Why LLCs Must Have an ALLCA Compliant Operating Agreement: Reason #8
Yes Dorothy, beginning September 1, 2019, Arizona manager managed LLCs will no longer be in
Kansas limited liability company land. Instead they will be in liability company land, a new environment in which a manager of an Arizona manager managed LLC can be sued for violating one or more of the fiduciary duties the new Arizona Revised Limited Liability Company Act (ALLCA) levies on managers of manager managed Arizona LLCs.. When ALLCA becomes effective all managers of manager managed Arizona LLCs will have numerous new duties the violation of which will give members and the company causes of action to sue managers. This is why I call ALLCA the Arizona liability company act.
What are the New Manager Duties under ALLCA?
Arizona Revised Statutes Section 29-3409 levies the following new fiduciary duties on all managers of Arizona LLCs that are manager managed. ALLCA is applies to all Arizona LLCs formed after August 31, 2019, and all Arizona LLCs after August 31, 2020. Section 29-3409 states:
I. A manager of a manager-managed limited liability company owes to the company and the members the duties of loyalty and care stated in subsections j and k of this Section.
J. The fiduciary duty of loyalty of a manager in a manager-managed limited liability company includes the following duties:
1. to account to the company and hold as trustee for the company any property, profit or benefit derived by the manager to which the manager is not entitled:
(a) in the conduct or winding up of the company’s activities and affairs.
(b) from a use by the manager of the company’s property.
(c) from the appropriation of a company opportunity.
2. to refrain from dealing with the company in the conduct or winding up of the company’s activities and affairs as or on behalf of a person having an interest adverse to the company.
3. to refrain from competing with the company in the conduct of the company’s activities and affairs before the dissolution of the company.
4. to disclose to each of the other members and managers who are considering or voting on a decision or transaction regarding the company or one or more of the members’ interests in the company both of the following:
(a) any material conflict of interest on the part of the disclosing manager with respect to the decision or transaction.
(b) if a material conflict of interest exists, all material facts relating to the decision or transaction that are within the disclosing manager’s knowledge and not known or reasonably available to the affected members or managers.
K. The duty of care of a manager of a manager-managed limited liability company in the conduct or winding up of the company’s activities and affairs is to refrain from engaging in grossly negligent or reckless conduct or willful or intentional misconduct.
L. A manager shall discharge the duties and obligations under this Chapter or under the operating agreement and exercise any right consistently with the contractual obligation of good faith and fair dealing.
Q. In a manager-managed limited liability company, a member does not have any fiduciary duty to the company or to any other member solely by reason of being a member.
R. A conflict of interest is material if the conflict would reasonably be expected to affect a member’s or manager’s judgment regarding the decision or transaction under consideration.
Does Anybody in Arizona Understand the New Duties in Section 29-3409?
Probably not! Imagine you are the manager of an Arizona manager managed LLC that is governed by ALLCA, which means you are subject to all of the duties set forth in Section 29-3409. Would you know you are subject to the duties levied in Section 29-3409? If you did know about the duties levied on managers would you know how to protect yourself and avoid liability by “doing the right thing?” I wouldn’t and I’ve formed 8,400+ LLCs and been advising LLC clients about Arizona LLC law since 1992 when Arizona adopted its current LLC law. I’m an LLC lawyer and I don’t know what the new duties mean or how to comply with them in the operation of an LLC.
Here is a short list of some of the questions all managers of an Arizona manager managed LLC need to ask and know the answer to:
- What is the duty of loyalty?
- How does a manager satisfy the duty of loyalty?
- What is the duty of care?
- How does a manager satisfy the duty of care?
- When would a manager’s actions cause the company to act on behalf of a person having an interest adverse to the company?
- When does the managers actions constitute competing with the company?
- When the members are voting on an issue when does a manager have a conflict of interest that requires the manager to disclose all material facts to the members?
- If disclosure of material facts is required, must the manager prepare a written disclosure document and give it to the members before they vote on the issue? Hint: Yes if the manager wants to be able to prove he or she satisfied the disclosure requirement.
- What is grossly negligent conduct?
- What is reckless conduct?
- What is willful misconduct?
- What is intentional misconduct?
- What is the contractual obligation of good faith?
- What is the contractual obligation of fair dealing?
When you know the answers to the above questions only then can you act in ways that will satisfy your fiduciary duties as a manager and avoid liability for failing to satisfy a duty.
People or companies that are managers of manager managed LLCs need to be aware of the potential liabilities the managers have under Section 29-3409. There is good news, however, a well drafted ALLCA compliant Operating Agreement can eliminate or modify all of the duties that apply to managers in Section 29-3409 except
Warning for Managers of Manager Managed Arizona LLCs
If you or your company will be the manager of an Arizona manager managed LLC you should not accept the job unless all the members of the LLC sign an Operating Agreement that eliminates or modifies the manager’s duties under Section 29-3409.
Operating Agreement Can Eliminate or Modify Some Section 29-3409 Duties
One reason your Arizona member managed LLC needs an ALLCA compliant Operating Agreement is to have it eliminate or modify the fiduciary duties set forth in Section 29-3409. The general rule of Section 29-3105.A.3 of ALLCA is “in the event of a conflict between a provision of the operating agreement and this Chapter, the provision of the operating agreement governs” except an Operating Agreement may not:
- eliminate the contractual obligation of good faith and fair dealing or the duty to refrain from willful or intentional misconduct under Section 29-3409, or
- limit or eliminate a person’s liability for any violation of the contractual obligation of good faith and fair dealing or conduct involving willful or intentional misconduct.
KEYTLaw’s Operating Agreement Can Eliminate or Modify Fiduciary Duties
The Operating Agreement we prepare for all of our multi-member LLCs contains language that eliminates all of the manager’s duties levied in Section 29-3409. Our Operating Agreements do not eliminate or modify the contractual obligation of good faith and fair dealing or the duty to refrain from conduct involving willful or intentional misconduct. If your manager managed Arizona LLC wants its managers to be subject to the fiduciary duties levied in Section 29-3409 we will modify the Operating Agreement to make Section 29-3409 applicable to the LLC and its managers.
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How to Hire Richard Keyt to Prepare a Custom Operating Agreement
Option 1: Form a New LLC with a Custom Operating Agreement: When you hire me, Arizona LLC attorney Richard Keyt who has formed 8,400+ and has 287 five star Google & Facebook reviews), to form a new LLC I will prepare a custom Operating Agreement. Complete our online LLC formation questionnaire or call me at 480-664-7478 and give me your information. We form new LLCs and get them approved by the Arizona Corporation Commission the same day we are paid and you approve the LLC formation questionnaire you submit to us. See the “contents of the Bronze ($397), Silver ($597) & Gold ($997) LLC packages.
Option 2: Purchase a Custom Operating Agreement: If your Arizona LLC's Operating Agreement was drafted for the obsolete Arizona LLC law or if it doesn't have an Operating Agreement its members should hire us to draft a custom Operating Agreement by submitting our online Operating Agreement questionnaire.