Assigned to COMPS FOR
COMMITTEE
Assigned to COMPS FOR
COMMITTEE
ARIZONA STATE SENATE
Fifty-Third Legislature, Second Regular Session
limited liability company act; revisions
Purpose
Adopts the Arizona Limited Liability Company Act.
Background
The Arizona Corporation Commission (ACC), established by Article 15 of the Arizona Constitution, facilitates the incorporation of businesses and organizations, public utilities regulation, securities regulation and railroad or pipeline safety (A.R.S. § 10-130). The Corporations Division of the ACC: 1) approves the filing of all articles of incorporation for Arizona corporations and all articles of organization for limited liability companies (LLCs); 2) grants authority to foreign corporations and foreign LLCs to transact business in this state; 3) assures that no unlawful purpose is contained in the articles of incorporation; and 4) revokes the corporate charters of those corporations that do not comply with statute. Any significant changes to articles of incorporation or articles of organization for LLCs in the form of amendments, mergers, consolidations, dissolutions or withdrawals must also be filed with the Corporations Division of the ACC.
There is no anticipated fiscal impact to the state General Fund associated with this legislation.
Provisions
Organization
1. Applies the Arizona Limited Liability Act (Act) to the internal affairs of an LLC and the liability of a member or manager for a debt, obligation or other liability of an LLC.
2. Allows an LLC to provide a principle address for the LLC or its statutory agent, rather than its known place of business in the state, in its articles of organization.
3. Replaces a list of permissive LLC actions with a general declaration that an LLC may do all things necessary or convenient to carry on its activities and affairs.
4. Establishes the perpetual duration of LLCs unless authorized limited by its articles of organization.
5. Replaces the requirement that an LLC shall keep certain records at its known place of business with a requirement that the records must be kept by the LLC and furnished at a reasonable location specified by the LLC within 10 days after a demand.
6. Clarifies that LLCs with a statutory agent located in Maricopa or Pima County, rather than only LLCs with a known place of business in Maricopa or Pima County, are exempt from the requirement to publish an articles of organization notification in a newspaper of general circulation.
Standards of Conduct
7. Establishes duties of loyalty and care owed to a member-managed LLC and its members.
8. Requires, in exercise of their fiduciary duty of loyalty, a person who is a member in a member‑managed LLC or a manager in a manager-managed LLC to:
a) account to the LLC any derived property, profit or benefit to which the person is not entitled;
b) refrain from dealing with a person with an interest adverse to the LLC;
c) refrain from competing with the LLC before dissolution of the LLC; and
d) disclose any material conflicts of interest.
9. Prohibits a person from engaging in grossly negligent or reckless conduct, or in willful or intentional misconduct during the winding up of member-managed LLC affairs.
10. Allows members of an LLC to modify standards of conduct in the Act in the operating agreement or through collective action.
11. Stipulates that a member in a manager-managed LLC does not have any fiduciary duty to the LLC or its member solely by reason of being a member.
Service of Process
12. Allows an LLC without a statutory agent, or a statutory agent that cannot with reasonable diligence by served, to be served by registered mail, certified mail or commercial delivery to the principal address of the LLC.
13. Allows service to be made by handing a copy to the individual in charge of any regular place of business associated with the LLC, if process, notice or demand cannot otherwise be served.
14. Repeals the ability of a person to serve the ACC if process, notice or demand cannot otherwise be served and the requirement that the LLC has 30 days to respond after service to the ACC.
Operating Agreements
15. Allows an operating agreement to contain any provision that is not contrary to law.
16. Requires, in the event of a conflict between a provision of the operating agreement and the Act, the provision of the operating agreement to govern.
17. Repeals a reference to the court's permissive authority to enforce an operating agreement by injunction or other relief deemed to be fair and appropriate in the given circumstances.
18. Prohibits an operating agreement from:
a) varying the applicable law;
b) varying an LLCs capacity to sue and be sued in the LLCs own name;
c) varying any Act provision related to statutory agents or the ACC;
d) varying judicial order signing and filing requirements;
e) eliminating the contractual obligation of good faith and fair dealing;
f) eliminating the duty to refrain from willful or intentional misconduct;
g) unreasonably restricting the duties and rights of members and managers;
h) varying the causes of dissolution specified by the Act;
i) unreasonably restricting the right of a member to maintain a derivative action, but may require a member to plead and prove an actual or threatened injury not suffered by the LLC;
j) varying Act requirements for special litigation committees, unless the operating agreement provides for the absence of a special litigation committee;
k) varying the required contents of a plan of merger, interest exchange, conversion, domestication or division under the Act;
l) restricting the rights of persons other than members; or
m) reducing or eliminating distribution restrictions.
19. Allows an operating agreement to:
a) expand, limit or eliminate member or manager duties;
b) limit or eliminate liabilities for breach of agreement or duty;
c) specify a method by which an action that would otherwise violate a duty may be authorized or ratified, excluding a general provision providing for management by one or more members or managers;
d) designate a reimbursement and indemnification method, if the designation is more specific than a general provision providing for management by one or more members or managers;
e) define the fiduciary duties of a member and manager to be the same as those of directors, officers and shareholders in an Arizona corporation; or
f) specify that its amendment requires the satisfaction of a condition or approval of a person that is not party to the agreement.
20. Binds an LLC to an operating agreement whether the company itself has manifested assent to the agreement.
21. Attributes assent to the operating agreement for any person that becomes a member of the LLC.
22. Negates, in the ACC record, any provision in conflict of the Act and requires:
a) the agreement to prevail as to members, dissociated members, transferees and managers; and
b) the record to prevail for another person that reasonably relied on the record.
Transferable Interest
23. Stipulates that a transfer of interest does not itself entitle the transferee to access of records concerning the LLCs activities and affairs, unless the transferee makes a demand for records that are directly connected to the transferee's rights, duties and purpose in the LLC.
24. Allows a transferable interest to be evidenced by a certificate of the interest issued by the LLC.
25. Provides that an LLC is not required to give effect to a transferee's right until the LLC knows or has notice of the transfer.
26. Voids a restricted transfer of interest if the intended transferee has knowledge or notice of the restriction or if the restriction is embodied in the LLC's operating agreement.
27. Obligates a transferee acquiring an interest to assume the transferring member's liability, known to the transferee when becoming a member, for improper distributions.
28. Allows a court to require an LLC to pay the unsatisfied amount distribution, that would otherwise be paid to the judgment debtor, by charging order against the transferable interest of a debtor.
29. Stipulates that a court charging order is the exclusive remedy by which a person, in the capacity of a judgment creditor, may enforce a judgment against the transferable interest of a member or transferee.
Liability
30. Requires an LLC to indemnify a member and manager from liability for acting as a member or manager, rather than solely for reason of a being a member or manager.
31. Requires an LLC to reimburse a present or former member or manager of an LLC for any payment made in the course of activities on behalf of the LLC.
32. Requires an LLC to indemnify a person against any liability incurred because of the person's capacity as a member or manager the LLC.
33. Extends member and manager indemnification beyond the dissolution of the LLC.
34. Exempts, from grounds to impose liability, the failure of an LLC to observe formalities in the exercise of its powers or management of its activities.
35. Limits the liability of a person filing a document with ACC that contains inaccuracies, to a person that knows, rather than a person that should have known, inaccuracies were present in a filed record, if reasonable steps are not taken to correct the inaccuracy.
36. Attributes affirmation under penalty of perjury to any person who signs a record under the Act that the information is accurate to the person's knowledge.
37. Repeals the statute of limitations in the existing LLC Act, set at two years after discovery but not more than six years after filing, for imposing liability on a person that knowingly signs a record containing false information.
Notice
38. Declares that a person knows a fact if the person has actual knowledge of a fact or is deemed to know the fact under statute.
39. Declares that a person has notice of a fact if the person has reason to know the fact from all of the facts known to the person at the time in question.
40. Deems a nonmember to have notice of an LLC's:
a) dissolution after 90 days from a notice of winding up;
b) termination after 90 days from the articles of termination effective date; or
c) participation in a merger, interest exchange, conversion, domestication or division after 90 days from a statement of merger, interest exchange, conversion, domestication or division.
Member-Managed LLCs
41. Allows a person to become a member in an LLC through:
a) a provision in the operating agreement;
b) a transaction for merger, interest exchange, conversion, domestication or division;
c) agreeing to become a member, with the affirmative consent of all members; or
d) admission consented to by persons eligible to receive assets in liquidation after dissolution of an LLC caused by lack of members.
42. Allows a member to become a member without acquiring a transferable interest or making or being obligated to contribute to the LLC.
43. Stipulates that the authority to manage the company must be vested either in the managers or in the members.
44. Allows, except as provided in an operating agreement, a majority in interest of the members, rather than a majority of the members, to:
a) decide matters outside the ordinary course of company activity but within the company's purpose;
b) settle known differences among members;
c) determine whether to make an interim distribution before dissolution and winding up; or
d) elect to make an advance to a member or manager.
Dissolution and Winding Up
45. Designates a member's dissociation as wrongful if the person:
a) is expelled by judicial order,
b) breaches an express provision of the operating agreement;
c) becomes a debtor in bankruptcy;
d) signs an assignment for the benefit of creditors; or
e) seeks, consents to or acquiesces in the appointment of a trustee, receiver or liquidator of the person's property.
46. Allows an LLC, by affirmative consent of all members, to expel a member if it is unlawful to continue LLC affairs with the person as a member.
47. Allows an LLC, by judicial order, to expel a member because the person:
a) engaged in wrongful conduct that adversely and materially affects LLC affairs;
b) willfully or persistently committed a material breach of the operating agreement;
c) willfully or persistently breached a duty or obligation under standards of conduct in the Act as modified by the operating agreement; or
d) engaged in conduct relating to LLC affairs that makes it unreasonable to continue LLC affairs with the person as a member.
48. Allows any court of competent jurisdiction, rather than only the superior court in the county in which the LLC's known place of business is located, to dissolve an LLC.
49. Adds, to grounds for involuntary judicial dissolution, member or manager action that:
a) is illegal or fraudulent and has an adverse effect on the LLC;
b) breaches the operating agreement or standards of conduct willfully or persistently;
c) wastes, misapplies or diverts substantial assets of the company for non-LLC purposes.
50. Allows a court of competent jurisdiction to order judicial supervision during the winding up of a dissolved LLC.
51. Allows an LLC that is winding up its affairs and liquidating its assets to discharge, through public notice, its liabilities in advance of the statute of limitations.
52. Requires the ACC to provide a notice explaining the reasons for the denial of an LLC's application for reinstatement after administrative dissolution.
Derivative Actions
53. Allows a member to enforce the right of an LLC to maintain a derivative action 90 days after making a demand on the other members or managers, unless:
a) the demand would be futile;
b) irrepealable injury to the LLC would result by waiting 90 days; or
c) the statute of limitations would expire before 90 days.
54. Allows an LLC named in a derivative proceeding to appoint a special litigation committee to investigate claims and determine if pursuing the action is in the best interest of the LLC.
55. Requires, if an LLC appoints a special litigation committee, a court to stay a derivative proceeding for the time reasonably necessary to permit investigation.
56. Allows a special litigation committee to determine if it is in the best interest of the LLC that the proceeding:
a) continue under the control of the plaintiff;
b) continue under the control of the committee;
c) be settled on terms approved by the committee; or
d) be dismissed.
57. Requires the court to enforce the special litigation committee's determination, provided the court finds the members of the committee were disinterested and independent and that the committee acted in good faith, independently and with reasonable care.
Mergers
58. Assigns contractual appraisal rights to an interest holder of a domestic LLC that is merging, converting, domesticating, dividing or being acquired.
59. Repeals the authority of an operating agreement to provide an alternative action, other than by unanimous vote of all member, for approval of a plan to merge, convert, domesticate, divide or be acquired.
Professional LLCs
60. Allows a professional LLC to issue a transferable interest to, or admit as a member, any person who is not prohibited by a licensing authority.
61. Repeals a list of permissible entities that may be issued membership interest, including limitations on aggregate interests transferred to certain persons.
62. Repeals statute authorizing a professional LLC to adopt a fictitious name.
Foreign LLCs
63. Adds owning property or doing business in interstate commerce to activities of a foreign LLC that do not constitute doing business in the state.
64. Requires a foreign LLC to deliver a registration statement to the ACC that includes the name of the LLC, any alternate name adopted by the LLC to conduct business in Arizona, the originating jurisdiction of the LLC, and its member or manager organizational structure.
65. Requires a foreign series registered to do business in this state to include the word series in its name.
66. Allows the Attorney General to maintain an action to enjoin a foreign series from doing business in this state.
Definitions
67. Defines debtor in bankruptcy as a person subject to an order of relief under the U.S. Bankruptcy Code or comparable order under federal, state or foreign insolvency law.
68. Defines designating foreign company as the foreign LLC that designated or otherwise establishes a foreign series under the law of its jurisdiction of formation.
69. Defines distribution as:
a) a transfer of other property from an LLC to a person on account of a transferrable interest or in the person's capacity as a member;
b) a redemption or other purchase of a transferable interest by an LLC; and
c) a transfer to a member in return for the member's relinquishment of any right to participate as a member in the company’s affairs, including access to information.
70. Exempts, from the definition of distribution, amounts constituting reasonable compensation for service or payments made in the ordinary course of business under a retirement or other bona fide benefits program.
71. Removes unincorporated associations from the definition of foreign LLC.
72. Defines foreign series as a series of a foreign LLC established in a jurisdiction other than Arizona.
73. Defines jurisdiction, when referring to a political entity, as the United States, a state, a foreign country or a political subdivision of a foreign country.
74. Defines jurisdiction of formation as the jurisdiction whose law governs the internal affairs of an entity.
75. Clarifies that single-member LLCs are included in the definition of limited liability company.
76. Defines majority in interest of the members as one or more members that hold a majority of the interest in the LLC's profits, in proportion to their right at company dissolution to distributions exceeding contribution repayment, irrespective of any profit interests held by nonmembers.
77. Defines manager as a person responsible for performing management functions under a manager-managed LLC.
78. Modifies the definition of operating agreement by including agreements that are implied or not recorded, and clarifying the inclusion of amended or restated agreements.
79. Expands the definition of person to include a nonprofit corporation, general cooperative association, limited cooperative association, unincorporated nonprofit association, joint venture, government, government subdivision or any legal or commercial entity.
80. Defines principal address as the mailing address of an LLC or foreign LLC, wherever located.
81. Defines property as all property, whether real, personal, mixed, tangible or intangible.
82. Defines record as inscribed or electronically stored information that can be retrieved and perceived.
83. Defines registered foreign limited liability company as a foreign LLC registered with the ACC to conduct business in Arizona.
84. Defines sign as having present intent to authenticate or adopt a record while:
a) executing or adopting a tangible symbol; or
b) attaching or logically associating with the record an electronic symbol, sound or process.
85. Defines statutory agent as the agent of an LLC or foreign LLC that is authorized to receive service of any process, notice or demand required or permitted by law to be served on the company.
86. Defines transfer to include:
a) an assignment;
b) a conveyance;
c) a sale;
d) a lease;
e) an encumbrance, including a mortgage or security interest;
f) a gift; or
g) a transfer by operation of law.
87. Defines a transferable interest as the right, as initially owned by the person in the person's capacity as a member, to receive distributions in any fraction of the interest from an LLC, regardless of whether the person remains a member or continues to own any part of the right.
88. Defines transferee as a person to whom all or part of a transferable interest has been transferred, whether or not the transferor is a member, including the owner of a transferable interest.
89. Repeals definitions for assignee, court, deliver, delivery, electronic transmission, event of withdrawal, executed, filing, foreign limited liability company, initial articles of incorporation, member's interest and real property.
Miscellaneous
90. Requires, in applying and construing the Act, consideration to be given to the need to promote uniformity among states that have enacted the Uniform Limited Liability Company Act.
91. Stipulates that the Act supersedes sections of the Electronic Signatures in Global and National Commerce Act.
92. Becomes effective on September 1, 2019 for an LLC formed, converted or domesticated after September 1, 2019, or an existing LLC that elects to be subject to the Act.
93. Becomes effective on September 1, 2020 for all LLCs.
Prepared by Senate Research
February 1, 2018
GH/lb