What Rights Do Members in an LLC Have That an Operating Agreement Cannot Eliminate or Alter?
Under the Florida Revised LLC Act (“Revised Act”), members in an LLC have certain key rights that an operating agreement cannot eliminate or alter. In contrast, members maintain certain rights that an LLC operating agreement can eliminate or alter unless it would be “manifestly unreasonable” to do so. Here is a summary of these rights and whether they can be modified by the LLC.
An LLC Cannot Vary the Grounds for Dissolution Initiated by a Manager or Member
Under section 605.0105(3)(i), Florida Statutes, an LLC operating agreement cannot vary the grounds for dissolution of the LLC when a manager or member files an action for dissolution. Section 605.0702(1)(b), Florida Statutes, which is incorporated into the above section, sets forth the specific grounds for when a manager or member can initiate dissolution. They are as follows:
- The conduct of all or substantially all of the LLC’s activities and affairs is unlawful;
- It is not reasonably practicable to carry on the LLC’s activities and affairs in conformity with the articles of organization and the operating agreement;
- The managers or members in control of the LLC have acted, are acting, or are reasonably expected to act in a manner that is illegal or fraudulent;
- The LLC’s assets are being misappropriated or wasted, causing injury to the LLC, or in a proceeding by a member, causing injury to one or more of its members; or
- The managers or the members of the LLC are deadlocked in the management of the LLC’s activities and affairs, the members are unable to break the deadlock, and irreparable injury to the LLC is threatened or being suffered.
Sec. 605.0702(1)(b), Fla. Stat.
An LLC Cannot Eliminate or Alter the Right of a Member to Maintain an Action Against the LLC, Managers or Other Members
Under sections 605.801 and 605.802, Florida Statutes, a member may maintain two types of actions against the LLC, managers or other members. These types of actions are both direct and derivative actions and are summarized as follows:
- Direct Action. A member may maintain a direct action against another member, a manager, or the LLC to enforce the member’s rights and otherwise protect the member’s interests, including rights and interests under the operating agreement, the Florida Revised LLC Act, or arising independently of the membership relationship. Sec. 801, Fla. Stat.
- Derivative Action. A member may maintain a derivative action to enforce a right of the LLC if the member first makes a demand on the managers requesting that the managers cause the LLC to take suitable action to enforce the right, and the managers or other members do not take the action within a reasonable time, not to exceed 90 days. A demand, however, need not be made if it would be futile or irreparable injury would result to the LLC by waiting for the managers to enforce the right. Sec. 802, Fla. Stat.
An LLC operating agreement cannot eliminate or alter a member’s rights to bring direct and derivative actions, but as set forth in detail below, can eliminate or alter certain duties that may support a direct or derivative cause of action.
An LLC Can Eliminate or Alter a Manager’s Duties of Loyalty or Care Unless it Would be “Manifestly Unreasonable”
Under section 605.04091(2), Florida Statutes, a manager’s duty of loyalty imposes the following duties upon a manager:
- Accounting to the company and holding as trustee for it any property, profit, or benefit derived by the manager;
- Refraining from dealing with the company in the conduct of, or winding up of, the company’s on behalf of a person having an interest adverse to the company; and
- Refraining from competing with the company.
Under section 605.04091(3), Florida Statutes, a manager’s duty of care includes the duty to refrain from engaging in grossly negligent or reckless conduct, willful or intentional misconduct, or a knowing violation of law.
An LLC operating agreement, however, may eliminate or alter these duties unless it would be “manifestly unreasonable” to do so. Sec. 605.0105(3)(e), (4)(c), Fla. Stat. Specifically, an operating agreement may do the following:
- Alter or eliminate the aspects of the duty of loyalty;
- Identify specific types or categories of activities that do not violate the duty of loyalty;
- Alter the duty of care, but may not authorize willful or intentional misconduct or a knowing violation of law; and
- Alter or eliminate any other fiduciary duty.
Sec. 605.0105(3)(e), (4)(c), Fla. Stat.
The only available challenge to the elimination or alteration of such duties is proving they are manifestly unreasonable, which a Court must decide as a matter of law and does not get presented to a jury. Sec. 605.0105(4)(c) and (5), Fla. Stat.
An LLC Cannot Eliminate a Manager’s Obligation of Good Faith and Fair Dealing
Under section 605.04091(4), Florida Statutes, managers shall discharge their duties and obligations under this chapter or under the LLC operating agreement and exercise any rights consistently with the obligation of good faith and fair dealing. An operating agreement, however, may prescribe the standards upon which the good-faith obligation is to be measured. Sec. 605.0105(3)(f), Fla. Stat. The only limitation to such standards is that they must not be manifestly unreasonable, which a Court decides as a matter of law. Sec. 605.0105(4)(c) and (5), Fla. Stat.
An LLC Cannot Relieve or Exonerate a Manager from Liability for Bad Faith, Willful or Intentional Misconduct, or Knowing Violations of the Law
It is unenforceable for an LLC operating agreement to relieve or exonerate a manager from liability for bad faith, willful, or intentional misconduct, or knowing violations of the law. Sec. 605.0105(3)(g), Fla. Stat. Limitations on a manager’s duties, short of intentional misconduct, however, may be included in an operating agreement.
An LLC Cannot Indemnify a Member or Manager for Bad Acts
Under section 605.0105(3)(p), Florida Statutes, an LLC operating agreement cannot indemnify a member or manager for various bad acts, including:
- Conduct involving bad faith, willful or intentional misconduct or a knowing violation of the law;
- A transaction from which the member or manager derived an improper personal benefit;
- Liability for improper distributions; and
- A manager’s breach of the duties of loyalty, care or good faith and fair dealing.
Under the Revised Act, an LLC operating agreement cannot eliminate or alter certain LLC, manager, and member duties to the detriment of members. The LLC can remove or modify other duties, however, unless the member can demonstrate the removal or modification was manifestly unreasonable. The upshot here is that LLC’s have vast discretion to craft operating agreements in a manner that may limit member’s rights significantly. Accordingly, all LLC members should have competent counsel review an operating agreement before a member signs it.
If you are a member of an LLC and are having a dispute with the LLC or its managers, contact the attorneys at McCabe Rabin, P.A. for a free consultation at 561-659-7878 or 877-915-4040.