Insight Do you own or operate an Idaho LLC formed before July 1, 2008?

If so, your Articles of Organization and Operating Agreement need to be updated to avoid unintended consequences under Idaho’s new Limited Liability Company Act taking effect July 1, 2010.

Following a two year transition period, the Idaho Revised Uniform Limited Liability Company Act becomes effective July 1, 2010 for all LLCs created prior to the July 1, 2008 effective date of the Act. Articles of Organization and Operating Agreements for pre-Act Idaho LLCs should be reviewed and updated to adapt to the new Act.

Your Articles of Organization are based on the old LLC statute that is being replaced July 1, 2010. You need to review your Articles of Organization, ensure that the information is accurate and current, and then re-file an Amended and Restated “Certificate of Organization” with the Idaho Secretary of State. We can help to ensure that you take care of this filing correctly and that no mistakes are made.

You also need to know that the new Act imposes default rules that, in the absence of appropriate provisions in your Operating Agreement, will govern the relationships among members of your LLC and between the manager and the members if your LLC is manager-managed. If your Operating Agreement is silent on any of the matters addressed by these default rules, you may be unpleasantly surprised that your rights and duties as an LLC member or manager are not what you thought they were. If you do not have a written Operating Agreement, you need one if there is more than one member of the LLC.

To assist you in dealing with the new Act, we are offering a courtesy consultation to review your current Articles of Organization and Operating Agreement and discuss with you the potential application and effects of the new default rules and any other questions or concerns you may have concerning transition to the new Act. The default rules, that will apply to your LLC in the absence of Operating Agreement provisions that modify those rule, include:

Management structure

The Act provides that the LLC is member-managed by the members, with each member having an equal right in management and conduct of business, majority voting on ordinary course business and unanimity required for matters outside the ordinary course.

Voting

The Act mandates per capita voting (one person one vote) by members and (if the LLC is manager-managed) by managers, rather than voting in proportion to amount of contributed capital or other basis.

The Act requires unanimous member vote to amend the operating agreement.

The Act requires unanimous vote by the members to approve a merger, sale of substantially all assets and other transactions outside the ordinary course of business.

Distributions

The Act mandates that any distribution prior to dissolution be made in equal shares to each member (per capita), and that any distribution on liquidation be made to return each member’s capital contribution with the balance being distributed per capita.

Fiduciary duty of loyalty

The Act prohibits use of LLC property, profit or benefit for personal use. (For example, the Act would prohibit personal use of vacation property owned by a family LLC.)

The Act prohibits conflicting interest transactions in which members or managers enter into transactions with the LLC, absent unanimous approval by the members after full disclosure. (For example, the Act would prohibit a professional from leasing an office or equipment to an LLC of which the professional is a member or manager, unless all members consent.)

The Act prohibits a member or manager from starting a similar business (appropriating an LLC opportunity) or competing with the LLC. (For example, the manager of a real estate development LLC would be prohibited from developing similar projects without first offering the project to the LLC and would be prohibited from owning or operating a competing business

Fiduciary duty of care

The Act mandates the following standard of care: Each member of a member-managed LLC and each manager of a manager-managed LLC must act with the care that a person in like position would reasonably exercise under similar circumstances and in a manner reasonably believed to be in best interests of LLC.

The liability of managers and members for money damages for breach of the duty of care would not be limited or eliminated as permitted by the Act if the operating agreement contains an exculpation clause.

Contractual duty of good faith and fair dealing

The Act mandates this duty but permits the operating agreement to prescribe standards by which to measure performance of the duty.

Authority to act for LLC

The Act eliminates statutory apparent authority of members to bind the LLC, but provides no statutory basis for determining which members and/or managers have actual authority to act for and bind the LLC. Absent operating agreement provisions, any member or manager might have apparent authority to bind the LLC in transactions with third parties.

The Act permits filing a statement of authority with the Idaho Secretary of State to state or restrict the authority of specific persons or positions to act for the LLC in real property transactions.

Members’ information rights

The Act prescribes a detailed regime of information available to members, far broader than provided in the prior limited liability company act. Operating agreements drafted prior to the new Act likely contain limited information rights that will be found to be unreasonably restricted and unenforceable.

The Act allows the operating agreement to impose reasonable pre-requisites to member access to information such as a confidentiality/nondisclosure agreement.

Members’ remedies

The Act authorizes members to bring direct and derivative actions and prohibits operating agreement provisions varying a court’s statutory power to decree dissolution of the LLC under specified circumstances. Operating agreements of pre-Act LLCs may be unenforceable to the extent they purport to limit members’ statutory remedies.

To avoid unintended consequences caused by the new Act, please contact us at 208.344.6000 or email corporate@hawleytroxell.com to have your LLC documents updated.