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Birmingham Bar Association Bulletin - Fall 2014

Alabama LLC Act Gregory A. Brockwell; Leitman, Siegal & Payne, P.C. The New Alabama LLC Act: Impact on Members’ Rights and Internal Disputes “What you’re supposed to do when you don’t like a thing is change it,” or so said Maya Angelou. Taking its cue from the late poet, a committee of the Alabama Law Institute (“ALI”) began working in 2007 to overhaul Alabama’s limited liability company law. After many years of work, 2014 saw the passage of the new law, to be known as the “Alabama Limited Liability Company Law of 2014” (the “2014 Act”).1 The ALI Committee has this to say about its passage: This Act marks a significant improvement in the state of the law in Alabama relating to limited liability companies. The last substantive revision to Alabama’s Limited Liability Company Act came in 1997. This revision will bring Alabama to the forefront in laws governing limited liability companies. The committee considered the Revised Uniform Limited Liability Company Act and the Revised Prototype Limited Liability Company Act, but this proposal is unique to Alabama. The committee considered all sources choosing the best provisions from each national proposal and also looked to the law of other states. … The Act focuses on the contractual nature of the limited liability company. There are few mandatory provisions in the Act; most features of a limited liability company can be modified by the parties to suit their needs. … Despite the emphasis on allowing the parties to make their own contract, the Act provides that certain obligations, such as the implied contractual covenant of good faith and fair dealing, cannot be modified.2 It may be true that the 2014 Act is a significant improvement in Alabama law. At the same time, however, the 2014 Act will have some significant impacts on the rights of LLC members and also on internal disputes amongst the membership. This article is intended to provide an overview of some of the larger issues. Company Agreement may be “Oral” or “Implied” Under the 2014 Act, what has historically been known as an LLC “operating agreement” will now be known as the “limited liability company agreement.”3 The “company agreement” means “any agreement (whether referred to as a limited liability company agreement, operating agreement or otherwise), written, oral or implied, of the member or members as to the activities and affairs of a limited liability company.”4 Under the previous law, the “operating agreement” was defined as “a written agreement of the member or members governing the affairs of a limited liability company and the conduct of its business.”5 Whereas previously the LLC would be bound only by the statute and written operating agreement, under the 2014 Act the LLC may also be governed by “oral” and “implied” agreements. Now a member will be able to assert the protection of an oral or implied agreement, while other members may very well deny the existence or substance of such agreement. It is easy to imagine that this change will open the door to many new disputes amongst the members. New Definition of “Knowledge” and “Notice” The prior law did not include a definition of knowledge or notice. The 2014 Act now defines these terms.6 This may have the effect of eliminating some doubt and dispute as to when a member and/or the LLC have knowledge or notice. “Freedom of Contract,” supplemented by “Law and Equity” The 2014 Act states that “It is the policy of this Chapter and this state to give maximum effect to the principles of freedom of contract and to the enforceability of limited liability company agreements.”7 Thus, it is intended that the LLC should be free to operate however the members agree, whether good, bad, or otherwise. That being said, the “principles of law and equity supplement this Chapter” unless specifically displaced.8 So, in the event of a dispute, one may possibly still look beyond the company agreement to “law and equity.” Elimination of “Fiduciary Duties” One very significant change in the 2014 Act is that a member or manager’s fiduciary duties may now be eliminated. The 2014 Act, as a default, does place several duties on “persons with direction and oversight” of the company, including the duty of loyalty and the duty of care.9 However, the 2014 Act then provides that “To the extent…a member or other person has duties (including fiduciary duties)… the ‘member’s or other person’s duties may be expanded or restricted or eliminated by a written limited liability company agreement….’” 10 Under the prior law, fiduciary duties could not be eliminated, although the operating agreement could specify cer- 32 Birmingham Bar Association


Birmingham Bar Association Bulletin - Fall 2014
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