Effective January 1, 2023, Wisconsin will have a new Uniform Limited Liability Company Law applicable to all Wisconsin limited liability companies (“LLCs”) unless existing LLCs opt out before December 31, 2022, with the Wisconsin Department of Financial Institutions (“WDFI”). 2021 Wis. Act 258, signed into law by Governor Evers on April 15, 2022, repeals the prior Wisconsin Limited Liability Company Act in its entirety (the “Prior Statute”) and adopts the Revised Uniform Limited Liability Company Act created by the Uniform Law Commission, with some Wisconsin specific changes (the “New Statute”).
Select Changes from the New Statute
The New Statute implements a number of key changes to how LLCs will be governed in Wisconsin. A selection of key changes include:
- Prior Statute. The Prior Statute required an LLC to designate whether it was member-managed or manager-managed in the LLC’s articles of organization.
- New Statute. The New Statute no longer requires a designation of whether the LLC is member-managed or manager-managed in the articles of organization, thereby eliminating the need to amend the articles should members decide to change the form of management. Members can opt to be member-managed or manager-managed simply by specifying the management form in the LLC’s operating agreement. If an LLC fails to designate a management structure in its operating agreement, the New Statute defaults to treating LLCs as member-managed.
Definition of “Operating Agreement”
- Prior Statute. The Prior Statute required all operating agreements (the document that generally governs the rights of members and management of an LLC) to be in written form.
- New Statute. The New Statute expands the definition of an operating agreement to include agreements that are written, oral, implied, or any combination of the three. LLCs that do not opt out of the New Statute or LLCs formed after December 31, 2022, should consider including an integration clause expressly stating that the written operating agreement is intended to be the sole agreement governing the LLC.
Fiduciary Duties of Members and Managers
- Prior Statute. The Prior Statute imposed minimal fiduciary duties on members and managers and only prohibited the following actions: (i) willful failure to deal fairly with the LLC or its members in a matter in which such member or manager has a material conflict of interest, (ii) violations of criminal law, (iii) a transaction from which the member or manager derives an improper personal profit, and (iv) willful misconduct. Despite these minimal duties contained in the Prior Statute, case law created some uncertainty regarding the fiduciary duties owed by members and managers and may impose fiduciary duties beyond those listed in the statute. (See e.g., Marx v. Morris 2019 WI 34, 386 Wis. 2d 122, 925 N.W.2d 112; Smith v. Kleynerman, 2017 WI 22, 374 Wis. 2d 1, 892 N.W.2d 734).
- New Statute. The New Statute clarifies that all members in a member-managed LLC and all managers in a manager-managed LLC owe each other the duty of loyalty and duty of care. All members and managers, regardless of the management style of the LLC, must exercise all duties and rights consistent with the contractual obligation of good faith and fair dealing. An operating agreement allows members to contract around these duties to a certain extent but not waive them completely. Specifically, an LLC can ratify or authorize an act or transaction that would otherwise constitute a breach of the duty of loyalty so long as all material information related to the act or transaction is disclosed. Written operating agreements can also alter the standards by which performance of the obligations are measured.
Access to Information
- Prior Statute. Under the Prior Statute, members had to request to inspect or copy company records and information, which included specified information kept at the LLC’s principal place of business and limited to information regarding “things affecting the member.” Access to all other records could be limited by the operating agreement.
- New Statute. The New Statute grants members greater rights to access company information. Any member (including those no longer involved in management) can make reasonable requests for information regarding the company’s affairs, activities, financial condition, and other circumstances, even that which is not material to the proper exercise of the member’s rights and duties. The New Statute also precludes the operating statement from placing unreasonable restrictions on members’ right of access. An LLC also has an affirmative obligation to provide its members with information concerning the LLC’s activities, affairs and financial condition that are material to the member’s rights and duties.
Authority to Bind Company
- Prior Statute. The Prior Statute stated that any member in a member-managed LLC, and any manager in a manager-managed LLC, was an agent of the LLC. Under the concept of ‘apparent authority,’ agents have the power to bind the LLC contractually. The LLC could be held liable to third parties for obligations a member (or manager, in a manager-managed LLC) entered into on behalf of the company while acting in the ordinary course of business.
- New Statute. The New Statute does not treat members as agents of the LLC solely by reason of their membership, eliminating their broad grant of authority to bind the LLC. LLCs now have the option to file a statement of authority with the WDFI, specifying which persons have authority to bind the LLC and any restrictions on that authority. A statement of authority on file constitutes “notice” to a third party as to who has authority to bind the LLC, protecting LLCs from liability for obligations under claims of apparent authority. This statement of authority will remain effective for five years, or until amended otherwise.
Mergers, Conversions, Exchanges, and Domestications
- Prior Statute. For a merger to be approved under the Prior Statute, an affirmative vote by members who cumulatively owned more than 50% membership interest was needed.
- New Statute. Under the New Statute, all members must agree to effect a merger. A written operating statement that provides for the approval of a merger with less than unanimous consent can override this default rule.
The New Statute will be effective January 1, 2023. LLCs formed on or after January 1, 2023, will be subject to the New Statute. Existing LLCs or LLCs formed prior to December 31, 2022, may choose between three options:
- LLCs may, with the consent of the parties required to amend the LLC’s operating agreement, file a Statement of Applicability to become subject to the New Statute effective upon filing with the WDFI.
- LLCs may, with the consent of the parties required to amend the LLC’s operating agreement, file a Statement of Nonapplicability to remain subject to the Prior Statute.
- LLCs may do nothing, at which point they will be subject to the New Statute effective January 1, 2023; provided that any provision of an operating agreement valid under the Prior Statute will remain in effect until otherwise amended by the LLC.
An LLC that files a Statement of Nonapplicability can choose to be subject to the New Statute at any point in the future.
Action Item for Existing LLCs
If you have an existing LLC, you should evaluate whether you wish to remain subject to the Prior Statute or become subject to the New Statute before December 31, 2022. This question should be considered sooner rather than later, as electing to be governed by the Prior Statute may require a vote of the LLC’s members. Many LLCs may choose to file a Statement of Nonapplicability by default in order to provide their members and managers additional time to review the New Statute further before deciding to become subject to it, including any changes to the LLC’s operating agreement that may be required to conform with the New Statute.