Posted In: Business Transactions & Corporate Counseling

Business Blog: Ohio's Revised LLC Act Effective January 1, 2022 - Issues for Existing Companies

By Molly Z. Brown on October 6, 2021

On January 1, 2022, Ohio Revised Code Chapter 1706, the Ohio Revised Limited Liability Company Act (Revised LLC Act) repeals and replaces Ohio’s LLC statute (R.C. Chapter 1705). The changes brought by the Revised LLC Act should command the attention of all LLC owners as the statute will govern LLCs in Ohio, both domestic and foreign. LLC owners should revisit their current operating agreement to ensure compliance with the new statute. 

The Revised LLC Act changes the default settings that are in place in a few ways. Most important, is that the Revised LLC Act makes an overarching statement that broadens and clarifies that the operating agreement governs and underscores the importance of the freedom to contract. By comparison, the current statute states in context within its sections the permissibility of deviations from the default rules. The following discussion reviews relevant default rules that LLC owners should consider as they move forward under the new statute requirements. 

Indemnification

The Revised LLC Act makes it permissible for a company to indemnify its members, managers, officers, and other persons; however, it does not provide for terms under which indemnification can be provided.  Beginning January 1, 2022, if a company’s members, managers, etc. want to be indemnified for acts they have taken on behalf of the company, then the company will need to modify its operating agreement to expressly provide for indemnification and the terms, parameters, and processes of such indemnification. 

Fiduciary Duties

Corporate law has long recognized the implied covenant of good faith and fair dealing and its application in the interpretation of operating agreements and business dealings. Under the Revised LLC Act, the default fiduciary duties for members (in a member-managed LLC) are the duty of loyalty and care, as well as the duty of good faith and fair dealing. Similarly, by default, managers also have these same duties.  In manager-managed LLCs duties for members are limited by default to the implied covenant of good faith and fair dealing.

Under the Revised LLC Act, LLCs may choose to expand or limit these default fiduciary duties by including language in their operating agreements. Fiduciary duties, however, cannot be lowered to eliminate the implied covenant of good faith and fair dealing for members and managers. (See ORC §1706.08). This limitation makes Ohio’s Revised LLC Act similar to Delaware’s developed jurisprudence. Under Delaware law, the implied covenant of good faith and fair dealing is not a waivable standard; it adheres to every contract and, by statute, cannot be waived or modified. 

Officers and Managers

The new law provides broad authority for LLCs to authorize individuals to perform different functions for an LLC under whatever title they choose to give them. However, in order for an agent, officer, manager, or director to be able to have the “power to bind the limited liability company,” an agent must satisfy one of the following parameters:

1. “[be] authorized to act as the agent of the limited liability company . . . under or pursuant to the operating agreement”;
2. have been authorized by all of its members under §1706.30(A);
3. be an authorized agent and have had such appointment as an agent filed upon a Statement of Authority with the Ohio Secretary of State; or
4. as “provided by law other than this chapter.” 

See ORC §1706.18 (A-D).

In addition to the foregoing parameters, all agents, officers and managers must be appointed in writing and consent in writing to their appointment. Going forward, LLCs will need to be diligent about maintaining written records of appointments and written acceptances.   

Also, if the sole statutory agent of an LLC dies, resigns, or moves out-of-state, the domestic or foreign limited liability company shall appoint a new one. If the LLC fails to continuously maintain a statutory agent, the secretary of state shall give 30-days' notice to cure such failure and if the LLC fails to correct the matter, the articles of the LLC or the registration of a foreign LLC shall be canceled without further notice by the secretary of state. 

Merger and Conversion Consent

Under the Revised LLC Act, the default provisions for approval of mergers of an Ohio limited liability company require the consent of all members. (See 1706.711 and 1706.73). Existing companies will need to make sure that an operating agreement that deviates from this default has been approved by all members in writing. A means to accomplish this for the admission of new members is to have new members acknowledge in a joinder agreement to the operating agreement that they have read the company’s operating agreement and consent to approval of a merger or conversion by less than all members. The approval must be made in writing and relate to the terms of the reduced consent requirement for mergers and conversions. It is not sufficient for members to approve a general change in the approval requirements of the operating agreement, although prior written approval by existing all existing members of an operating agreement including a reduced consent requirement to mergers will be sufficient. 

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The Revised LLC Act brings important changes to the current law’s provisions, such as the rules regarding indemnification, fiduciary duties, agent consent requirements, and merger consent language.  We recommend that our LLC clients contact an attorney for a review of their existing operating agreements and to evaluate which modifications might need to be made before the Revised LLC Act takes effect in January. The attorneys at Brouse McDowell are skilled in the practice of corporate law and can assist you with the preparation or revision of your limited liability company’s operating agreement, the maintenance of its corporate records, and in its matters of corporate governance and legal compliance. Please contact our Business Transactions & Corporate Counseling Group for more information. 

This blog is intended to provide information generally and to identify general legal requirements. It is not intended as a form of, or as a substitute for legal advice. Such advice should always come from in-house or retained counsel. Moreover, if this Blog in any way seems to contradict advice of counsel, counsel's opinion should control over anything written herein. No attorney client relationship is created or implied by this Blog. © 2023 Brouse McDowell. All rights reserved.

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