United States: NJ LLC Act Amendments Now In Effect

Last Updated: April 8 2013
Article by Adrienne C. Rogove

The amendments to the NJ LLC Act went into effect March 18, 2013.

The amendments represent the first significant changes to the LLC Act since it went into effect in 1994. The amended act will apply to new limited liability companies ("LLC") formed in New Jersey on and after March 18, 2013, and to all New Jersey LLCs beginning on March 1, 2014, when New Jersey's current LLC law will be repealed. In some ways, the Revised Uniform Limited Liability Company Act ("RULLCA") brings the LLC rights and remedies in line with the NJ shareholder freeze out statute which applies to closely held corporations. Other changes in the Act are summarized below:

Perpetual Duration: Under the new Act, an LLC will have perpetual duration unless otherwise specified. Prior to the amendment, the duration of LLCs was 30 years.

Flexible Management: The new Act provides for an LLC to set forth its management structure in its operating agreement. This could consist of a corporate model with a board of directors and officers, a manager, management by the members or other structures. Prior to the amendment, flexibility in management structure was not explicit, and the amendments now make this clear.

Purpose: The new Act permits an LLC to be formed for any lawful purpose, regardless of whether for profit. Thus, for example, an LLC can be used to operate a not-for-profit organization or to own non-income producing property.

Fiduciary Duties: The new law provides that, if not manifestly unreasonable, the operating agreement may alter the duty of care, except that the operating agreement may not authorize intentional misconduct or knowing violations of law; and may alter any other fiduciary duties, including particular aspects of that duty. It remains to be seen how the term "manifestly unreasonable" will be construed by the courts.

Indemnification: Under current law, an LLC may The new Act requires the LLC to indemnify and hold harmless its members, managers and others, but allows the operating agreement to alter or eliminate such an obligation. Prior to the amendment, the obligation to indemnify and hold harmless was discretionary.

Exculpation: The new Act authorizes operating agreements to eliminate or limit a member or manager's liability to the LLC or its members for money damages, except for (i) a breach of the duty of loyalty, (ii) a financial benefit received by the member or manager to which he or she is not entitled, (iii) a wrongful distribution of money or other property to the members, (iv) intentional infliction of harm on the LLC or a member, or (v) an intentional violation of criminal law.

Amendments to Operating Agreements: An operating agreement may now specify that an amendment to the agreement requires the approval of a person that is not a party to the agreement or the satisfaction of some other condition. This provision will most likely be utilized in certain types of financing arrangements.

Statement of Authority: The new Act creates the concept of a statement of authority, which would be filed in the Office of Commercial Recording and will set forth the authority of one or more individuals to act on behalf of the LLC. This also may come to be utilized or required in certain financing transactions.

Charging Orders: The new Act clarifies and expands the provisions relating to charging orders. A charging order in favor of a judgment creditor of a member of an LLC constitutes a lien on the judgment debtor's interest in the LLC, and requires the LLC to pay over to the person holding the charging order any distributions from the LLC with respect to that interest. The new Act provides that upon a showing that distributions under the charging order will not pay the judgment debt within a reasonable time, a court may foreclose the lien and order the sale of the transferable interest. The purchaser acquires the transferable interest in a foreclosure sale but does not become a member of the LLC.

Deadlock and Oppression: New Jersey deviated somewhat from the Uniform Act in adopting provisions in the amended LLC Act that are based on the oppressed minority shareholder provisions of the New Jersey Business Corporation Act, N.J.S.A. 14A:12-7. The New Jersey Superior Court can enter an order dissolving an LLC on the grounds that its conduct is unlawful or that it is not reasonably practical to carry on the LLC's activities in conformity with either the certificate of formation or the operating agreement. Furthermore, upon a finding that the managers or members in control of an LLC have acted illegally or fraudulently or in a manner that is oppressive and directly harmful to the applicant, the court will have broad powers to dissolve the company, appoint a receiver or order the sale of certain membership interests.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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