What You Need To Know About The Recent Changes To The New Jersey Law Governing Limited Liability Companies (LLCs)
On September 19, 2013 the Revised Uniform Limited Liability Company Act (“RULLCA”), N.J.S.A. 42:2C-1 et seq. was signed into law. In creating RULLCA the goal was to combine the best features of the existing LLC Law with the laws that apply to corporations and partnerships. The goal of was to have a scheme that better reflects the reality of how the LLC entity form is utilized and operated.
Effective on March 1, 2014, RULLCA will apply to all LLCs in the State of New Jersey and will completely replace the current New Jersey Limited Liability Act. RULLCA currently applies to all LLCs formed on or after March 18, 2013 and to any LLCs whose members have affirmatively elected to have RULLCA apply prior to March 1, 2014.
The following is a brief summary of some of the significant changes caused by RULLCA to the law governing LLCs in the State of New Jersey:
- Default Provisions Provide That Members Are Treated Equally Regardless of Capital Contribution: The default provisions under RULLCA, provide that unless provided elsewhere:voting and distributions are to be shared equally and on a “per capita” basis. Thus, if there are three (3) members (A, B and C) of an LLC, the default provisions provide that each member is to receive: 1/3rd of the votes and 1/3rd of the distributions. This is so, even if member A contributed 100% of the capital and works at the business 60 hours a week and members B and C do absolutely nothing. Thus, it is more important than ever to have an Operating Agreement that clearly delineates the voting, distribution and ownership percentages of the members.
- Duration (life span) Of An LLC: Under the current law, unless otherwise stated the duration (life span) of an LLC is 30 years. Under RULLCA that duration will be perpetual, unless otherwise stated. Thus, now an LLC will continue forever unless action is taken by the members or as a matter of law the LLC is terminated.
- LLC’s Can Operated As Non-Profits: RULLCA makes it clear that an LLC can operate for profit as well as a non-profit. The prior law did not clearly indicate that LLCs could operate as non-profits.
- Three Possible Forms Of Operating Agreement: Under RULLCA an operating agreement for an LLC can be set forth in one of the following three/four manners: (1) written, (2) oral, (3) implied from the conduct of the LLC, or (4) any combination of the first three.
- LLCs Can Be Member Managed or Manager Managed: Under RULLCA an LLC may be manager-managed or member-managed. Unless otherwise indicated, an LLC is considered member-managed.
Under a member-managed LLC, each member has “equal rights in the management and conduct of the company’s activities.” A difference arising in the ordinary course of the business of the LLC is to be decided by a majority vote. An act carried on “outside” the ordinary course requires the consent of all members.
In a manager managed LLC, matters relating to the activities of the company is decided exclusively by the managers. In cases, where there is more than one manager, each manager has equal rights in the management and conduct of the LLC. Any differences arising in the ordinary course are decided by a “majority of the managers.” A manager can be removed by the consent of the majority of the members. Even in a manager-managed LLC the consent of all members is still required to: (1) “sell, lease, exchange, or otherwise dispose of all, or substantially all, of the company’s property, with or without good will, outside the ordinary course of the company’s activities”, (2) to approve mergers, conversions or domestications of the LLC, (3) to “undertake any other act outside the ordinary course of the company’s activities;” and (4) amend the operating agreement.
- New Law Imposes Common Law duties on Members and Managers: RULLCA provides that all members conduct themselves in a manner consistent with the contractual obligation of good faith and fair dealing.
A member in a member-managed LLC also owes the company and fellow members a duty of loyalty and care. The duty of loyalty includes a duty to account and to hold LLC property as a trustee, to conduct and wind up the companies’ activities, refrain from use of company property, refrain from taking appropriate company opportunities and to refrain from dealing with the company on behalf of a person or company that has an adverse interest. The duty of care of a member is to refrain from engaging in grossly negligent, reckless or intentional or knowingly unlawful contract. A manager is subject to same duties of loyalty and care as members in a member managed LLC.
- Operating Agreement Can Impose Limits on Duties Owed by Members and Managers: Under RULLCA an Operating Agreement can provide for the following restrictions so long as the restrictions are not “manifestly unreasonable”: (1)eliminate or restrict the duty of a member to account to the LLC, (2) identify specific acts or types of acts that do not violate the duty of loyalty owed by a member or manager, (3) alter the duty of care owed by a member or manager, except it cannot permit intentional misconduct or knowing violations of the law, (4) alter the duty of care, including eliminating particular aspects of the duty, and (5) set forth standards by which to measure the contractual obligation of good faith and fair dealing.
- Protection From The Liabilities Of The LLC: RULLCA provides that the “debts, obligations, or other liabilities” of the LLC are solely the debts and liabilities of the LLC and do not become the debts or liabilities of the members or managers acting in their roles as members or managers.
- Statements Of Authority: RULLCA provides for documents called Statements of Authority to be filed with Division of Commercial Recording in the Department of Treasury setting forth the person or persons that have the authority to take actions that bind an LLC. It is no longer sufficient to list the persons with such authority in the Certificate of Formation; a separate Statement of Authority is required.
- New Law Imposes Indemnification Requirements on the LLC: RULLCA requires the indemnification of the “agents” of the LLC. This includes the indemnification of managers, members (in member-managed LLCs) and employees and other officers of the LLC. The indemnification is for liabilities, debts or obligations incurred in the course of actions taken on behalf of the LLC and additionally, for litigation expenses incurred in a successful litigationrelated to agent’s service of the LLC. RULLCA does allow the Operating Agreement to provide for the limitation or elimination of the indemnification requirement.
- Limitations on Distributions: RULLCA provides, unless otherwise stated, that distributions are to be made “in equal shares among members and dissociated members”. Distributions are prohibited, if after the distribution, the LLC would not be able to pay its debts or the total amount of the assets would be less than its total liabilities.
- New Law Allows For Domestication, Mergers And Conversions: Under RULLCA an LLC may merge with another entity, covert to an entity form that is not an LLC and vice versa (another entity can convert into an LLC) and a foreign LLC can domesticate in New Jersey and vice versa (a New Jersey LLC can domesticate in another State). All of these actions require the unanimous consent of the members.
- New Law Creates Weapons for Aggrieved Members: Under the new law a member can file a lawsuit for not only dissolution, but for other less harsh remedies (such as the appointment of a receiver or fiscal agent, an accounting or various other forms of injunctive relief) based on the claims that: (1) the conduct of all or substantially all the LLC’s activities are unlawful; (2) it is not reasonably practicable to carry on the LLC’s activities in conformity with the certificate of formation or operating agreement; (3) that the “managers or those members in control of the company” “have acted, are acting, will act in a manner that is illegal or fraudulent;” or “have acted, are acting, will act in a manner that is oppressive and was, is, or will be directly harmful to the applicant”. The third option, provides members of LLCs virtually the same protections and rights as minority corporate shareholders.
- Disassociation of Members: Under RULLCA a member has the power to dissociate at any time by expressing their will do to so. There are numerous other ways a member can be dissociated, including: (1) by an event set forth in the operating agreement; (2)the person is expelled under certain circumstances by a unanimous consent of the other members; (3) by judicial order, (4) appointment of a guardian; and, (5) being a debtor in bankruptcy. The effects of dissociation include the termination of the dissociated member’s right to participate in management and conduct of LLC and the dissociated member only has the rights of a transferee and only holds an “economic interest”. Unlike the existing law, under RULLCA, unless otherwise provided in an Operating Agreement, the dissociated member is not entitled to any value for the loss of his ownership interest.
- New Law Provides For Litigation Committees To Address Derivative Claims: RULLCA permits the creation by the LLC of a special litigation committee of independent and disinterested persons to consider requests by members to bring derivative actions. Upon the appointment of the committee, the committee can file a motion staying a lawsuit to permit the committee to conduct its own investigation. The committee will then submit the findings of its investigation to the Court as to whether the suit should continue with the plaintiff, or under the control of the committee, be settled or dismissed. If the Court finds that the committee was disinterested and independent and acted in good faith with reasonable care the Court “shall” enforce the findings of the committee.