The Arizona legislature revised the text of proposed SB 1353, the law that if enacted will replace Arizona’s existing limited liability company law that took effect in 1992.  The red lined version of the proposed law is show below.

I oppose the proposed law.  If SB 1353 becomes law it will have the following consequences:

  • Instead of being a state that has “good” LLC law, Arizona will become a state that has “bad” LLC law.
  • The new law will cause Arizona’s limited liability company act to be nicknamed the Arizona liability company act because it creates many new obligations and liabilities on members and managers that will be the basis for lawsuits not possible under existing Arizona LLC law.  For example, new Section 29-409.B.4 states: “The fiduciary duty of loyalty of a member . . . includes the following duties: . . . . To disclose to each of the other members that are considering or voting on a decision or transaction regarding the company or one or more of the members’ interests in the company both of the following: (a) Any material conflict of interest on the part of the disclosing member with respect to the decision or transaction; and. (b) If a material conflict of interest exists, All material facts relating to the decision or transaction that are within the disclosing member’s knowledge and not known or reasonably available to the affected members.”  This statute will be a litigator’s dream because few members who vote on an issue will prepare a written disclosure document and give it to the other members.  A written disclosure document is the only way a member can prove that the member disclosed all material facts.
  • Knowledgeable people will not not form a new LLC in Arizona, but will instead form new LLCs in good LLC law states such as Delaware and Nevada.
  • Members of Arizona LLCs that do not adopt an Operating Agreement that eliminates the problems of SB 1353 will suffer the significant adverse consequences of having their LLC being governed by the new LLC law.  For example, the proposed law does not provide how members vote to adopt LLC issues.  Current LLC law in A.R.S. Section 29-681 states that a majority of the members means “more than one-half of the members” unless the LLC has an Operating Agreement that provides otherwise.  This means that if the LLC has 3 members the vote of two members is needed to approve LLC action.  Under the proposed law an Arizona LLC that does not have an Operating Agreement will be subject to new A.R.S. Section 29-3102.13 that defines majority in interest of the members as “one or more members that hold in the aggregate a majority of the interests in the limited liability company’s profits . . . . the members’ respective interests in the company’s profits shall be are in proportion to their rights to share in distributions that exceed the repayment of their contributions on dissolution and winding up of the company.”  The term “profits” is not defined in the proposed law.  Nor does the proposed law define what this statement means:  “the members’ respective interests in the company’s profits shall be are in proportion to their rights to share in distributions that exceed the repayment of their contributions on dissolution and winding up of the company.”  Do you know what this provision means?  I don’t.  I have a masters degree in income tax law from New York University School of Law.  I’ve formed Arizona LLCs since the law was adopted in 1992.  I’ve formed 9,300+ LLCs since I started counting in 2002.  I’ve written two books on Arizona LLC law.  I don’t have a clue how members of an Arizona LLC subject to the proposed law would determine how to vote on issues without an Operating Agreement.
  • Knowledgeable people who form an Arizona LLC after the new law becomes effective or who have an existing Arizona LLC will adopt an Operating Agreement that causes the LLC to opt out of all the bad provisions in SB 1353.

One of the primary purposes of the LLC laws are to provide the “rules” for operating an LLC when the members do not adopt a comprehensive Operating Agreement.  Current LLC laws does just that and does it well.  Unfortunately SB 1353 will provide far too many default rules that have adverse consequences on the members of an Arizona LLC.