Fiduciary Duties Under the New Arizona Limited Liability Act
On September 1, 2020, Arizona’s new Limited Liability Act finally goes into full effect. Once the Act is in full effect, all Arizona LLCs will be regulated under a new framework which brings a host of novel and altered default rules. One such example is the new default fiduciary duties. While the duties will apply differently depending on if your LLC is a member-managed or manager-managed LLC, they should nonetheless be accounted for in your LLC’s operating agreement.
Note: LLCs formed after September 1, 2019 are already subject to the Act.
All members of a member-managed LLC owe both the LLC and its members a duty of loyalty, duty of care, and duty of good faith and fair dealing.
Duty of Loyalty
The Duty of Loyalty is an umbrella term which incorporates the following express duties:
Duty to Account – A member has a duty to account to the LLC and hold as trustee for the LLC any property, profit, or benefit improperly derived by the member. This means that any member who takes a business opportunity from the LLC, gains some benefit through improper use of LLC property, or otherwise obtained a benefit through some other improper means must account this benefit to the LLC and not keep it for him or herself.
Duty to Avoid Conflict– A member has a duty to avoid dealings which place his or her own interests in conflict with the LLC. Keep in mind however, that one is not in automatic violation of the Act merely because they are furthering their own interests.
Duty to Not Compete – Members have a duty to refrain from competing directly with the LLC before dissolution.
Duty to Disclose – When your LLC votes on a decision or transaction, you must disclose any material conflict and all material facts relating to that decision or transaction which you know and which are not reasonably available to the other members. Material conflicts or facts are those which would reasonably be expected to affect one’s judgement regarding the decision or transaction.
Curing or Defending a Violation: If following a conflicted member’s full disclosure of all material facts, the non-interested members vote to approve or ratify the conduct or transaction, that violation is cured. Further, it is a defense to claims of conflict or non-disclosure that the transaction in question was fundamentally fair to the LLC.
Duty of Care
Members have a duty to not engage in grossly negligent, reckless, or willful or intentional conduct. This is a high bar and if you violate this, you are likely aware that you should not be engaging in the activity that calls this into question.
Good Faith & Fair Dealing
Members must discharge all of their duties and obligations under the Act and their LLC’s operating agreement in good faith and fair dealing. This obligation cannot be eliminated in an operating agreement or through agreement of the parties.
The manager of a manager-managed LLC owes the LLC and its members the same duties as discussed above.
Members of a manager-managed LLC do not have independent fiduciary duties merely because they are a member of an LLC, but the duties can arise if the member exerts control over the LLC or participates in management or the affairs of the company.