605 versus 608 Unenforceable Terms of an Operating Agreement

Operating Agreement

605 versus 608 Unenforceable Terms of an Operating Agreement

The Florida Legislature’s recent passage of the new Chapter 605 and replacement of Chapter 608 has significant consequences for all limited liability companies.  This article compares the list of terms in an operating agreement which were unenforceable with the old 608 versus those which are unenforceable with the new 605.

 

(605.0105)  An operating agreement can not: Comparing Old 608 to New 605
(a) Vary the LLC’s ability to sue and be sued. No prohibition in 608.
(b) Change its choice of law to another state. No prohibition in 608.
(c) Vary anything in the Chapter 605 pertaining to Registered agents or the Department of State. No prohibition in 608.
(d) Vary the process by which a court may force a person to file or sign something required by 605. No prohibition in 608.
(e) Eliminate entirely the fiduciary duties of loyalty and care (exceptions below): See below.
Duty of care may be altered if such alteration is not manifestly unreasonable and if such alteration does not authorize willful or intentional misconduct or a knowing violation of law.   The Old 608 defined the duty of care as limited to grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.  And it allowed for the reasonable reduction of this duty.  The new 605 does not define the fiduciary duty – it leaves it up to the drafter of the operating agreement.
Duty of loyalty may have its aspects altered or eliminated, and the OA may name specific types or categories of activities which do not violate the duty of loyalty, provided that any such term is not manifestly unreasonable. The Old 608 defined the duty of loyalty as limited to 1) profiting from LLC property or a usurpation of an LLC opportunity, 2) Refraining from dealing with the LLC as or on behalf of a party having an interest adverse to the LLC, and 3) Refraining from competing with the LLC. The old 608 also allowed the operating agreement to specify which members could approve of a duty of loyalty violation.  The new 605 does not define the fiduciary duty – it leaves it up to the drafter of the operating agreement.
(f) Eliminate the obligation of good faith and fair dealing but it may prescribe the standards by which a violation is to be measured if the standards are not manifestly unreasonable. Same prohibition.
(g) Relieve or exonerate a person from liability for conduct involving bad faith, willful or intentional misconduct, or a knowing violation of law. This was basically the duty of care under the old 608, which could have been reasonably limited
(h) Unreasonably restrict the duties and rights related to the records to be kept by the LLC, but the operating agreement may impose reasonable restrictions on the availability and use of information obtained under that section and may define appropriate remedies, including liquidated damages, for a breach thereof. Under the old 608, an LLC couldn’t “unreasonably restrict a right to information or access to records under s. 608.4101.”  There was no clause allowing for reasonable restrictions to be placed on the availability and use of the information.  Significantly, the new 605 statute gives much more control to manager managed companies attempting to stop a minority member from demanding information.  However, reasonable notice prior to a visit by a person looking for information is required for member-managed entities and not for manager-managed entities.
(i) Vary the power of a person to dissociate as a member other than to require that a person wishing to dissociate must provide notice in writing (record form). No prohibition in 608.
(j) Vary the grounds for judicial dissolution. No prohibition in 608.
(k) Vary certain wind up requirements. 608 and 605 have similar requirements that the operating agreement cannot vary the wind up requirements, however 605 makes specific reference to the sections.  
(l) Unreasonably restrict the right of a member to sue directly or through a derivative action. No prohibition in 608.
(m) Vary the provisions relating to the special litigation committee other than to deny the company the ability to appoint a special litigation committee. No prohibition in 608.
(n) Vary the right of a member to approve a merger, interest exchange, or conversion. No prohibition in 608.
(o) Vary the required contents of plan of merger, a plan of interest exchange, a plan of conversion, or a plan of domestication. No prohibition in 608.
(p) Except as otherwise provided in ss. 605.0106 and 605.0107(2), restrict the rights under this chapter of a person other than a member or manager. No prohibition in 608.
(q) Provide indemnification for a member or manager for any of the following: No prohibition in 608.
1. Conduct involving bad faith, willful or intentional misconduct, or a knowing violation of law. No prohibition in 608.
2. A transaction from which the member or manager derived an improper personal benefit. No prohibition in 608.
3. A breach of fiduciary duty involved with an improper distribution. No prohibition in 608.
4. A breach of fiduciary duties, as adjusted in the operating agreement. No prohibition in 608.
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