of the Revised Act as compared to existing law.

Eliminates Managing Member Option. The Revised Act eliminates the term “managing member” from the definitions enumerated in section 605.0102, Florida Statutes.  Under the Revised Act, the default rule makes the LLC member-managed, with all members retaining apparent authority to bind the LLC, even if some members are not designated as “managing members,” absent other evidence of an intent to be manager-managed.

Expands Non-Waivable Default Rules, including Fiduciary Duty & Management Rules. The Revised Act provides that the operating agreement cannot eliminate duties of loyalty and care except in certain situations. Pursuant to Section 605.0105(4), Florida Statutes, the “manifestly unreasonable” standard is to be applied with respect to the elimination or alteration of any duty of loyalty or any alteration of the duty of care.  Under subsection (5), the court will decide as a matter of law whether a term contained in the operating agreement is “manifestly unreasonable,” making its determination as of the time the challenged term became part of the operating agreement and invalidating the term only if in light of the purposes, activities, and affairs of the company, it is readily apparent that: (1) the objective of the term is unreasonable or (2) the term is an unreasonable means within which to achieve the stated objective.  The Revised Act also provides that the operating agreement cannot eliminate the obligations of good faith and fair dealing and may not allow indemnification of members or managers in cases involving certain types of misconduct.

Modifies Members’ and Managers’ Standard of Conduct. Section 605.04091, Florida Statutes, provides the standard of conduct for members and managers of Florida LLCs.  In that regard, each manager and member owes fiduciary duties of loyalty and care to the LLC and to its members. The duty of loyalty is expressly limited to (a) accounting to the LLC and holding as trustee for it any property, profit, or benefit derived by the manager or member in (1) the conduct or winding up of the company’s activities and affairs; (2) the use by the member or manager of the company’s property; or (3) the appropriation of a company opportunity. The duty of loyalty is also described as (b) refraining from dealing with the LLC and in conduct or of winding up of its activities and affairs as, or on behalf of, a person having an interest adverse to the company, except to the extent that a transaction satisfies the requirements of this section; and (c) refraining from competing with the LLC and the conduct of its activities and affairs before the dissolution of the company.

Under section 605.04091(3), Florida Statutes, the duty of care is limited to the conduct or winding up of the company’s activities and affairs by refraining from engaging in grossly negligent or reckless conduct, willful or intentional misconduct, or a knowing violation of law.  The Revised Act makes clear that these duties apply to the winding up of the LLC’s activities and affairs and attempts to distinguish between “willful” and “intentional” misconduct.

Expands “safe harbor” for Approving Conflict of Interest Transactions. Section 605.04092, Florida Statutes, governs conflict of interest transactions.  The Revised Act looks to specific defined terms governing potential conflict of interest transactions.  A member or manager is “indirectly” a party to a transaction if they have a material financial interest in it or is a director, officer, member, manager, or partner of a person, other than the LLC, who is a party to the transaction. A member or manager has an “indirect material financial interest” if a spouse or other family member has a material financial interest in the transaction, other than having an indirect interest as a member or manager of the LLC, or if the transaction is with an entity, other than the LLC, which has a material financial interest in the transaction and controls, or is controlled by the member or manager or another person listed in this subsection.  A transaction is “fair to the limited liability company” when the transaction, as a whole, is beneficial to the LLC and its members, taking into appropriate account whether it is (1) fair in terms of the members’ or managers’ dealings with the LLC in connection with that transaction and (2) comparable to what might have been obtainable in an arm’s length transaction.  If these requirements are met, a transaction is not void or voidable because of the specific interest or relationship or interest.  Under subsection (4), the person challenging the validity of a transaction has the burden to prove the lack of fairness of the transaction.

Permits Derivative Actions by Members.    The Revised Act provides that a member may bring a derivative action to enforce the LLC’s rights or interests following a demand.  Specifically, Section 605.0802, Florida Statutes, permits a member to bring a derivative action to enforce the rights or interests of the LLC if the member first makes a demand on the other members of a member-managed LLC or the managers of a manager-managed LLC requesting that the managers or other members cause the company to take suitable action to enforce the right, but no action is taken in a reasonable time, not to exceed 90 days. A member may also maintain a derivative action if making such a demand would be futile or if irreparable injury to the LLC would result in waiting for other members or managers to take action.

The Revised Act further provides for who is a proper plaintiff in a derivative action.  Specifically, section 605.0803, Florida Statutes, provides that a proper plaintiff bringing a derivative action must be a member at the time the action is commenced and either must have been a member when the conduct giving rise to the action occurred or must obtain her status as a member by operation of law or pursuant to the terms of the operating agreement from a person who was a member at the time the conduct occurred.

If you have any questions regarding these updates in the law and how they may impact your LLC, please contact the attorneys at Knott Ebelini Hart to discuss in further detail.  We look forward to the opportunity to be of assistance to you and your corporation.

January 28, 2015

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