United States: The New California LLC Law: Highlights For Private Equity And Venture-Backed Companies

Last Updated: January 20 2014
Article by Richard S. Grant and Kimberly M. Nakamaru

With the new California limited liability company law in full force, we have been fielding many questions from clients about how the law impacts their investments. The new law, the California Revised Uniform Limited Liability Company Act, took effect at the start of the year. As a practical matter, the new law will not significantly impact many private equity or venture-backed companies, as many are formed outside California (although more on that below), are organized as corporations, or have governing documents that already address many issues that are created by the new law. Also, for PE investments that are wholly owned by the fund, the new law will have little effect because the fund has full managerial authority over the venture.

Nevertheless, there are several changes in the new law that may require attention, particularly for investors in joint ventures or those holding minority interests. This alert identifies those changes and suggests ways to address them. Keep in mind that parties to existing companies may be unwilling to change their documentation, so as a practical matter they may not be able to address these issues. But for new ventures, new practices may be in order.

  1. Manager Fiduciary Duties. Managers have fiduciary duties under both the old and new law, but the new law describes those duties in greater detail. Funds and investors should pay careful attention to the new definitions, particularly the duty of loyalty and how it affects their ability to undertake competing ventures. Also, in some instances it may be appropriate to modify the duty of care to reflect a business judgment rule standard and other practices of venture-backed companies.
  2. Can the Parties Modify Manager Fiduciary Duties? Assuming the parties wish to modify the statutory fiduciary duties, they will need to proceed cautiously. Under the new law, companies may modify — although not eliminate — the statutory duty of loyalty and duty of care, but only if done with the members' "informed" consent and if the modified duties meet certain tests of reasonableness. The new law provides little guidance on how to satisfy the informed consent requirement, although modifications that result from negotiation among sophisticated parties should, presumably, meet the informed consent test. Nevertheless, if the parties wish to change the statutory duties, the venture documentation should clearly recite that all parties were aware of the statutory standards and knowingly modified them. The same principles apply to satisfying the reasonableness tests: The new law does not provide meaningful guidance, but sophisticated parties likely will have difficulty showing that a change was not reasonable, especially where the deal documentation recites why the manager duties were changed.
  3. Limiting Manager Liability. The new law allows the LLC, with certain exceptions, to eliminate or limit a manager's liability for monetary damages. (One of the exceptions is that the company may not limit liability for a breach of the duty of loyalty.) As a result, LLCs may adopt liability limitations akin to those found in ventures operated as corporations.
  4. Member Approval of Sale of the Company. Ventures should pay careful attention to the new default rules on member approvals. A number of company actions require unanimous member approval, including a company sale. The default rule can be modified in the operating agreement, but it needs to be addressed clearly or the company may face unintended results. For example, in some LLCs a board is given full company oversight, except for certain decisions reserved for approval by certain investor members. If a sale of the company is not one of those reserved decisions, the company may need unanimous member approval in order to undertake a sale.
  5. Other Member Approvals. The new law also requires unanimous member approval of amendments to the operating agreement and actions taken "outside the ordinary course." The former requirement will not likely be an issue in PE and VC deals because amendment provisions are often addressed in detail and, therefore, will likely override the statutory default rules. The requirement of approval for events outside the ordinary course is more troubling, however, because the new law does not indicate what events fall outside the ordinary course. The LLC can avoid the issue entirely by including a provision in the operating agreement that modifies or eliminates these member approval rights; the same is true for approval of a sale of the company (discussed above).
  6. Third-Party Reliance and Internal Governance. Be mindful of the new rules regarding internal versus external governance. Where there is a conflict between the LLC's articles of organization and operating agreement, the articles trump the operating agreement as to third parties that reasonably rely on the articles, and the operating agreement governs as between the members and managers. To avoid a conflict, limit the content of the articles, although in some ventures it may be appropriate to set forth certain managerial authority — such as the ability to sell a key asset — in the articles. Lender and Other Third-Party Protections. The parties may now condition amendments to the operating agreement on third-party consent. If this type of provision is included in the operating agreement, an amendment will not be legally effective unless the third party consents. This can be a useful tool for persons who are not parties to the operating agreement but need control rights, such as lenders and persons who hold economic interests in the enterprise but are not members.
  7. Avoid California Law? Some ventures may wish to avoid California law by organizing the LLC under a more freedom of contract friendly jurisdiction, such as Delaware. It remains to be seen, however, whether this will be an effective strategy. The new law provides conflicting guidance on what law governs foreign LLCs operating in California. On the one hand, the new law states that it applies to foreign LLCs registered in California, while another section states that, for a foreign LLC, the law of its jurisdiction of formation governs its "internal affairs." Arguably, the former is a statement as to when the new law becomes effective and the latter determines how the new law applies to out-of-state LLCs. If this interpretation is correct (although there is no assurance it is), then it would seem that matters such as manager duties and approval of transactions would be "internal affairs" and would be addressed under the laws of the foreign jurisdiction. This is not clear from the statute, however, and is open to interpretation.

Private equity and venture-backed investments organized as California LLCs may want to reexamine customary practices for structuring their entities. Otherwise, new rules under the California Revised Uniform Limited Liability Company Act may provide unwelcome surprises.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.