Washington state approved significant amendments to its Limited Liability Company Act earlier this year that will become effective on January 1, 2016.  For many existing LLCs, the amendments will not have a meaningful impact because their operating agreements already address matters that are covered by the statutory amendments.  However, for some LLCs, the managers and/or members may need to take affirmative steps to insure that the revised statute will not change their status quo in unexpected ways.

In this update, we offer a spot-check guide for clients with existing Washington LLCs to determine if amendments are required to permit business to continue as it has under the old law.  This is not a comprehensive summary of the changes that have been enacted, but we hope it will help you identify if you need to take action prior to January 1, 2016 to avoid surprises.

Oral LLC Agreements.  The amended statute changes the long-standing Washington requirement that LLC operating agreements be in writing.  Despite the change in the law, we still strongly recommend that our clients have written LLC agreements to minimize disputes over what actually has been agreed.  Following the amendments, LLC agreements can be oral, which means they can also be amended orally, unless your written LLC agreement does not permit oral amendments. 

Action Item:  Review your LLC agreement's amendment provision and confirm that all amendments must be in writing to be binding on the parties.

Board-Managed Entities.  The amended statute differentiates between LLCs governed by multiple managers and those governed by a board of managers.  Starting in January, in an LLC with multiple managers, each manager will have authority to bind the LLC and direct its operations, subject to the limitations and restrictions set forth in the LLC agreement.  In an LLC with a board of managers, the board as a body will have authority to direct the LLC but individual managers will not.  It will be up to the board to delegate specific authority to particular manager(s) or officers to act on behalf of the LLC.

Action Item:  If your LLC agreement provides for more than one manager, determine whether you intend for each manager to have authority to bind the entity and adopt appropriate amendments, if necessary, so that authority resides where intended.

Member- vs. Manager-Managed Entities.  Presently an LLC that wants to be a manager-managed entity must specify that in its publicly filed certificate of formation.  After January 1, 2016, the LLC agreement, not the certificate of formation, determines whether an entity is manager-managed or not.  As before, the default is member managed unless expressly stated otherwise.

Action Item:  Confirm that your LLC agreement clearly states that it is to be managed by a manager (if that is your intention), otherwise it will become a member-managed entity on January 1, 2016 regardless of what your certificate of formation says.

Apparent Authority.  A corollary of the preceding point is that since the public can no longer determine from a public records search whether members or managers have authority to act on behalf of the LLC, be prepared for more scrutiny before a signature will be accepted by a sophisticated counterparty.  It is likely you will be asked more often for evidence that the person signing has the actual authority to do so and may be asked to produce copies of your LLC agreement and authorizing resolutions clearly delegating authority to the signing party.

Action Items:  Review your LLC agreement to confirm that the right people have express authority to act on behalf of the LLC, or that procedures exist to delegate authority to appropriate persons.  It would be prudent to read your LLC agreement with an eye toward disclosing it to a broader universe of people.  Is there anything in there that is not necessary that you would rather not tell the world?

Fiduciary Duties.  The new provisions describe in some detail the manager's or managing-member's duties of loyalty and care and the ability of an LLC agreement to modify, expand, restrict or eliminate such duties.  Under the new provisions, an LLC may not eliminate or limit a person's liability for (1) intentional misconduct and knowing violations of the law, (2) authorizing a distribution in contravention of the LLC agreement or that would leave the company unable to pay its debts as they come due, or (3) the implied duty of good faith and fair dealing, which applies to all contracts generally.  Other than those restrictions, an LLC agreement can expand, narrow or eliminate all other duties owed by the managing person(s) to the members. 

Action Item:  Review your LLC agreement to determine if any existing fiduciary duty provisions are consistent with the revised law.  Consider whether a description of the members' expectations of the managing person(s) would be appropriate to document any agreements regarding permitted and forbidden actions and considerations.

Voting by Members.  The default voting scheme under the revised statute is "one member, one vote," rather than the prior default rules that required members holding a majority of contributed equity to approve actions brought before the members.  This revised voting rule will result in a holder of a very small percentage interest having the exact same voting power as majority member, unless your LLC agreement provides otherwise. 

Action Item:  Review your LLC agreement's member-voting provisions to determine if there is an express description of how member votes will be counted.  Consider amending your agreement if it is unclear or silent on the issue, and you are not willing to accept per capita voting.

Access to Records.  The new provisions expand the universe of records that LLC members have mandatory access to.  These include the certificate of formation, LLC agreement, contribution obligations, the three most-recent years' tax returns, annual reports and financial statements and records of member actions.  Additionally, members can have access to lists of members’ names and addresses, manager meeting records and LLC accounting records, if they can demonstrate a proper purpose, i.e., one related to their interest as a member, and the records are directly connected to that purpose.  To protect LLCs from unduly burdensome requests for records, an LLC agreement can include procedures for requesting company information, as long as those procedures do not unreasonably restrict access to records.  What constitutes an unreasonable restriction will no doubt be litigated in years to come, but there is some caselaw guidance from states with similar corporate record statutes.

Action Item:  Consider your LLC agreement's records provisions and whether you would like to add some procedures around requesting company records to protect against unreasonable and disruptive records requests.

If you determine that you would like to revise your LLC agreement in preparation for the statutory changes or would like to discuss how the updated statute will impact your LLC, please contact experienced business counsel.

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