Florida's new revised LLC act.

• Author: Conti, Louis T.M.
• Position: Part 3

This is the third in a four-part installment of articles describing the new Florida Revised LLC Act (revised act), which took effect January 1. This installment addresses member dissociation, dissolution and winding up of the LLC, reinstatement after dissolution, and actions by members (direct and derivative). When reading the following descriptions of the new law, keep in mind that these are statutory "default" rules, which may be over-ridden or otherwise modified except to the extent provided in F.S. [section] 605.0105 of the revised act.

Dissociation of a Member

The revised act significantly increases the ways in which a member may dissociate from an LLC. Existing law permits a member to withdraw only upon bankruptcy, dissolution, and winding up, or the occurrence of an event stated in the LLC's articles of organization or operating agreement. The revised act (1) adds no less than 10 new ways in which a member may dissociate (or be dissociated), depending upon whether the member is an individual or an entity, and if an entity, which type. The two most notable dissociation provisions may be the voluntary dissociation by express will, and the involuntary dissociation by expulsion.

Dissociation by express will recognizes the power of a member to withdraw from an LLC at any time. Withdrawal of a member affects the member's dissociation, and under the revised act, (2) a member may withdraw, rightfully or wrongfully, at any time. The operating agreement cannot vary a member's power to dissociate. (3) When a member wrongfully dissociates from an LLC, however, the wrongfully dissociated member incurs liability to the LLC and remaining members for any damage caused by the wrongful dissociation. This liability arises in addition to any other liability of the dissociated member to the LLC or other members. Any dissociation in breach of the operating agreement is deemed to be wrongful. The revised act (4) expressly recognizes that the article of organization or operating agreement may prohibit an assignment of a member's interest, such that a withdrawal effectuated by an assignment in violation of such a restriction would be deemed wrongful for this purpose. Additionally, dissociating before the LLC is wound up is deemed to be wrongful if it takes place by express will, by judicial order, in bankruptcy (in the case of a member-managed LLC), or by dissolution of a member that is an entity (other than an estate or nonbusiness trust).

Dissociation by expulsion can occur under one of two circumstances under the revised act. (5) First, the operating agreement can prescribe a method by which a member may be expelled. Upon expulsion under the operating agreement, the member is dissociated. Absent a method for expulsion in the operating agreement, the members may unanimously agree to expel a member. Expulsion by unanimous consent is only available if the LLC cannot lawfully carry on its activities with the expelled member; the expelled member has transferred its entire transferable interest in the LLC (other than under a security agreement or a charging order that has not been foreclosed); or the expelled member is a corporation or other entity that is dissolved. It is noteworthy that under existing law the transfer of a member's entire interest will automatically terminate the transferor's status as a member, and that under the new law this will not occur unless the transferor's expulsion must be unanimously approved. It may be advisable, therefore, to have the operating agreement provide for automatic dissociation to avoid the need for such an approval by all of the members.

Expulsion of a member can also be effectuated by judicial order in a case in which a member's wrongful conduct adversely and materially affects the company's activities and affairs, constitutes a willful or persistent and material breach of the operating agreement, violates fiduciary duties or other statutory standards of conduct (in the case of member-managed company), or makes it not reasonably practicable to carry on the company's activities and affairs with that person as a member. (6)

The revised act (7) describes the rights, obligations, and legal status of dissociated members. A dissociated member holds its transferable interest as a "transferee" only. The dissociated member has no right to participate in management, nor has any management obligations to the LLC. Also, a member's dissociation does not discharge any debt that the dissociated member owes to the LLC or any member. Finally, the revised act eliminates the existing law's prohibition on a dissociated member's receiving a distribution, but the dissociated member's status as a transferee means it will be entitled to distributions only at the time the dissociated member would otherwise have received them (which substantively has the same effect). (8)

Dissolution and Winding Up

The revised act does not change the events causing dissolution (upon an occurrence stated in...