2015 Legislative Amendments to the Florida Revised LLC Act
Although initially begun as a "Glitch Bill," 1 the 2015 amendments ("2015 Amendments") to the Florida Revised LLC Act ("Chapter 605" or the "2013 Legislation") grew into legislation that did much more. This article will address the most significant changes to Florida’s Revised LLC Act as a result of the 2015 Amendments.
The 2015 Amendments carried out their technical purpose to delete or replace obsolete references to the former Florida LLC Act ("Chapter 608"), and to make technical, stylistic and grammatical changes, including elimination of all references to "managing member," as a result of the repeal of Chapter 608.
The 2015 amendments then went on to make several substantive changes to the 2013 Legislation, the most significant of which is probably the "un-cabining" of fiduciary duties in Florida LLCs and the explicit application of common law principles to fiduciary duties. "Un-cabining" refers to the elimination of the concept of limiting or "cabining-in" fiduciary duties to those expressly stated in the LLC Act, which had been the law in Florida prior to the 2015 Amendments.
The substantive changes in the 2015 Amendments were the result of a number of forces:
- changes to the Uniform Limited Liability Company Act 2006 (as amended through 2013) (the "Uniform LLC Act")2, which occurred after Florida enacted the 2013 Legislation;
- concerns raised by Florida practitioners regarding a few of the provisions in the 2013 Legislation3; and
- a policy change in the Florida legislature concerning fiduciary duties in Florida LLCs.4
The 2015 Amendments to Chapter 605 were passed by the Legislature in April 2015, and signed into law by the Governor on June 11, 2015, with an effective date of July 1, 2015 for all provisions except the provision repealing Chapter 608, which had already been repealed with an effective date of January 1, 2015.
Repeal of Chapter 608
The 2013 Legislation initially became effective on January 1, 2014, with a delayed effective date for Florida LLCs which were in existence prior to January 1, 2014. The 2013 Legislation became effective for all Florida LLCs (regardless of when they were organized) on January 1, 2015, entirely replacing Chapter 608 with Chapter 605.
The 2015 Amendments formally repealed Chapter 608, as of January 1, 2015 and eliminates all references in other Florida Statutes to Chapter 608, and replaces them with references to Chapter 605 as the Florida Revised Limited Liability Company Act.
The formal action by the 2015 Legislature "in a current session" repealing Chapter 608 has the effect of deleting the statutory language which previously existed in Chapter 608.
Un-cabining of Default Fiduciary Duties and Application of Common Law Principles
The Florida Revised LLC Act, Chapter 605, when it was initially adopted in 2013, followed the approach of prior law in limiting fiduciary duties to those expressly stated in the LLC Act, essentially "cabining-in" fiduciary duties by using the language "is limited to" when describing the duty of loyalty 5 and the duty of care6.
The 2015 Amendments "un-cabin" the duty of loyalty and the duty of care by: (i) deleting the phrase "is limited to" in s. 605.04091(2) in connection with the duty of loyalty and replacing it with the single word "includes"7 ; and (ii) deleting the word "limited" in s. 605.04091(3) in connection with the duty of care8 .
The changes to s. 605.04091(2) and (3), although a significant change from prior Florida statutory law, are now consistent with ULLCA Section 409, which does not limit or "cabin-in" the duties of loyalty and care.9
The 2015 Amendments then go further by making two additions to the rules of construction and supplemental principles of law found in s. 605.0111 to: (i) permit the restriction, expansion, or elimination of duties, including fiduciary duties and obligations (subject to the non-waivable rules of s. 605.0105), and (ii) explicitly incorporate the application of common law principles associated with the duties of loyalty and care into s. 605.0111.
The first change is the addition of a new subsection (2) within s. 605.0111, which now provides:
“To the extent that, at law or in equity, a member, manager or other person has duties, including fiduciary duties, to a limited liability company or to another member or manager or to another person that is a party to or bound by an operating agreement, the duties of the member, manager or other person may be restricted, expanded or eliminated including in the determination of applicable duties and obligations under this Chapter, by the operating agreement, to the extent allowed by s. 605.0105."
The second change to s. 605.0111 renumbers old subsection (2) as new subsection (3) and inserts the new phrase "including the common law principles relating to the fiduciary duties of loyalty and care." So subsection (3) now reads: "Unless displaced by particular provisions of Chapter 605, the principles of law and equity, including the common law principles relating to the fiduciary duties of loyalty and care, supplement Chapter 605."
The above are non-Uniform Act changes since they are not found in ULLCA. The Supplemental Principles of Law provision in ULLCA, Section 111, simply provides: "Unless displaced by particular provisions of this Act, the principals of Law and Equity supplement this Act."
The official comments to ULLCA are helpful here as they make it clear that common law principles of contract and agency (and other law) are particularly important in LLCs, and those common law principles should supplement a state’s LLC Act.10
Prior to the 2015 Amendments, the prevailing view was that the specific language limiting fiduciary duties under s. 605.04091 ("is limited to") trumped the general application of common law principles under s. 605.0111, because of the introductory clause in 605.0111(2) "Unless displaced by particular provisions of this chapter," the principles of law and equity supplement this chapter...
However, an important legislative sponsor of both the 2013 Legislation and the 2015 Amendments wanted absolute clarity because of his experience that some courts in Florida have inconsistently followed the application of common law principles when it came to fiduciary duties in s. 605.04091.
Consequently, the 2015 Amendments now make it quite clear that the default fiduciary duties articulated in the Chapter 605 are to be supplemented by common law principles applicable to the duties of loyalty and care.
Another important aspect of the 2015 Amendments to s. 605.0111 worth highlighting is the codification of the right of members of a Florida LLC to limit, expand or eliminate fiduciary duties (including common law fiduciary duties) in their operating agreement, to the extent permitted in s. 605.0105.11
Member Dissociation as a Matter of Right is Now “Waivable”
The 2015 Amendments remove from the list of non-waivable provisions under s. 605.0105(3)(i) the provision that prohibited an LLC's operating agreement from varying the power of a member to dissociate from the LLC.
Section 605.0601(1) of the Florida Revised LLC Act provides, as a default rule, that a person has the power to dissociate as a member of an LLC at any time. The Florida Revised LLC Act, as adopted in 2013, made that provision a non-waivable provision based on the then current Uniform Act which also treated that right as non-waivable. The 2015 Amendments changed that, and will now allow the operating agreement to prohibit a member from dissociating from the LLC.
The 2015 Amendments reconcile the Florida Revised LLC Act with the latest version of the Uniform Act, which had made the same change to the Uniform Act after the 2013 Legislation was enacted. Finally, it resolves concerns raised by practitioners who were concerned that many LLC owners had already adopted operating agreements that prohibited members from dissociating at will, and unless the non-waivable rule was changed, existing LLCs would be harmed, and perhaps it would cause practitioners to recommend other jurisdictions for LLC formation if they wanted to assure that members could not dissociate at will.
Of course, the default rule remains that a member can dissociate from an LLC at any time without consent. If members want to prevent member dissociation at will, they need to ensure the operating agreement prohibits dissociation by members at will, or, if dissociation is to be permitted, the operating agreement should address the consequences of such dissociation.
Interested Transactions as an Exception to Appraisal Rights as the Exclusive Remedy
Section 605.1072(2) provides that the legality of a proposed or completed “appraisal event” may not be enjoined, set aside or rescinded in an equitable or legal proceeding by a member after the members have approved the appraisal event, unless the appraisal event:
(a) was not properly authorized and approved as required…;
(b) was procured as a result of fraud, a material misrepresentation or omission of a material fact; or
(c) is an interested transaction, unless it has been approved under s. 605.04092 (which addresses the approval of conflict of interest transactions by disinterested members) or is fair to the limited liability company as defined in s. 605.04092(1)(c).
The 2015 Amendments eliminated subsection 605.1072(2)(c), the third exception regarding interested transactions. As a result of the change, appraisal rights are the sole and exclusive remedy in most transactions in which appraisal rights are available, including interested party transactions.
This change was controversial within The Florida Bar drafting committee because the 2013 Legislation as originally enacted followed the Revised Model Business Corporations Act Section 13.40 which included interested transactions as an exception to the general rule. However, the prevailing view of the Drafting Committee was that for now the Revised LLC Act should more closely harmonize appraisal rights as the exclusive remedy in appraisal events with Florida's current corporate statute, s. 607.1302.
Note however, that the LLC Act provides more expansive language in s. 605.1072(2)(b), and in this author’s view, the LLC Act language is preferable to the more narrowly focused language in the current Florida corporate statute analogue.12
Moreover, a current drafting committee of the Florida Bar is considering changes to the corporate statute and that committee may end up changing the corporate analogue to add interested transactions as an exception to the general rule, so we may be back to the 2013 Legislation formula again next year.
Deemed Knowledge and Notice of Authority or Limitation of Authority to Non-Members in connection with Real Property Transactions
Section 605.0103(4)(a) imputes knowledge, and (4)(b) imputes notice, on persons who are not members of an LLC in the case of certain filed records, including with respect to grants or limitations of authority contained in the LLC’s articles of organization.
Specifically, under s. 605.0103(4)(b)(5), a third party is deemed to have knowledge of a grant of authority or limitation imposed on the authority of a person holding a position or having a specified status in an LLC if the grant of authority or limitation is described in the LLC's articles of organization. This was a change from prior law in Florida which generally required that deemed notice in connection a limitation of authority in connection with real property was tied to real property records, rather than a person’s status as a member or manager in the articles of organization.13
The 2015 Amendments limits the deemed notice to third parties in the context of a real estate transaction. Amended s. 605.0103(4)(b)(5) adds a new sentence to the end of the subsection: "A provision of the articles of organization that limits the authority of a person to transfer real property held in the name of the limited liability company is not notice of such limitation to a person who is not a member or manager of the company, unless such limitation appears in an affidavit, certificate, or other instrument that bears the name of the limited liability company and is recorded in the office for recording transfers of such real property."
This clarification was requested by the Real Property, Probate and Trust Law Section and is important for real estate practitioners, since the first place one looks when dealing with real property is the real estate records in the county where the property is located. This also conforms more closely to prior Florida law under former Chapter 608.
Voting Rights of Members & Managers – Actions taken by Written Consent
The voting rights of members and managers is addressed in s. 605.04073 and provides that an action requiring the vote or consent of members can be taken without a meeting.
Subsection 605.04073(4) was revised by the 2015 Amendments to add language requiring that in connection with any action by members taken without a meeting, the action must: (i) be approved in a record, and (ii) be approved by members with at least the minimum number of votes necessary to authorize or take the action at a meeting of the members.
New Requirements for Responding to a Member’s Demand for Records
Florida’s Revised LLC Act specifies the minimum records which must be maintained by an LLC, and further provides rules regarding access to those records by members and managers of the LLC. There have been a number of cases where disputes have arisen in connection with a member’s access to company records and the time in which a Florida LLC must respond to member requests for records or information.
Consequently, the 2015 Amendments revised s. 605.0410(2)(c), which now requires that in a member-managed LLC: "Within 10 days after receiving a demand pursuant to subparagraph (b)2. The company shall provide to the member who made the demand a record of:
1. The information the company will provide and when and where the company will provide the requested information, and
2. For any information that the company is not providing, the reasons the company is not providing the requested information.
This requirement was already in the s. 605.0410(3)(c) addressing requests for information in a manager-managed LLC as a result of the 2013 Legislation, so its application to member-managed LLCs is not controversial and was seen as a "glitch" fix.
Reinstatement of Administratively Dissolved LLC
At the request of the Florida Department of State, additional provisions were added to Sections 605.0715 and 605.0909 to specify information that administratively dissolved LLCs (both foreign and domestic) must include in their application for reinstatement.
The 2015 Amendments also provided that the filing of a current annual report and paying all delinquent fees and penalties is an acceptable alternative to filing an application for reinstatement.
Discrepancy between filed Articles of Organization and Operating Agreement as to Management Structure in a Manager-Managed LLC
When the 2013 Legislation became law on January 1, 2014, there was a one year transition period for LLC’s formed prior to January 1, 2014, which could still be subject to Chapter 608 instead of new Chapter 605. Section 605.1108 provided for the application of the 2013 Legislation to LLCs formed prior to the effective date in certain instances.
For example, subsection 605.1108(3)(a) provided that the company’s earlier filed articles of organization under 608 were deemed to be the articles of organization of the company under new Chapter 605. Subsection 605.1108(3)(b) provided that in a manager-managed LLC, that the management structure described in an LLC's articles of organization “operates as if that language were in the operating agreement."
The 2015 Amendments deleted subsection 605.1108(3)(b), since it was no longer necessary to apply that deemed construct because Chapter 605 requires that for an LLC to be manager-managed, there must be some affirmative clear indication that the members want a manager-managed entity, and most often in filed articles the articles often referred to a “managing member,” but we eliminated the “managing member” term as part of the 2013 Legislation, so now that the transition period has expired, it not necessary to have the deemed attribution to the operating agreement. Particularly since the management structure is a de facto requirement in every operating agreement, so if there is an inconsistency between the articles and the operating agreement, we don’t need the added complexity of a “deemed” inconsistency by virtue of old section 605.1108(3)(b).
Majority in Interest Definition Modified
The 2015 Amendments to subsection (37) of s. 605.0102 modified the "majority-in-interest" defined term by removing the phrase "and who have the right to vote." As modified the default definition of the term is defined to mean "those members who hold more than 50 percent of the then-current percentage or other interest in the profits of the limited liability company owned by all of its members."
This is not a substantive change in the law, but rather a clarification of the default rule in Florida that more than 50% of profits interests in an LLC constitutes a "majority-in interest" without having the "right to vote" trigger also included in the calculation since it was better dealt with elsewhere.
Of course the "then current percentage interest in the profits" standard is the default rule, which can be overridden by the standard adopted in the company operating agreement.
Revisions to Service of Process on Florida LLCs
The 2015 Amendments also changed the rules in Chapter 48.062 regarding service of process on Florida LLCs. The new rules substantial improve the rules for service of process (which previously were analogous to service on a partnership) to provide a clear cut waterfall for service of process.
Service may first be made on the company’s registered agent, or any employee of the registered agent (even if the RA is an individual) so long as made at the registered agent’s address during normal business hours, or if not possible to serve the registered agent because there is no registered agent or the registered agent is not available or cannot be served with reasonable diligence, service may be made on any member of a member-managed LLC, or any manager of a manager-managed LLC, or, if that is not possible, service may be made on an employee of the LLC if made during normal business hours.
Louis T. M. Conti served as the Chair of The Florida Bar Drafting Committee, which drafted the 2013 Florida Revised Limited Liability Company Act and the 2015 Amendments to the Florida Revised Limited Liability Company Act.
1CS/CS/CS/HB 531 sponsored in the House by Representative McGhee and in the Senate by Senator David Simmons.
2The Uniform Limited Liability Company Act ("ULLCA")was initially promulgated by the Uniform Law Commission (a/k/a the National Conference of Commissioners on Uniform State Laws) in 2006 as amended through 2013, but it has undergone significant changes in the years since it was first adopted by the ULC. The ULLCA was the model, and formed the basis, with significant deviations, for the Florida Revised Limited Liability Company Act enacted in 2013.
3Practitioners in the Real Property Probate and Trust Law section of The Florida Bar, as well as real estate industry professionals were troubled by the deemed notice and knowledge provisions in the 2013 Legislation; and transactional lawyers were concerned about the non-waivable provision which allowed a member to dissociate at any time. Both of these concerns resulted in changes addressed in the body of this article.
4The Senate sponsor of the 2013 Legislation, who also was the Senate sponsor of the 2015 Amendments, was particularly concerned with Florida’s treatment of fiduciary duties in limited liability companies and the inconsistent application of common law principles in addressing fiduciary duties, particularly the duty of loyalty.
5Duty of loyalty in old Section 605.04091(2) - The duty of loyalty is limited to accounting to the limited liability company and holding as trustee any property, profit or benefit derived by the manager(s) or managing member(s) in certain enumerated circumstances including refraining from appropriating a company opportunity, refraining from dealing with the company with an interest adverse to the company, and refraining from competing with the company before dissolution of the company.
6Duty of care in old Section 605.04091(3) "The duty of care in the conduct or winding up of the company’s activities and affairs is limited to refraining from engaging in grossly negligent or reckless conduct, willful or intentional misconduct, or a knowing violation of law."
7Under the 2015 Amendments Section 605.04091(2) is changed to read "The duty of loyalty "includes" accounting to the limited liability company and holding as trustee any property, profit or benefit derived…"
8Under the 2015 Amendments Section 605.04091(3) “The duty of care in the conduct or winding up of the company’s activities and affairs is to refraining from engaging in grossly negligent or reckless conduct, willful or intentional misconduct, or a knowing violation of law.
9ULLCA 409 does not describe the duty of care as a fiduciary duty. The official comments to Section 409 describes the failure to do so as intentional, based on the premise that the duty of care arises in contexts outside of the fiduciary relationship. No change in the law was intended by the semantic change in labeling the duties differently. Also, the amendments to Section 409 changed the description of the duty of care to eliminate the reference to the Business Judgment Rule and to conform to the duty of care language found in the Uniform Limited Partnership Act and the Uniform Partnership Act as both Acts, along with ULLCA, were amended in 2013 as part of the ULC Harmonization of Business Entities Project.
10ULLCA comment to Section 111 provides: "For this act, the common law rules of contract and agency are among the most important supplemental principles of law." With regard to transactions under Article 10, noteworthy principles include the rights of creditors following leveraged buyouts, spinoffs, asset purchases, or similar transactions; and creditors’ rights under other laws.”
11Section 605.0105(4)(c), provides that an operating agreement may, if not manifestly unreasonable, alter or eliminate the duty of loyalty under Section 605.04091, identify specific activities that do not violate the duty of loyalty and alter the duty of care, but it may not authorize willful or intentional misconduct or a knowing violation of law.
12Our corporate statute, Section 607.1302(4) provides two exceptions in subparagraphs (a) and (b) to the rule of exclusivity of appraisal rights, but they are different than the comparable provisions in our LLC Act. Section 607.1302(4)(b) provides the exception where the appraisal event "was procured as a result of fraud or material misrepresentation." The LLC Act in 605.1072(2)(b) uses the more expansive "was procured as a result of fraud, material misrepresentation, or an omission of a material fact that is necessary to make statements made, in the light of the circumstances in which they are made, not misleading."
13Former section 608.407(6) in addressing deemed notice of limitations of authority of a member or manager in connection with transfers of real property of the LLC, required the limitation of authority to be recorded in the office for recording transfers of real property.