United States: California’s Revised LLC Statute Could Have Profound Effects On Entertainment Industry Limited Liability Companies

Last Updated: January 21 2014
Article by Ekong Udoekwere

The use of limited liability companies, or LLCs, is pervasive in the entertainment industry. Writers, actors, directors and other "talent" often render their creative services through single-member "loan-out" LLCs. Providers of a wide range of film and television production-related services (such as visual and special effects, post-production services, payroll services, catering and equipment rentals) operate as LLCs.

Film and television production joint ventures commonly are entered into by holders of content rights, financiers and producers for the purpose of financing and producing one or more films or television series, and such joint ventures are often operated as LLCs. Many film distribution companies are also organized as LLCs. Major and mini-major studios typically form "one-off " LLCs in connection with the production of specific movies and television series. Musical groups frequently organize and operate as LLCs as well.

While many such entertainment entities are formed under the laws of other states, such as Delaware and New York, the number of entertainment industry-related LLCs that have been formed under California law is truly staggering. A recent search of the California Secretary of State's online database reveals that the number of registered LLCs whose names contain the terms "Entertainment," "Production(s)," "Distribution(s)," "Television," "Studio(s)" or "Film(s)" exceeds 33,000.

Those in the entertainment industry who conduct business through California LLCs should be aware that, effective January 1, 2014, California's existing limited liability company statute (Corporations Code §§ 17000 – 17656) was replaced by the California Revised Uniform Limited Liability Company Act (Corporations Code §§ 17701.01 – 17713.13). Actions taken by LLC managers and LLC members prior to January 1, 2014 will remain governed by the old statute, but the new statute will apply to all LLC actions taken on or after that date. Many of the default and mandatory rules established by the old law will be replaced by new and different default and mandatory rules under the new law.

While some of these changes are likely to have more of an impact on multi-member LLCs (such as joint ventures and musical groups) than on single-member LLCs (such as "loan-out" companies and one-off production entities), all of the changes to the law could result in significant and unintended consequences to entertainment LLCs. LLC members and non-member managers of entertainment LLCs could discover that the new law significantly alters their rights and expectations in ways that conflict with or override their written operating agreements. Accordingly, all members and

managers of California LLCs should consider whether revisions to their formation documents may be necessary. Some of the more potentially impactful changes to California's LLC law are discussed below.

Who Manages the Company?

California's revised LLC law creates new rules for forming manager-managed LLCs (i.e., LLCs that are run by only one of its members, or by someone other than an LLC member). For example, the new law requires both the LLC's articles of organization and its written operating agreement to include a written statement designating the LLC a manager-managed LLC. Under the former statute, a manager-managed LLC could be established by a statement to that effect only in the articles of organization. Accordingly, if the members of an existing California LLC intend their LLC to be manager-managed, they should ensure that the intention is expressed in both of the LLC's formation documents. Otherwise, the new statute will treat the LLC as a member-managed LLC, and subject to different rules.

Consider, for example, a film production joint venture organized as an LLC with the members comprising a holder of content rights, a financier and a production company. It is not unusual for the daily and routine operations of such entities to be delegated to a single manager rather the all the members (usually the production company-member since it has the most relevant experience necessary to operating a film production company). However, if the LLC's articles of organization and written operating agreement do not both include a statement to that effect, an amendment to one of the LLC's formation documents would be necessary in order for the LLC to continue to be treated as manager-managed under the new law. Otherwise, the manager will find that the new law treats the LLC as a member-managed entity subject to its rules for member-managed LLCs. Such a result would, among other things, require member consent (including unanimous member consent in some circumstances) for otherwise routine actions that the members intended the manager to take in its sole discretion, which may lead to unnecessary and costly business delays.

What is the Scope of the Manager's Powers?

By default under the new law, a manager's authority to take certain actions without approval of all the members is limited, unless such limitations are expressly waived. Absent a waiver of these limitations, a manager must obtain approval for any actions that would be considered to be outside of the "ordinary course" of the company's business. The new statute does not define "ordinary course" or provide any guidelines for what actions generally would be considered to be outside of the ordinary course. Such ambiguity can readily lead to disputes should a manager take some action without the members' consent that one or more members believe required their consent.

Consider a musical group organized as an LLC, where the organizer is also the lead singer and/or creative force behind the band. It is not unusual for the organizing member, given his particular interest and investment in the band, to retain sole management authority. If the operating agreement does not expressly grant specific powers to the manager, or clearly define certain actions as being "in the ordinary course" of the LLC's business, the band member-manager may find his or her authority restricted under the revised statute.

This issue is not unique to music band LLCs and the same concern applies to any LLC where management is vested in one or more managers rather than the members. Unless appropriate amendments to the operating agreement are made, the band member-manager must seek unanimous (rather than majority or supermajority) member consent before taking such action. To avoid future disputes, members and managers should review their operating agreements to ensure that it is explicit in: (i) the powers granted to the manager; (ii) outlining those specific activities deemed within ordinary course of the company's business; and/or (iii) the standard for member approval of certain matters (i.e., majority or supermajority instead of unanimous), if that is their intention.

In addition, the standard "ordinary course" of the company's business is vague and potentially sweeping. We recommend that the delegation of powers to a manager and the limitations on those powers requiring member approval be clearly articulated in the operating agreement, as is the common practice where the members are concerned about having certain veto rights or approval rights. If the delegation and limitations are not clear, there is a significant risk that the LLC will face questions about whether or not important actions have been authorized or were within the scope of the manager's authority.

What Rights Do Transferees of LLC Interests Have?

Multi-member entertainment LLCs usually intend to limit membership to the founding members and certain permitted affiliates. Thus, the operating agreements of these LLCs may restrict the rights of any non-permitted transferee of an LLC interest. For example, such a transferee may be limited to an economic interest in the company (i.e., distributions of profits) but have no voting or information rights (i.e., access to books and records of the LLC). The old law referred to such a transferee as an "assignee." While the new law maintains the same concept, it refers to such a person as a "transferee" and not an "assignee." Because the new law does not use the term "assignee" in the same way as the old law, members to pre-2014 operating agreements may find that certain transferees, who are intended to own only a limited economic interest, may have broader rights in the LLC under the new law.

For example, in connection with an unpermitted transfer of LLC interests, some operating agreements automatically convert the transferred membership interest to a limited economic interest. If the underlying operating agreement includes language such as "a non-permitted transferee shall have the rights of an assignee, as defined in the Act," or otherwise relies on the default rules of the old law to accomplish this conversion, the transferee may actually have broader rights under the new law than intended. Members and managers should consult their operating agreements to ensure the limited economic rights of certain transferees are clearly worded using the nomenclature of the new law.

What Fiduciary Duties Are Owed?

Members in a member-managed LLC owe fiduciary duties to each other; managers in a manager-managed LLC owe fiduciary duties to the LLC's members. The old law made general reference to the fiduciary duties of members and managers but did not specify the nature or scope of such duties. The new law specifically states that the fiduciary duties of members (in a member-managed LLC) and managers (in a manager-managed LLC) include the duty of loyalty, the duty of care, and "any other fiduciary duty."

While the new law permits the modification (but not elimination) of the duty of loyalty, any alteration of this duty is subject to a "not manifestly unreasonable" standard. The new rules also require full disclosure and the informed consent of the members in connection with any modification of fiduciary duties. We strongly recommend that parties seeking to modify fiduciary duties specifically define the duty of loyalty and the duty of care and specifically authorize certain actions that might otherwise be viewed as conflicting with the fiduciary duties. Modifications of fiduciary duties should be targeted to avoid running afoul of the "not manifestly unreasonable" standard and facilitate showing informed consent of the members. It is not sufficient for purposes of establishing informed consent to rely upon the fact that the modifications of fiduciary duties are in the operating agreement and the members signed the operating agreement.

What Should You Do?

California's revised LLC law is a potential trap for the unwary. To guard against any potential inconsistency between an operating agreement adopted under the provisions of the old law and the revised statute, members of existing California LLCs should consult legal counsel to review such agreements, determine the potential impact of the new law and make appropriate changes.

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.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
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.

Disclaimer

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.

Registration

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.

Cookies

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.

Links

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.

Mail-A-Friend

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.

Emails

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 .

Security

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.