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Arizona has enacted a new Limited Liability Company Act (the “New LLC Act”). See A.R.S. § 29-3101, et seq. The stated purpose of the New LLC Act is to provide default provisions governing the relationships between the Company, its Members, and, if applicable, its Managers (collectively, the “Interested Parties”) as to matters that are not addressed in the operating agreement of the Company.  When the original statutes authorizing limited liability companies (LLCs) were enacted, it was thought that these entities would be used primarily for special circumstances and that the Interested Parties would adopt comprehensive operating agreements by which the critical provisions concerning such relationships are agreed to and confirmed by them.  In fact, LLCs became the entity of choice in most instances, and many of these entities did not adopt comprehensive operating agreements. The drafters of the New LLC Act intended to plug the holes with provisions that, in their judgment, represented outcomes that would have been selected by the Interested Parties had they considered the issues.

So, as to existing LLCs, if the parties are completely satisfied with their operating agreement, no action need be taken. Except as to a few select provisions, which cannot be overridden by agreement of the parties (some of which are identified below), the provisions of the operating agreement of the Company will prevail over the default provisions of the New LLC Act.

The provisions that cannot be altered by agreement of the Interested Parties (the “Immutable Terms”) include:

1. Invoking the laws of a state other than Arizona;
2. Eliminating the contractual obligation of good faith and fair dealing, or conduct involving willful or intentional misconduct;
3. Unreasonably restricting the rights of Interested Parties to obtain information concerning the Company;
4. Varying the default causes for dissolution of the Company (but the adding of additional causes is permitted);
5. Unreasonably restricting the rights of Members to maintain derivative actions in the Company’s name;
6. Varying the content of organizational or structural change documents;
7. Restricting the rights of persons other than Interested parties; and
8. Reducing or eliminating distribution restrictions.

Best practices suggest that the Interested Parties should review the operating agreement of their company periodically to confirm that the company and the Interested Parties are adhering to the operative provisions thereof, and to confirm that the significant provisions are still representative of the intent and desires of the Interested Parties. In light of the New LLC Act, that review should also include an analysis as to whether provisions of the LLC operating agreement that purport to alter the default provisions of the New LLC Act are sufficiently specific so as to effectuate that override, and that any provisions of the operating agreement that do not attempt to alter any of the Immutable Terms, and as to matters not addressed in the operating agreement, whether the default provisions of the New LLC Act are adequate and appropriate under the prevailing circumstances. The assistance of your advisor will likely be required for such analysis, and particularly as to the default provisions of the New LLC Act, the listing of which would be voluminous, and is beyond the scope of this Alert.

The New LLC Act applies to any Arizona limited liability company that is formed on or after September 1, 2019. It also applies to any Arizona limited liability company that exists prior to such date, but only effective as of September 1, 2020, and provided further that any existing company can elect to be governed by the New LLC Act prior to that date.

Disclaimer:  This Alert is for informational purposes only, and is not intended to substitute for the reader obtaining and acting upon legal advice that is specific to the circumstances of the reader as obtained from the reader’s own professional.

For more information on this topic or other commercial litigation matters, please contact Jack N. Rudel.