For many individuals and entities, they have elected to organize their business as a Limited Liability Company ("LLC") in the State of Arizona and, as such, have been operating under certain parameters that govern their entity's operations. Those parameters dramatically changed on September 1, 2019 with Arizona's passage of a new LLC Act. Until September 1, 2020, however, the old LLC Act was still in effect and applicable to all LLCs formed before September 1, 2019. Now, the old LLC Act has been repealed, and the new LLC Act governs all Arizona LLCs regardless of when they were formed. This raises practical considerations regarding which rules apply to events that took place, or rights and obligations that accrued, before the new LLC Act became effective. In light of the significant differences between the new LLC Act and the old LLC Act, it is important for Arizona LLCs—particularly, LLCs that were formed before September 1, 2019—to understand how the changes impact their entity's operations going forward and to recognize which version of the law applies to pending or future disputes.
The New Act Creates Important Substantive Changes
On September 1, 2019, Arizona joined an increasing number of states in adopting a new LLC Act, codified at A.R.S. §§ 29-3101, et seq., based on the Revised Uniform Limited Liability Company Act. The new LLC Act makes significant changes to the default provisions governing Arizona LLC operations and member rights and obligations. Some of the most noteworthy changes include (i) the ability to expand, limit, or eliminate certain fiduciary duties owed, including the duty of loyalty and duty of care, through the operating agreement, (ii) the right bestowed to former LLC members, under certain circumstances, to inspect the company's books and records, and (iii) a requirement that a member's contribution obligation be in writing in order to be enforceable.
It is important for LLCs and their members and managers to familiarize themselves with the new LLC Act and update their LLC's operating agreement to override any of the default provisions that the company does not wish to be governed by. Except in the circumstances explained below, if the operating agreement is silent as to a particular issue, the rights, duties, and obligations set forth in the new LLC Act will apply.
The Significance of the Savings Clause
As of September 1, 2020, the old LLC Act has been repealed, leaving the new Act to govern all LLC's regardless of when they were formed. Importantly, however, the new LLC Act comes equipped with a savings clause that designates three circumstances in which the old LLC Act still applies. First, the old LLC Act applies to all lawsuits filed before September 1, 2019. Second, the old Act applies to all rights that accrued before September 1, 2019. Third, with respect to LLCs formed before September 1, 2019 only, "the rights and obligations of the company's members and managers relating to matters arising and events occurring before September 1, 2020" are determined "according to the law and terms of the operating agreement in effect at the time the matters and events occurred." 2018 Ariz. Legis. Serv. Ch. 168, Sec. 6 (Savings Clause) (S.B. 1353). This third provision is significant because it not only impacts pending litigation, but also applies to future litigation involving rights and obligations arising from events occurring before September 1, 2020.
Notably, however, unlike the other two provisions, the third provision in the savings clause does not plainly state that the old LLC Act applies. Instead, one must look to "the law and terms of the operating agreement" that were "in effect" "at the time the matters and events occurred." There can be no dispute that the old LLC Act was in effect before September 1, 2019. Thus, that old Act will govern member and manager rights and obligations relating to matters and events taking place before that date. With respect to disputes relating to matters and events occurring between September 1, 2019 and September 1, 2020, however, there is less clarity regarding which Act will apply. The effective date of the new LLC Act is September 1, 2019, but the new LLC Act did not begin to govern LLCs formed before September 1, 2019 until September 1, 2020. Thus, there may be room to argue over which act was "in effect" during that one-year period. Regardless of the apparent ambiguity as to which LLC Act applies, the terms of the operating agreement in effect at the time of the event or activity giving rise to the dispute also govern. Accordingly, the parties should look to the terms of the operating agreement to help resolve any ambiguity. Moreover, if the operating agreement mentions or incorporates one of the LLC Acts, a court is likely to apply the law as reflected in the operating agreement.
Because of the significant differences between the new Act and the old Act, disputes will likely still arise regarding which Act is applicable concerning member and manager rights and obligations relating to matters and events taking place between September 1, 2019 and September 1, 2020. Unless the Legislature clarifies this provision in the savings clause, it will be up to the courts to determine which rules will apply.
Conclusion -- With Change Comes Uncertainties
The enactment of the new LLC Act brings important changes to the laws governing Arizona LLCs. With change, comes uncertainties. Members and managers of LLCs will want to familiarize themselves with the new parameters governing their entities, while also keeping in mind that the old LLC Act is not dead and buried, but still applies to certain prior conduct, events, and disputes.
Originally published 9.10.2020.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
