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Birmingham Bar Association Bulletin - Fall 2014

Alabama LLC Act Gregory A. Brockwell; Leitman, Siegal & Payne, P.C. of the members; or (3) to the extent provided by other law.25 The Committee Comment makes clear that the “other law” is intended to be the “law of agency.” Thus, under the 2014 Act, a member may bind the company under principles of agency law, including apparent agency. Clawback of Distributions The 2014 Act forbids an LLC from making a distribution to a member “to the extent that at the time of the distribution, after giving effect to the distribution, all liabilities… exceed the fair value of the assets.”26 If a member knowingly receives an improper distribution, then the member shall be liable to the LLC for the amount of the distribution. 27 Knowledge is key, for the unwitting member who receives an improper distribution is not liable and gets to keep the distribution. 28 The statute of limitations for bringing a “clawback” action is two years from the date of the distribution.29 Restricted Access to Books and Records As with the prior law, the 2014 Act provides a member certain access to “books and records.”30 The 2014 Act, however, permits some restrictions on access to the books and records. The company agreement may state restrictions or conditions on access, and the company may in the ordinary course of its activities impose additional restrictions (if “reasonable”) and may even keep some information confidential from the members.31 The penalty for improperly refusing access is also different in the 2014 Act. Under the prior law, if the requesting member was wrongfully denied access to the books and records, then the requesting member was entitled to a penalty “not to exceed 10 percent of the fair market value of the membership interest of the member.”32 This has subtly changed in the 2014 Act, which provides a penalty “not to exceed 10 percent of the fair market value of the transferable interest of the member.”33 “Transferable interest” is a defined term under the 2014 Act and is only the member’s financial rights— something less than the member’s broader rights.34 This likely means the value of the penalty will be reduced under the 2014 Act. Procedural Rules for Member Lawsuits (both “direct” and “derivative”) The prior law provided for “derivative actions” by members.35 The 2014 Act provides for both “direct” and “derivative” actions by members, subject to certain requirements and procedures.36 These sections of the 2014 Act appear to be a codification of the law that has already developed under Rule 23.1 of the Alabama Rules of Civil Procedure and case law interpreting that rule. If there is a significant difference between the old procedures and the new, it is not immediately apparent. Conclusion In many respects, the 2014 Act will likely be lauded by corporate practitioners who will view it as an improvement to Alabama law, bringing the law more in line with Delaware and other leading jurisdictions. As far as that goes, the 2014 Act may serve a valuable purpose. For individual LLC members, however—and particularly minority members—the 2014 Act will have some significant impacts on their rights. The landscape of litigating internal membership disputes will undoubtedly be different than under the prior law. Like a stone cast into the waters, the 2014 Act will cause many ripples. Many of those ripples may not be felt by the Bar until the disputes begin. G ENDNOTES 1 The 2014 Act will become effective on January 1, 2015, for companies that form after that date or that “opt in.” For existing companies that do not opt in, the 2014 Act will become effective on January 1, 2017. Ala. Code § 10A-5A-12.01. 2 The entire text of the 2014 Act, along with the commentary of the ALI Committee, is available on the ALI website at: http://ali.state.al.us/ documents/RevisedLLC.pdf 3 Ala. Code § 10A-5A-1.02(k). 4 Id. 5 Ala. Code § 10A-5-1.02(8). 6 Ala. Code § 10A-5A-1.03. 7 Ala. Code § 10A-5A-1.06(a). 8 Ala. Code § 10A-5A-1.06(b). 9 Ala. Code § 10A-5A-4.08. 10 Ala. Code § 10A-5A-1.08(b)(1). 11 Ala. Code § 10A-5-3.03(l). 12 Ala. Code § 10A-5A-1.08(b)(1). 13 Ala. Code § 10A-5A-1.08(b)(2). 14 See, e.g., Ala. Code § 7-1-203; Tanner v. Church’s Fried Chicken, Inc., 582 So.2d 449, 451 (Ala. 1991); Government Street Lumber Co., Inc. v. AmSouth Bank, N.A., 553 So.2d 68, 72 (Ala. 1989); Peninsular Life Ins. Co. v. Blackmon, 476 So.2d 87, 89 (Ala. 1985). 15 See Srivinas M. Raju, “Fiduciary Duties in the Alternative Entity Context,” ABA, August 16, 2012 (“The implied contractual covenant of good faith and fair dealing is a common-law concept that antedated its usage in DRULPA and the LLC Act.  By not defining the term in DRULPA or the LLC Act, the Delaware legislature is assumed to have adopted the common-law concept.”). 16 See, e.g., Airborne Health, Inc. v. Squid Soap, LP, 984 A.2d 126, 145-46 (Del. Ch. 2009). 17 See, e.g., PAMI-LEMB I, Inc. v. EMB-NHC, LLC, 857 A.2d 998, 1016 (Del. Ch. 2004). 18 Ala Code § 10A-5A-1.08(b)(2). 19 Ala. Code § 10A-5A-1.08(b)(4). 20 Ala. Code § 10A-5A-1.08(b)(5). 21 See, e.g., Ex parte Brown, 562 So. 2d 485 (Ala. 1990). 22 Ala. Code § 10A-5A-6.01(a). 23 Ala. Code § 10A-5A-6.01(b). 24 Ala. Code § 10A-5A-6.01(c). 25 Ala. Code § 10A-5A-3.02. 26 Ala. Code §10A-5A-4.06(a)(1). 27 Ala. Code § 10A-5A-4.06(a)(2). 28 Id. 29 Ala. Code § 10A-5A-4.06(e). 30 Compare Ala. Code § 10A-5-2.06 and Ala. Code § 10A-5A-4.09. 31 Ala. Code § 10A-5A-4.09(g). 32 Ala. Code § 10A-5-2.06(b). 33 Ala. Code § 10A-5A-4.09(b). 34 Ala. Code §§ 10A-5A-1.02(i), 10A-5A-5.01. 35 Ala. Code § 10A-5.4.04. 36 Ala. Code §§ 10A-5A-9.01-9.09. 34 Birmingham Bar Association


Birmingham Bar Association Bulletin - Fall 2014
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