California’s new Limited Liability Company laws replaced important governing provisions of the operating agreements created prior to January 1, 2014 – mostly, the impact of default provisions. This blog focuses on Mandatory Reimbursement and Indemnification.
Under California’s new LLC laws, there is a new set of default rules where the operating agreement is silent, including the area of Reimbursement and Indemnification. This is particularly troublesome – and ripe for dispute – where members had thought there was a clear understanding of what was mandatory reimbursement and indemnification.
Prior to Jan. 1, 2014, there were no limits on reimbursement to managers or members for costs on behalf of the LLC. Now, by default, reimbursement is dependent upon whether there was a violation of fiduciary responsibility tied to the cost by the member or manager.
The same holds true for indemnification, which under the new law mandates, rather than allows, the indemnification for those who incur liabilities while acting on behalf of the LLC, unless there is a breach of fiduciary duty.
The impact of the new default provisions on pre-existing LLC’s may lead to significant legal disputes; therefore, it would be extremely prudent for managers/members to review their operating agreements or, to amend impacted provisions such as reimbursement and indemnification.