A model for LLC laws

I have already written on the incredibly misguided Revised Uniform Limited Liability Company Act. In my analysis of the law, I note that the Act "threaten[s] to impose substantial risks and costs on limited liability companies. . .that there is little reason for states to adopt the Act, and that practitioners should be wary about advising clients to form under it." In The Non-Uniformity of Uniform Laws Bruce Kobayashi and I "show that NCCUSL not only failed to move state laws toward uniformity, but reduced state uniformity that can arise in the absence of NCCUSL. . . . [and that] the very NCCUSL institutions that are designed to produce uniformity actually may tend to undermine it."

As misguided and as harmful as the "uniform" law is, many state legislatures do need some sort of model because they lack the resources to draft state-of-the-art statutes. They can use the more sophisticated statutes, including those of Delaware, Colorado, Georgia, and Virginia. But they may need guidance picking particular provisions from these statutes.

To that end, a task force of the ABA’s Business Law Section is developing a Revised Prototype LLC Act, now out in Version 2.01, which the task force will consider at the Section's April meeting. The Act revises the original Prototype Act, completed in 1992, which has served as the model for several state statutes, and for which I was the Reporter. The Revised Prototype draws from some of the above statutes among other sources.

I believe that the original version was far superior to both of the “uniform” laws (uniformity being a somewhat misleading term here, since these laws have been adopted by only a few states). Indeed, there are good reasons for expecting a “model” law like the Prototype statute to be superior to a “uniform” law product. As Bruce Kobayashi and I detail in our recent “Non-Uniformity” article, as well as in our earlier Uniform Laws, Model Laws and ULLCA, 66 Colorado Law Review 947 (1995), a political process designed to produce uniformity also produces serious drafting defects that compromise the workability of the statute (and therefore, of course, the likelihood that it will be widely adopted).

The Revised Prototype Act is still a work in process. (Gary Rosin provides details on the status of the Act and how to comment on it.) Most interestingly, the drafters note in their introductory comment to the Act that it will

be an ongoing or ‘evergreen’ project, and will be updated regularly to reflect changes in tax law, developments in case law, changes in the law applicable to other unincorporated business entities, academic commentary, and the adoption by states of innovative and constructive LLC legislation.

This is another significant advantage of a model law project over one designed to seek uniformity. Uniformity requires the preservation over many years of a single proposal that the states can adopt.  This, of course, prevents evolution, which is particularly important in a fast-moving area like LLC law. At the same time, given parties’ ability to choose the applicable law, uniformity has little value. To the extent that individual provisions need to be uniform, they can remain the same across the states and over time while other provisions evolve. The market for state law provides the mechanism for choosing which provisions remain stable and which evolve. The Prototype Act is designed to give states with minimal drafting resources an evolving model without locking them into an unchanging, and soon outmoded, “uniform” law.

Although the Revised Prototype law is not completed, it is already clear that it will be far more sophisticated and usable than RULLCA.  Among other things, it provides better guidance regarding the agency power of members (for comparison with RULLCA, see my analysis linked above and my paper, Are Partners Agents?), as well as more clarity and flexibility regarding opting out of fiduciary duties.  And it omits RULLCA's incredibly confusing idiosyncracies regarding the nature and effect of the operating agreement.

The bottom line is that states planning to make wholesale revisions in their LLC laws should not rush like lemmings to the "uniform" law (so far "uniformly" adopted, more than a year after its promulgation, in the great state of Idaho). Wait for (and contribute to) the Revised Prototype law.