When dealing with an LLC, who has the right to represent the company?
In the previous article, we introduced that the common types of companies in the United States include Corporation and LLC (Limited Liability Company). Since California law does not mandate that LLCS maintain a company seal, and LLCS do not have the concept of a legal representative similar to that under Chinese law. Therefore, when conducting business with an LLC registered in California, how to determine who has the right to represent this LLC is a legal issue worthy of attention.
01 Two forms of management
According to the California Revised Uniform Limited Liability Company Act (hereinafter referred to as the "Limited Liability Company Act"), LLC has two statutory management models to choose from. They are respectively Member-Managed type and Manager-Managed type. Among them, the member management type is the default management mode.
According to Section 17703.01 (a) of the Limited Liability Company Act, in a member-managed limited liability company, any member has the right to act on behalf of the company for its business or affair. Furthermore, any agreement signed by any member in the usual way for the affairs of the company is binding on the company.
In a manager-managed limited liability company, any manager has the right to act on behalf of the company for business or affairs and thereby sign binding agreements for the company. The manager can be a member of the LLC or another entity. Managers can be either natural persons or institutions.
On the official website of the California Secretary of State, enter the name of the limited liability company to check whether it is a member-managed or manager-managed limited liability company.
02 The effect of an agent's acts beyond their authority
When agents engage in acts beyond their authority, the Limited Liability Company Law provides sufficient safe harbor protection mechanisms for the counterparties of LLC transactions.
For member-managed companies, the limited liability company is not bound by such agreements only if the member does not have the authority to act as an agent (including but not limited to the agency authority of a specific member which may be restricted by the operating agreement of the limited liability company), and the counterparty is aware of it.
For manager-managed companies, in addition to applying the rules of the aforementioned member-managed companies by reference as well. Article 17703.01 (d) of the Limited Liability Company Law further clarifies that for a limited liability company managed by a manager, any bill, mortgage, debt certificate, contract, statement, transfer document, etc. concluded or signed between the limited liability company and others, if managed by at least two managers (or if the company's articles of association stipulate that it shall be managed by only one manager), Then it shall be signed by the manager. If the other party does not actually know that the signing manager does not have such authority, even if the manager does not actually have the agency authority for the matter, the company shall not claim that the document is invalid to the company on this ground.
In practice, in a second-instance ruling made by the California Court of Appeals in February 2017 [1], the manager signed a compensation agreement on behalf of the LLC against the insurance company. According to this agreement, if an insurance company suffers losses due to providing a deposit for a certain construction project, the insurance company will have the right to demand compensation from several entities, including the LLC, in accordance with the compensation agreement. The LLC has a total of 9 members, and this construction project is only related to one member of the LLC, and it has no actual authority to sign this compensation agreement on behalf of the LLC. The California Court of Appeals upheld the ruling of the Santa Barbara County Superior Court in California. Both levels of courts have determined that even if the manager lacks agency authority, according to the legal safe harbor rules, the agreement signed by the manager can still bind the LLC without the actual knowledge of the other party's lack of agency authority.
03 Coping Suggestions
From the perspective of the counterparty, to avoid getting embroiled in the uncertainty of legal proceedings, it is recommended to first check whether the LLC operates under a manager-managed or member-managed management model, and further request the LLC to provide its Operating Agreement [2]. To determine whether a specific matter falls within the agency authority of the manager/member.
From the perspective of an LLC, the members of an LLC should clearly stipulate the liability for breach of contract and the scope of compensation among themselves (for member-managed LLCS) or between the members and the manager of an LLC (for manager-managed LLCS), so that the LLC has the right to claim compensation from agents who have entered into contracts beyond its authority.
Footnote
[1].Western Surety Co. v. La Cumbre Office Partners, LLC, 8 Cal. App. 5th 125, 213 Cal. Rptr. 3d 460, 2017 Cal. App. LEXIS 77, 2017 WL 445408.
[2]. The operation agreement cannot be queried through public channels and can only be requested to be provided voluntarily by the counterparty.
