California has dramatically changed the LLC law. Effectively, many of the “form” provisions which were customarily used in LLC Agreements are no longer “legal” because the act has specifically prohibited or limited the use of some clauses.
Probably the most critical is a common clause used in real estate deals which allows all of the members to buy other projects without first offering those projects to the LLC. This type of clause is no longer valid. You have to specifically obtain an “informed consent” to waive this right. This means that the waiver cannot be contained in the LLC operating agreement. It must be a separate document. Without this, a member may claim that all real estate deals of each member in an LLC must offer all new deals to the LLC. In the absence of doing so, a member may sue after the fact and claim that he or she had a right to participate in a “profitable deal” that was not offered to the LLC.
Another important change is that the Act now specifically allows a member to dissociate whether or not it is permitted under the Operating Agreement. The Operating Agreement should really be amended to clarify what this means and how it affects the other members.
There are many, many more provisions that will apply to existing LLC’s even if the Operating Agreements are not amended. The Act specifically provides that it will apply to existing LLC’s with respect to the actions of managers or members which take place on or after 1/1/2014 even if the LLC was formed prior to then.
Therefore, the prudent thing to do is to advise each LLC that you work with to consult their attorney and determine to what extent the Operating Agreement should be amended.
In a follow up newsletter I will highlight the important changes for you.
We hope that you find these items of interest to you. If you need further information or would like to discuss a particular issue, feel free to give us a call. We will get you to the right person.