Why LLCs Must Have an ALLCA Compliant Operating Agreement: Reason #9
The 1948 movie “The Treasure of the Sierra Madre” starring Humphrey Bogart contained these famous words:
“Badges? We ain’t got no badges! We don’t need no badges! I don’t have to show you any stinking badges!”
When I read new Arizona Revised Statutes Section 29-3410 it makes me think:
“LLC records? We ain’t got no LLC records! We don’t need no LLC records! I don’t have to show you any stinking LLC records!”
If you’ve been following my articles about the new Arizona Limited Liability Company Act that is effective September 1, 2019, you know I call the law the Arizona liability act because it creates many new ways members, managers and the company can sue each other. Section 29-3410 is one of the new statues that is baffling and that creates new grounds for lawsuits.
New Section 29-3410.A requires all Arizona LLCs to maintain the following records:
1. a current list of the full name and last known address of each member and manager.
2. a copy of the Articles of Organization and all amendments to the Articles of Organization.
3. a copy of all current and prior written operating agreements and amendments to all current and prior written operating agreements.
4. any record of a member’s obligation to make a capital contribution to the company.
5. a copy of the company’s federal, state and local income tax returns and reports, if any, for the three most recent years.
6. a copy of the company’s financial statements, if any, for the three most recent years.
B. During regular business hours and at a reasonable location specified by the limited liability company, a member or manager may inspect and copy the records described in subsection A of this Section and any other company record regarding the activities, affairs, financial condition and other circumstances of the company as is just and reasonable if all of the following apply:
1. the member or manager seeks the records for a purpose reasonably related to the rights and duties of the member or manager under the operating agreement or this Chapter.
2. the member or manager makes a demand in a record received by the company describing with reasonable particularity the records sought and the purpose for seeking the records.
3. the records sought are directly connected to the member’s or manager’s purpose.
C. not later than ten days after receiving a demand pursuant to subsection B, paragraph 2 of this Section, the limited liability company shall inform in a record the member or manager that made the demand of:
1. the records that the company will make available in response to the demand and when and where the company will make the records available. The time and location may not be unreasonable under the circumstances.
2. the reasons for declining if the company declines to provide any demanded records.
D. Whenever this Chapter or the operating agreement provides for a member or manager to vote on or give or withhold consent to a matter, before the vote is cast or consent is given or withheld, the limited liability company, without demand, shall provide the member or manager with all information that is known to the company and all records in the company’s possession that are material to the member’s or manager’s decision except to the extent the company reasonably believes that the member or manager already knows the information or is in possession of the records.
E. To the extent that some or all of a limited liability company’s records are maintained by a member or manager, the member or manager shall make those records available to the company as necessary for the company to satisfy its obligations pursuant to this Section.
K. In addition to any restriction or condition stated in its operating agreement, a limited liability company may impose reasonable restrictions and conditions on access to and use of information to be furnished and records to be made available under this Section, including designating information and records confidential and imposing nondisclosure and safeguarding obligations on the recipient. In a dispute concerning the reasonableness of a restriction under this subsection, the company has the burden of proving reasonableness.
L. If a dispute arises regarding a member’s or manager’s right under this Section to obtain information or inspect or copy a record, or regarding whether any restriction imposed by the limited liability company on a member’s or manager’s right to obtain, inspect, copy or use any such information or record is unreasonable, the court may award the successful party reasonable expenses, including reasonable attorney fees and costs.
Current vs. Future Arizona LLC Records Law
Under current law members are entitled to get copies of the records. There is no procedures that allow the LLC to refuse to give records to members. New Arizona LLC law creates an elaborate process that must be satisfied before a member can get required records. Here are some of the potential problems created by Section 29-3410:
- LLC has two members, Homer Simpson and Ned Flanders. Each owns 50% of the LLC. Ned sends Homer an email that he wants copies of the records the company must maintain. Here are some of the problems that arise:
1. Neither Homer nor Ned is obligated to maintain the records. The company is required to maintain the records, but it cannot do so unless somebody acts on its behalf.
2. Did Ned make a demand in a record received by the company describing with reasonable particularity the records sought and the purpose for seeking the records?
3. How does Ned make the demand for copies of records and who does he give the demand to?
4. Who determines if Ned’s purpose is a proper purpose?
5. Is Ned’s purpose reasonably related to his rights and duties as a member?
6. Are the records sought by Ned directly connected to his purpose?
7. Who determines if the records sought are directly connected to the member’s purpose in making the request?
8. If Ned sues to enforce his rights under Section 29-3410 who does he sue?
9. Does Homer have any personal liability for the company’s failure to satisfy its obligations under Section 29-3410?
- What if Homer owns 90% of the LLC and Ned owns 10%? Do the answers to the above questions change?
Section 29-3410.L encourages litigation over records requests by expressly authorizing the prevailing party in a lawsuit to enforce Section 29-3410 to collect attorneys fees and costs from the losing party.
KEYTLaw’s Operating Agreement Eliminates Section 29-3410 Duties
The Operating Agreement we prepare for all of our multi-member LLCs contains language that eliminates all of the troubling duties in Section 29-3410. If your Arizona LLC wants to be subject to the duties levied in Section 29-3410 we will modify the Operating Agreement to make Section 29-3410 applicable to the LLC and its members.