What Experts Say About RULLCA

Note: All articles on Utah’s New LLC Act are in the process of being updated to conform to the changes made before it was enacted in 2014. Please check back to see the revised articles.

[A 39-page analysis and commentary on RULLCA is included as Appendix E-2 in Volume 3 of the leading legal treatise on LLCs – Ribstein and Keatinge on Limited Liability Companies (Second Edition – June, 2011) [© 2011 Thompson Reuters]. At the end of that analysis and commentary, Larry E. Ribstein states (quoted with permission):]

The new RULLCA provisions raise serious problems that legislators and lawyers should consider carefully before deciding whether to adopt RULLCA in their state or to advise a client to form an LLC under a RULLCA-based statute. These particularly include the following:

  1. An unworkable and confusing provision on shelf registration
  2. Failure to clarify the law on series LLCs.
  3. Awkward and convoluted new provisions on the operating agreement.
  4. A questionable default rule on distributions in kind.
  5. Eliminating LLC rules on agency power of members and managers.
  6. Opening the door to uncertain new fiduciary duties.
  7. Creating significant uncertainty about the members’ ability to contract regarding fiduciary duties and remedies.
  8. Adding a questionable new basis for judicial dissolution.
  9. Further corporatizing the derivative remedy by adding a provision for special litigation committees.

In deciding whether to adopt RULLCA, legislators should keep in mind that there is little need for a uniform law in this area. All of the arguments against a uniform LLC law made in my article on ULLCA1 apply even more strongly here. To the extenet that there is a need for uniformity, the states have achieved and continue to achieve it on their own without NCCUSL’s help. Most strikingly, I and a co-author show that ULLCA actually decreased the level of uniformity that would have existed in the absence of ULLCA, and RULLCA threatens to do the same.2 Given the controversial nature of many of RULLCA’s changes and the fact that LLC law has matured over the twelve years since ULLCA, there is even less reason to think that RULLCA will achieve uniformity than there was for ULLCA.

It follows that legislators therefore should adopt RULLCA provisions only if they conclude that the provisions are appropriate for their states, and not because they think that the need for uniformity overrides any concerns they might have. In other words, legislators should adopt RULLCA only if they think that RULLCA is a suitable model. However, the above analysis suggests that it is not. Also, for the reasons discussed in my ULLCA article,3 there is no reason to expect that RULLCA would be a better model than many of the sophisticated state LLC statutes that have been crafted and revised over the last generation of LLC law. Moreover, even if legislators conclude that some of RULLCA’s provisions are clearly superior to existing law, they should not adopt RULLCA unless they are satisfied that the benefits of RULLCA exceed the costs of creating uncertainly by anbandoning prior case law and precedents.

Practicing lawyers face a serious question concerning advising clients to form under RULLCA. In particular, RULLCA’s agency provisions may threaten the security of transactions with third parties, and the provisions on waiver may subvert even well-crafted operating agreements. With respect to waiver, contracting parties obviously expect that a court will enforce their agreements. While this does not necessarily mean that the law should make all agreements fully enforceable, it does mean that clients rely on their lawyers to inform them of significant risks of non-enforceability. . . . RULLCA creates myriad escape hatches from the agreement.

Even if a lawyer conscientiously believes that RULLCA is appropriate for the parties’ relationship, she should consider the need to disclose to clients the significant risks the Act presents. Indeed, failure to disclose these risks may constitute legal malpractice.4

Finally, RULLCA holds lessons for uniform lawmaking generally. The defects in RULLCA cannot be attributed to any individual shortcomings of the skilled, hardworking and experienced lawyers who contributed to the project over several years. Rather, the defects are hardwired into the process of drafting uniform laws. Given the risks of poor policy choices, uniform lawmaking is a questionable endeavor and should be undertaken, if ever, only in a limited number of circumstances in which a uniform state law is likely to be useful. Limited liability companies do not fall in this category.5

[Reprinted from Appendix E-2 of Ribstein and Keatinge on Limited Liability Companies, 2d with permission of Thomson Reuters. For more information about this publication please visit http://store.westlaw.com]

  1. See Ribstein, “Critique“, 25 Stetson Law Review 313 (1995).
  2. See Bruce H. Kobayashi & Larry E. Ribstein, The Non-Uniformity of Uniform Laws (July 5, 2007), avail. at http://ssrn.com/abstract=998281.
  3. See id.; Ribstein, “Critique“, 25 Stetson Law Review 313, 331-32 (1995)
  4. See Thomas E. Rutledge & Allan W. Vestal, Making The Obvious Choice Malpractice: LLPs and the Lawyer Liability Time Bomb in Kentucky’s 2005 Tax Modernization, 94 Ky.L.J. 17 (2005) (discussing the risk of malpractice in advising clients in choosing the LLP form in Kentucky without consideration and disclosure of tax risks).
  5. See Bruce H. Kobayashi & Larry E. Ribstein, The Non-Uniformity of Uniform Laws (July 5, 2007), avail. at http://ssrn.com/abstract=998281.