by Louis T. M. Conti and Gregory M. Marks
This is the second of four articles that will address the changes made by the Florida Revised LLC Act (revised act) effective January 1. This article will address provisions in the revised act dealing with management structures, voting rights, fiduciary duties, conflicts of interest, recordkeeping and inspection rights, transfers, and charging orders.
As mentioned in part one of this series, the features of the revised act discussed below are “default” provisions, all of which can be overridden or supplemented by the terms of the operating agreement of the LLC, with the exception of the nonwaivable items described in F.S. §605.0105.
The revised act changes existing law (e.g., eliminating the term “managing member”), but does not follow RULLCA precisely. The new management rules are found in F.S. §§605.0407 through 605.04074.
All LLCs are either member-managed or manager-managed. If the articles or operating agreement do not expressly provide that the LLC will be “manager-managed” or “managed by managers” or that “management is or will be vested in managers” or “words of similar import,” then the LLC will by default be deemed member-managed pursuant to F.S.§605.0407. The old term “managing member(s)” is not used in the revised act, and if used by pre-existing LLCs, the company will be deemed to be member-managed, as that term is not considered “words of similar import” sufficient to make the company “manager-managed,” so the use of that term should be discontinued, and existing LLCs should clearly identify as “manager-managed” if that is what they intend. The best practice is to expressly state in the articles or operating agreement which management structure has been elected. As noted in part one of this article, if the articles state that the LLC is manager-managed, that has constructive notice effect under F.S. §605.0103.
In manager-managed LLCs, matters relating to the activities and affairs of the company are decided exclusively by the manager(s), and no member has any management rights, subject to certain voting rights expressly reserved to them in the statute (discussed below).
In member-managed LLCs, all members have management authority unless specifically provided otherwise. A member may not be compensated for managing a member-managed LLC; however, if there is no agreement to the contrary, a member can be reasonably compensated for services performed during the winding up of the LLC. Additionally, if a member advances money in excess of the capital that the member agreed to contribute, the member can be reimbursed for excess funds advanced to the LLC.
The revised act provides that management rights afforded to members and managers are not affected by dissolution of the LLC. However, if a person wrongfully causes dissolution of the LLC, that person thereafter loses the right to participate in management.
Members and managers may delegate rights and powers to manage the LLC, and F.S. §605.04071 includes a list of persons to whom members and managers can delegate powers and rights. If a member or manager delegates rights or powers, the member or manager does not lose the rights and powers associated with their status.
Selection and Terms of Managers in a Manager-managed LLC
As in existing law, new F.S. §605.04072 provides that managers may be chosen by the consent of the member or members holding more than 50 percent of the then-current percentage or other interest in the profits of the LLC. In RULLCA, managers may be selected or removed by a majority of the members voting per capita, so the Florida approach significantly differs from the uniform act.
A manager continues to act until a successor is chosen; the manager resigns, is removed, dies; or, if the manager is an entity, until it terminates. A manager may be removed at any time without notice or cause by consent of the members holding more than 50 percent of the then-current percentage or other interest in the profits of the LLC. A manager remains liable for any debt, obligation, or other liability to the LLC or members that the manager incurred while a manager. The dissociation of a member who is also a manager triggers the member’s automatic removal as a manager.
Voting Rights of Members and Managers
In a member-managed LLC, each member has the right to vote on a company’s activities, proportionate to that member’s then-current percentage or other interest in the profits of the LLC. The revised act F.S. §605.04073 requires that the vote or consent of a majority-in-interest (rather than a per capita simple majority as in RULLCA) is required to undertake an act, whether within or outside the ordinary course of the company’s activities or affairs. The articles and operating agreement may be amended only with a unanimous vote or consent of the members, which is a change from existing law. The admission of a new member, expulsion of an existing member, and dissolution of the LLC, also require unanimous vote or consent.1
In a manager-managed LLC, each manager has equal rights in the management and conduct of the company’s ordinary course activities and affairs. An affirmative majority vote will suffice, but if the action is taken without a meeting, a unanimous consent in a record is required. An act not in the ordinary course of the company’s activities and affairs requires the vote or consent of a majority of the managers, as well as a majority in interest of the members. The revised act contains separate voting provisions relating to mergers, conversions, and interest exchanges, as well as the procedures for submitting the transaction to members for approval, which will be addressed in a subsequent installment of this series.
In another departure from RULLCA, if a member has transferred all or a portion of the member’s transferable interest in the LLC to a person who is not admitted as a member, if the transferor has not been dissociated, the transferor remains entitled to vote on any action reserved to the members, in proportion to the then-current percentage in the profits of the LLC that the transferor would have if the transfer had not occurred. Unlike existing law, a member who transfers all of its transferable interest retains voting rights unless the member is expelled by the vote or consent of all of the other members.
Consistent with existing law, actions by members may be taken by written consent, and a member may appoint a proxy or other agent to vote or consent for the member. If an action is taken by fewer than all of the members without a meeting, notice of the action must be given to those members who did not consent in writing to the action, or who were not entitled to vote on the action, within 10 days of taking the action. Managers may also take action by unanimous written consent in lieu of a meeting, or by majority vote if the vote is taken at a meeting. Like existing law, a manager may appoint a proxy or other agent to vote or consent for the manager, as long as there is a signed appointing record. Also, meetings of members or managers may be conducted via conference telephone call and other communications equipment; participation of persons using that medium is the same as the person’s presence at the meeting.
Agency Rights of Members and Managers
In a member-managed LLC, the default rule under F.S. §605.04074 makes each member an agent of the LLC, whose act binds the company, unless the member had no authority to act for the company in the matter, and the person with whom the member was dealing had no notice that the member lacked authority. If the member’s action is not taken for the purpose of carrying on in the ordinary course of the company’s activities and affairs, it is only binding on the company if the act was authorized by appropriate vote of the members.
In a manager-managed LLC, the new statute expressly negates the apparent authority or agency status of a member based on that person’s “member” status alone. Instead, each manager is an agent of the LLC, and an act of a manager binds the company unless the manager had no authority to act for the company in the matter, and the person with whom the member was dealing knew or had notice that the member lacked authority. However, actions not apparently taken for carrying on in the ordinary course of the company’s activities and affairs, are binding on the company only if the act was authorized by appropriate vote of the members.
A member of a member-managed, or a manager of a manager-managed, company may sign and deliver a deed or any other instrument transferring or affecting the LLC’s interest in real property, unless a certified statement of authority recorded in the real estate records limits such authority. The instrument is “conclusive” in favor of a person giving value without knowledge of the lack of authority of the member or manager delivering the instrument.
Reimbursement, Indemnification, Advancement, and Insurance
Under F.S. §605.0408 of the revised act, an LLC “may” provide for the reimbursement, indemnification, advancement of defense expenses, and insurance for members and managers. This is a carry-over of existing law and varies from RULLCA, which imposes these obligations on the LLC by default.
Indemnification rights are not available for transactions in which the member or manager failed to comply with their fiduciary duties; transactions in violation of criminal law; transactions in which the person received an improper benefit; liability in connection with improper distributions; and willful misconduct or conscious disregard of the company’s interest in a derivative action. The revised act specifically addresses improper conduct in connection with a derivative action and expands the list of wrongful conduct so as to preclude indemnification for any breach of statutory standards of conduct or the knowing violation of any law (not just criminal law), which is a change from existing law. The prohibition of indemnification for such wrongful conduct cannot be changed by the operating agreement, nor can the operating agreement limit a person’s liability to the LLC if his or her wrongful conduct causes damages (both are nonwaivable under F.S. §§605.0105(3)(g) & (p)).
An LLC may provide for the advancement of reasonable expenses if the person agrees to repay the advancement if it is subsequently determined that the person is not entitled to indemnification. An LLC may purchase and maintain insurance on behalf of a member or manager against liability incurred in their capacities, or arising from their status, even for wrongful conduct of the kind described above for which indemnification would not otherwise be permitted. This is not in existing law.
Standards of Conduct for Members and Managers
Section 605.04091 provides standards of conduct for members (in a member-managed LLC) and managers (in a manager-managed LLC), and is modeled after RULLCA §409, but has been revised to follow the “cabined in” approach of existing law, which is to list exhaustively the duties of the members and managers. This differs from the “uncabined” approach in RULLCA, which invites the expansion or clarification of duties by court interpretation. The 2011 amendments to RULLCA closed the door to the cabin somewhat, but did not exhaustively list the aspects of the duty of loyalty. The drafting committee believed that existing law should be followed because of the certainty and predictability it provides, and because it is the same approach used in the Florida general and limited partnership statutes.
Each manager of a manager-managed LLC, and member of a member-managed LLC, owes fiduciary duties of loyalty and care to the LLC and its members. In its addition of the word “fiduciary” the revised act clarifies existing law, which did not use “fiduciary” to describe the duties of care and loyalty. In RULLCA, only the duty of loyalty is called a fiduciary duty, but not the duty of care.
The revised act expressly describes the duty of loyalty (modeled after RULLCA, but substantive similar to existing law) as 1) accounting to the LLC and holding as trustee in a) the conduct or winding up of company’s activities and affairs, b) the use of the company’s property, or c) the appropriation of a company opportunity; 2) refraining from dealing with the company as, or on behalf of, a person having an interest adverse to the company; and 3) refraining from competing with the company before its dissolution.
The duty of care is limited to refraining from engaging in grossly negligent or reckless conduct, willful or intentional misconduct, or a knowing violation of law, either in the conduct, or the winding up, of the LLC’s activities and affairs. This clarifies existing law by providing that the duty of care also applies to winding up, but differs from existing law by adding the term “willful” to take into account certain case law distinguishing willful conduct from “intentional” conduct. The same change was made in the 2011 amendments to RULLCA.
In discharging fiduciary duties, one is entitled to rely on information, opinions, reports, or statements, including financial statements, if prepared or presented by 1) members or employees of the LLC whom the manager or member reasonably believes to be reliable and competent in the matters presented; 2) legal counsel, public accountants, or other persons as to matters the manager or member reasonably believes are within the person’s professional or expert competence; or 3) a committee of members or managers of which the affected manager or member is not a participant, if the member or manager reasonably believes the committee merits confidence. A member or manager that has knowledge that makes the aforementioned reliance unwarranted will not be considered acting in good faith. In discharging their duties, a member or manager may take into account factors deemed relevant, including those illustrated in F.S. §605.4091.
Conflict of Interest Transactions
Section 605.04092 provides rules governing conflict of interest transactions, similar to existing law, but expands coverage and clarifies key concepts. It is based on comparable provisions in fairly recent amendments to the Model Business Corporation Act and supplements the provision in F.S. §605.4091 that states a member or manager does not violate a duty or obligation under the statute or under the operating agreement solely because a person’s conduct furthers their own interest. It also supplements F.S. §605.0105(4), which expressly allows the operating agreement to specify a method by which an act or transaction that otherwise violates the duty of loyalty, to be approved by one or more disinterested persons after full disclosure of all material facts.
It newly defines or clarifies key terms, such as “indirect material financial interest,” whether a transaction is “fair to the limited liability company,” and when a member or manager is “indirectly a party” to a transaction. A person is indirectly a party if that person has a material financial interest in, 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 “indirect material financial interest” if a spouse or other family member has a material financial interest in the transaction, or if the transaction is with an entity that has a material financial interest in the transaction and controls, or is controlled by, the member or manager or another person specified by this section. A transaction is “fair to the limited liability company” if the transaction, as a whole, is beneficial to the LLC and its members, and takes into account whether it is 1) fair in terms of the member’s or manager’s dealing with the LLC in connection with that transaction, and 2) comparable to what might have been obtained in an arm’s-length transaction. If the above requirements are satisfied, a transaction is not void or voidable because of the relevant relationship or interest.
If the transaction in question is “fair to the LLC,” it is not grounds for equitable relief, and does not give rise to an award of damages or sanctions. Existing law suggested that liability protections could be available without necessarily meeting the fairness requirement if it was approved by disinterested members or managers who had full disclosure. The revised act, however, requires that the transaction must be “fair to the LLC” even if approved by disinterested members or managers.
In a proceeding challenging the validity of a transaction, the person challenging the transaction has the burden of proving the lack of fairness, if one of the following is satisfied: 1) In a manager-managed LLC, the interest in the transaction was disclosed or known by managers who voted on it, and the transaction was approved by a majority of disinterested managers even if these managers constituted less than a quorum, as long as the decision was not approved by just one manager; or 2) in a member-managed LLC or a manager-managed LLC in which the managers failed to or cannot act under (1), the material facts of the transaction and interest was disclosed or known by members who voted upon the transaction, and the transaction was approved by a majority of disinterested managers even if these managers constituted less than a quorum, as long as the decision was not approved by just one manager. If neither of the above conditions is satisfied, the burden will shift to the person defending the validity of the transaction.
A person challenging a transaction, in establishing the burden of proof, may also prove that a purportedly disinterested member or manager was not, in fact, “disinterested.”
Limitation of Liability of Managers and Members
Section 605.04093 closely follows existing law,2 providing that a manager (in a manager-managed LLC) or a member (in a member-managed LLC) is not personally liable for monetary damages to the LLC, its members, or any other person, unless such manager or member engaged in any of the types of wrongful conduct listed in that section.
Other sections of the revised act enable a member (in a member-managed LLC) to be relieved of certain duties if those duties are expressly delegated to another member.3 Section 605.0105(4) further provides that the operating agreement may relieve a member (in a member-managed LLC) from any other responsibility that the member would otherwise have under the statute, as well as the duties corresponding to that responsibility, as long as at least one other member has expressly been delegated that responsibility. However, this exoneration cannot apply in cases involving bad faith, willful or intentional misconduct, or a knowing violation of law.4
Records to be Kept: Rights of Member, Manager, and Person Dissociated to Information
The existing law requiring certain specified records to be maintained by the LLC have been carried forward, and the right of a member to inspect those specified records is essentially unchanged. The revised act allows records to be kept either at the principal office or at another location. The standards governing a member’s right to inspect records, however, depend upon whether the company is member-managed or manager-managed. In a member-managed LLC, the members are allowed unlimited access to specified records, but as to “other” records maintained by the company, they have access rights only to the extent the other records are “material to the member’s rights and duties under the operating agreement or this chapter.” Access to any other information is subject to the limitation that if the demand, or the information demanded, is unreasonable or otherwise improper under the circumstances, the information need not be provided. As under existing law, the company has the duty to furnish members “without demand” information that the company knows is material to the exercise of the member’s rights and duties under the operating agreement or the statute. Unlike existing law, however, the company does not have this obligation if it can establish that it reasonably believes the member already has that information. Also unlike existing law, a member that knows any of the information required to be furnished to members by the LLC also has a duty to furnish that information.
In a manager-managed LLC, the managers have the same access rights that inure to members in a member-managed LLC. Also, the duty to furnish information applies to managers (including the affirmative duty to provide certain information “without demand”). If a member seeks access to information, the member must make a demand in a record received by the company, describing with reasonable particularity the information sought, why the information is sought, and whether the information sought is directly connected to the member’s purpose.
The standard for receiving access to information requires that the information be for a purpose “reasonably related to the member’s interest as a member.” This differs from a member-managed LLC in which members do not have to make such a record, but the information sought must be “material to” the members’ rights and duties under the operating agreement. If the operating agreement or the statute provides for a member to approve a matter, the company must, without demand, provide the information to the member that is known to the company and material to that member’s decision.
Once a demand is made for information, the company has 10 days to respond. In its response, the company must explain what information the member may access, when and where the company will provide the information, and if the company declines to provide information, the company must specify its reason(s) for so declining.
A dissociated member has a right to access information if the information pertains to the period of membership, and the information is sought in good faith. The standards for relevancy of information and the requesting procedure are essentially the same that apply to a member’s request for “other” information in a manager-managed LLC.
The LLC may impose reasonable restrictions and conditions on access to and use of information, including designating information as confidential and imposing nondisclosure and safeguarding obligations on the recipient of the information. In a dispute regarding access to information, the company has the burden to prove reasonableness.
Court-ordered Records Inspection
Section 605.0411 clarifies and expands existing law by providing that an appropriate circuit court may summarily order inspection and copying of records (at company expense) demanded upon application of a person who complies with the applicable provisions of F.S. §605.0410. The cost of the proceedings, including reasonable attorneys’ fees, will also be at the LLC’s expense, unless the LLC can prove that it refused inspection in good faith based on a reasonable basis for doubt about the right of that person to access the requested records. The court may impose reasonable restrictions on the use or distribution of any LLC records.
Nature of Transferable Interest, Transferees, Rights of Creditors
The revised act5 uses the defined term “transferable interest” rather than “interest” as used in existing law. A “transferable interest” means only the transferee’s right to distributions, while the term “interest” under existing law means the distribution rights, as well as voting rights, management rights, or other member rights under the operating agreement or articles. 6
The revised act7 provides that a transfer, in whole or in part, of a transferable interest is allowed and does not cause a dissociation of the transferor, or dissolution of the LLC. While existing law provides that the transferee has the right to receive distributions and to share in profits and losses and allocations of income, gain, loss, deduction and credit, or similar items to which the assigning member was entitled,8 the revised act states that the transferee has only the right to receive the distributions to which the transferor would have been entitled. The accounting and tax aspects are not expressly referred to in the new statute, leaving the tax and accounting consequences to be governed by applicable tax law and accounting procedures.
Like existing law, the revised act does not entitle the transferee to participate in management or have access to records or other information, but it provides when the LLC dissolves and winds up, the transferee is entitled to receive specified information about the LLC from the date of dissolution. A transferee who is also a personal representative of a member has the rights possessed by the personal representative of a member.9
A transferor retains the rights not associated with the transferable interest, and retains all the duties and obligations of a member. However, if a member transfers a transferable interest to a person who becomes a member with respect to that transferable interest, the transferee will inherit that member’s liability for a promised contribution, or liability for knowingly receiving an unlawful distribution, if these obligations are known to the transferee at the time of the transfer.
A transferrable interest may be evidenced by a certificate and that certificate may be transferred to the transferee; however, no transfer is effective until the company knows or has notice of the transfer. If a transfer is in violation of a restriction in the operating agreement, the transfer is ineffective as to a person who has knowledge or notice of that restriction.
The charging order provisions of existing law10 were not changed. A court can enter a “charging order” against the transferable interest of a judgment debtor (member or transferee) for payment of the debt with interest. A charging order is a lien on a judgment debtor’s transferable interest, which requires the company to pay the judgment debtor’s distributions to the judgment creditor to satisfy the judgment.
The charging order is the sole and exclusive remedy for a judgment creditor to satisfy a judgment from the judgment debtor’s transferable interest in an LLC, except when the LLC has only one member, and the LLC will not satisfy the judgment within a reasonable time. In such circumstances, the court may order the transferable interest sold in a foreclosure sale. The purchaser at foreclosure acquires the entire LLC interest (not just the transferable interest), and becomes the sole member while the judgment debtor is automatically deemed dissociated.11
A secured creditor, as distinguished from a judgment creditor, may pursue all remedies available under law applicable to secured creditors. The principles of law and equity affecting fraudulent transfers, and the availability of equitable principles of alter ego, equitable lien, or constructive trust are also not limited by this provision. Additionally, the benefits of applicable exemption law are not restricted by this provision.
1 Fla. Stat. §§605.0401(3)(c), 605.0701(2), and 605.0602(5), respectively.
2 Fla. Stat. §608.4228.
3 Fla. Stat. §605.0205(2), duty to correct inaccuracies in filed records; Fla. Stat. §605.0406(2), approving an improper distribution.
4 Fla. Stat. §605.0105(3)(g).
5 Fla. Stat. §605.0102(66).
6 Fla. Stat. §608.402(23).
7 Fla. Stat. §605.0502.
8 Fla. Stat. §608.432.
9 Fla. Stat. §605.0410(8).
10 Fla. Stat. §608.433.
11 Fla. Stat. §605.0602(3).
Louis T. M. Conti and Gregory M. Marks served as the chair and reporter, respectively, of the drafting committee. Conti is a partner in the Tampa office of Holland & Knight, a uniform law commissioner, and a former chair of the Business Law and Tax sections of The Florida Bar. Marks is a partner in the Sarasota office of Shumaker, Loop and Kendrick, and has served on the executive council of the Tax Section of The Florida Bar. Both authors have previously served in leadership positions of previous Florida Bar business entity drafting committees.
This column is submitted on behalf of the Business Law Section, Stephen E. Nagin, chair, and Mark Nichols, editor.