The legislature last year passed 2021 WI Act 258, which completely rewrote the limited liability company statutes, Wis. Stat. chapter 183.
The law also:
rewrote the limited partnership statutes (Wis. Stat. chapter 179);
made substantive changes to the general partnership statutes (Wis. Stat. chapter 78); and
revised the corporation and nonstock corporation statutes (Wis. Stat. chapters 180 and 181).
With tens of thousands of new LLCs formed in Wisconsin each year, chapter 183 governs more than 90 percent of new Wisconsin entities and the large majority of total existing entities.
Business practitioners should be aware of how the new statute affects the agreements they draft for their clients – particularly their operating agreements.
Consideration: Should You Replace Existing Operating Agreements?
The new law defines "operating agreement" as:
the agreement, whether or not referred to as an operating agreement and whether oral, implied, in a record, or in any combination thereof, of all the members of a limited liability company, including a sole member, concerning:
(a) Relations among the members as members and between the members and the limited liability company.
(b) The rights and duties under this chapter of a person in the capacity of manager.
(c) The activities and affairs of the company and the conduct of those activities and affairs.
(d) The means and conditions for amending the operating agreement.
(e) Mergers, interest exchanges, conversions, and domestications.1
Although the LLC statutes have been completely rewritten and numerous laws and standards have changed, most LLCs will not need new operating agreements, as existing operating agreements that were valid under the old statutes remain valid and operational.2
This presumably includes agreements that are "oral, implied, in a record, or in any combination thereof" as the new law uses its expansive new definition of "operating agreement" to describe the existing agreements that will continue to govern the LLC.
Whether this broad definition is an improvement to the law is left to another day, but counselors would do well to convince their clients to replace any operating agreement that is not in written, signed form drafted by counsel.
Furthermore, approximately 4 percent of LLCs existing as of the beginning of this year opted out of most of the changes in the new law, such that the old statutes continue to govern.3
Though an operating agreement can override most anything in the statute, the new LLC law clarifies that certain of its provisions cannot be amended. A few notable exceptions under Wis. Stat. section 183.0105(3) are that it cannot:
(e) Alter or eliminate, or restrict the remedies for breach of, the duty of loyalty or the duty of care, except it may:
Specify the method by which a specific act or transaction that would otherwise violate the duty of loyalty may be authorized or ratified by one or more disinterested and independent persons after full disclosure of all material facts, except as provided in (g) below
Eliminate the duty of loyalty except as provided in (g) below.
(f) Eliminate or restrict remedies for the breach of, the contractual obligation of good faith and fair dealing, except that it may prescribe the standards, if not manifestly unreasonable, by which the performance of the obligation is to be measured.
(g) Relieve or exonerate a person from liability for:
1. A willful failure to deal fairly with the company or its members in connection with a matter in which the person has a material conflict of interest.
2. A violation of the criminal law, unless the person had reasonable cause to believe that the person's conduct was lawful or no reasonable cause to believe that the person's conduct was unlawful.
3. A transaction from which the person derived an improper personal profit.
4. Willful misconduct.
(h) Vary the information required to be kept by the LLC, or unreasonably restrict the duties and rights to provide information to members, managers, and dissociated members, but may impose reasonable restrictions on the availability and use of information obtained under that section and may define appropriate remedies, including liquidated damages and security for liquidated damages, for a breach of any reasonable restriction on use.
(k) Unreasonably restrict the right of a member to maintain an action against the LLC.
(m) Vary the right of a member to approve a merger, interest exchange, conversion, or domestication, except by provision that does not impair the rights of a member.
(o) Restrict the rights under this chapter of a person other than a member or manager, except certain instances prior to a person becoming a member, after they are dissociated as a member, or to transferees of membership interests
Given this Overhaul, is there
Anything that Won't Change in my Clients' Operating Agreements?
Yes! Although the LLC law was completely rewritten, most operating agreement provisions will not change as a result of the new law. These include provisions regarding:
options to purchase or sell;
drag-along and tag-along rights;
partnership tax provisions or subchapter "S" status and restrictions;
indemnification rights and responsibilities; and
defaults and remedies,
And, again, recall that existing valid operating agreements do
not need to be amended.
So, What Changes Should I Make to my Clients' Operating Agreements?
I've found three changes to make to every operating agreement going forward:
Specify management: under the new law, organizers no longer select management by members or managers. This now belongs in the operating agreement. With no specification, the default is management by members.
Specify that amendments to the operating agreement may be made only by a signed writing that expressly states that it is amending the agreement. As the new law recognizes operating agreements that are not in writing, or signed, it is clear that the intent is to enforce agreements as they're understood by the parties, rather than as they're written down. The "worst-case" scenario is that an operating agreement is deemed to have been amended by a separate signed writing, such as a loan guaranty, an incorrect tax return, or any other of the may documents members may sign that have not been drafted or reviewed by the LLC's counsel.
For manager-managed LLCs (which our firm recommends just about 100 times out of 100),
specify the membership interest vote necessary for the LLC to:
sell, lease, exchange, or otherwise dispose of all or substantially all of the company's property, with or without the goodwill, outside the ordinary course of the company's activities.
Unless otherwise specified in an operating agreement, each member has veto power over any of these transactions.4 (I am scratching my head about why the statute was drafted this way.)
Four Other Changes to Consider
1) If it makes sense to minimize the manager's (or managing member's) fiduciary duty of loyalty, such as in an LLC created to raise funds to develop property where the parties would expect the them to compete with the LLC, the duty should be expressly limited to the new law's floor – which is the old law's standard, limiting a breach of the duty to:
(a) A willful failure to deal fairly with the Company or its Members in connection with a matter in which the Manager has a material conflict of interest.
(b) A violation of the criminal law, unless the Manager had reasonable cause to believe that their conduct was lawful or no reasonable cause to believe that their conduct was unlawful.
(c) A transaction from which the Manager derived an improper personal profit.
(d) Willful misconduct.
2) Claims for breach of the covenant of good faith and fair dealing are always squishy. Limiting them to that same language provides more certainty, and is recommended in most situations.
3) The new LLC law makes clear that an operating agreement may not unreasonably restrict the right of a member of an LLC to maintain an action against it.5 A burdensome arbitration provision could be found unenforceable as an unreasonable restriction.
4) The new LLC law creates a new class of "non-economic" member.6 On first glance it seems this was created so that LLCs could be used in place of chapter 181 Nonstock Corporations for charitable purposes. In business, or particularly in "family cabin" LLCs, consider using this designation to give rights to people who have not made capital contributions. I expect estate-planning attorneys will find a good use for this.
Conclusion: What are Your Ideas?
With the statute being so new, and as I am just one of roughly 25,000 Wisconsin lawyers, it is extremely likely that other lawyers will have many more ideas. I am interested in your ideas as well – please don't hesitate to
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1 Wis. Stat. §§ 183.0102(13) and 183.0105(1).
2 Wis. Stat. § 183.0110(2)(d)2.
3 Except for requirements relating to filing or obtaining copies of records with the department, receiving or responding to notices from the department, and complying with administrative rules promulgated under this chapter.
See Wis. Stat. § 183.0110(2)(b).
4 Wis. Stat. § 183.0407(3)(c).
5 Wis. Stat. § 183.0105(3)(k).
6 Wis. Stat. § 183.0401(5).