As of March 18, 2013, the Revised Uniform Limited Liability Company Act of New Jersey (the “Revised Act”) became effective. The Revised Act amends the existing law with respect to operating agreements, member relations, entity duration and other various aspects of limited liability companies (individually, an “LLC” and collectively, “LLCs”). For New Jersey LLCs formed after March 18, 2013, the provisions of the Revised Act will govern upon formation. However, for pre-existing New Jersey LLCs, the entities continue to be governed by the prior version of the New Jersey Limited Liability Company Act (the “Prior Act”), and the Revised Act does not apply to such entities until March 1, 2014. This alert provides a brief outline of some of the vital changes in the Revised Act and how such changes will affect newly formed and existing New Jersey LLCs.
Under the Prior Act, unless otherwise stated in the Certificate of Formation of the LLC, an LLC had a limited existence. The Revised Act eliminates the default rule and provides for a perpetual duration, much like the perpetual life of corporations.
Before the Revised Act, absent a written operating agreement to the contrary, the operation of the LLC was governed by the default provisions of the Prior Act. While the Revised Act remains the default, the Revised Act is somewhat more flexible than the Prior Act in that in the absence of a written operating agreement, the Revised Act permits the operation of the LLC to be governed by an oral or implied operating agreement.
Further, the Revised Act also permits limiting amendments to the operating agreement to require either the satisfaction of a condition or the approval of a person not party to the operating agreement. For instance, this type of amendment limitation could be valuable to a lender who may find the ability to approve future amendments to the operating agreement as an attractive provision in the operating agreement of a borrower.
Distributions to Members
Unless otherwise prescribed by the operating agreement or other agreement by the members, under the Revised Act, distributions to members of an LLC are on a per capita basis. For instance, in a situation where there are two (2) members of an LLC who own forty percent (40%) and sixty percent (60%) respectively, absent an operating agreement, each member would receive an equal, one half distribution regardless of the fact that the members do not equally own the LLC.
Statements of Authority
The Revised Act allows LLCs to file statements of authority with the New Jersey Secretary of the Treasury affirmatively authorizing members or managers of an LLC to bind the entity. This flexibility permits an LLC to designate which members will have binding authority.
Dissociation of a Member
Under the Revised Act, a resigning member is no longer entitled to receive the fair market value of his or her ownership interest in the LLC. Instead, a resigning member is dissociated as a member and is limited to the same rights as any other outside economic interest holder.
Remedies for Deadlock and Oppression
Minority members of an LLC may seek, under the Revised Act, dissolution of the LLC if the managers or the controlling members have acted in a manner that is oppressive. Minority members are also permitted to seek the appointment of a custodian in such cases under the Revised Act.
Domestication and Conversion
The Revised Act also provides increased ease and flexibility for the domestication, merger or conversion of entities.
While the Prior Act is silent with respect to an LLC serving as a nonprofit entity, the Revised Act permits LLCs to be formed for any purpose permitted by law, which would include a nonprofit purpose. This development is particularly important because nonprofit entities can greatly benefit from the flexibility and limited liability available to LLCs, by forming wholly-owned LLCs to handle specific operations of the nonprofit.
The Revised Act increases flexibility with respect to management of LLCs in that it specifically provides for alternative management structures to the typical member-managed or manager-managed LLC, such as a board of directors or officers managing the entity. However, it is important to note that in the absence of an operating agreement, management decisions are made per capita under the Revised Act, regardless of member ownership of the LLC.
Further, unless an operating agreement prescribes otherwise, the Revised Act requires all decisions outside the ordinary course of business of the LLC to be made unanimously by the members, again regardless of ownership percentages of the members.
Fiduciary Duties of Managers and Members
The Prior Act allowed fiduciary duties of members such as duties of loyalty and care to the LLC to be restricted or expanded by the operating agreement. Under the Revised Act, the operating agreement of an LLC can affirmatively limit the fiduciary duty of care or other fiduciary duties; provided, however, that such alterations are not manifestly unreasonable.
Further, unless the default provisions of the Revised Act are waived by the operating agreement, members and managers are prohibited from competing with the LLC and from contracting with the LLC as a third party. This prohibition includes lending money to the LLC.
Indemnification of Managers and Members
Under the Prior Act, the LLC had the option of indemnifying any member or manager against any claims, suits, actions or other damages. Under the Revised Act, LLCs are required to indemnify any manager or member against liability unless otherwise limited by the operating agreement.
Under the Prior Act, a creditor of a member of an LLC could obtain a charging order which constituted a lien on the member’s interest in the LLC and required the LLC to pay any distributions attributable to the debtor-member to the creditor. The Revised Act, however, authorizes a court to foreclose a creditor’s lien and order the sale of the debtor-member’s interest in the LLC if the creditor can show that the distributions of the LLC will not pay the judgment in a reasonable amount of time. The buyer of the debtor-member’s interest does not become a member of the LLC, but holds the interest and any future distributions attributable to that interest.
The Revised Act provides LLC members increased flexibility and opportunities to operate LLCs in New Jersey. Both new and existing operating agreements should be drafted and revised by corporate attorneys with special attention to the provisions of the Revised Act. Please feel free to contact the members of the Business and Finance Department at Obermayer to discuss how your existing operating agreement should be revised in light of the Revised Act and for guidance in drafting an operating agreement for a new New Jersey LLC in accordance with the Revised Act.
The information contained in this publication should not be construed as legal advice, is not a substitute for legal counsel, and should not be relied on as such. For legal advice or answers to specific questions, please contact one of our attorneys.