United States: New LLC Law Became Effective On March 1st

Some may be surprised by the changes

The New Jersey Revised Uniform Limited Liability Company Act (RULLCA) became effective, and the New Jersey Limited Liability Company Act was repealed, on March 1. RULLCA makes some significant changes in New Jersey LLC law, which will require practitioners to revise their form of operating agreement. Among the changes are the following.

  • Distributions. Each member of an LLC is entitled to an equal share of the profits or losses. This is the default rule provided in the statute, which can be modified in the LLC's operating agreement. Under the old law, each member shared the profits or losses based on the agreed value of their capital contributions to the LLC.
  • Voting on Ordinary Matters. Each member has an equal vote, regardless of his ownership percentage interest, and a majority of the members decide matters in the ordinary course of business. Again, this is the default rule, which can be modified in the operating agreement. Under the old law, such ordinary matters were decided by a majority of the percentage interests.
  • Voting on Extraordinary Matters. Matters outside the ordinary course of business, such as a merger or sale of all LLC assets, are decided by the unanimous vote of the members. This default rule can be modified in the operating agreement (for example, to a simple majority or supermajority). Under the old law, such extraordinary matters were decided by a majority of the percentage interests.
  • Fiduciary Duty of Loyalty. The persons managing the LLC, whether members or managers, have a newly defined fiduciary duty of loyalty, which prohibits them from competing with the LLC and self-dealing with the LLC, such as lending money or leasing property to the LLC. This duty of loyalty can be altered or even eliminated in the operating agreement. The old law did not mention a fiduciary duty of loyalty.
  • Contractual Obligation of Good Faith and Fair Dealing. Members and any managers must exercise their rights and perform their duties under a standard of good faith and fair dealing. The old law did not include such a standard, but every agreement included and continues to include an implied covenant of good faith and fair dealing. RULLCA imposes this obligation of good faith and fair dealing not only on rights and duties in an operating agreement, but extends it to rights and duties under the statute. The obligation cannot be eliminated, but an operating agreement can prescribe how to measure whether a member or manager has complied with the obligation.
  • Manifestly Unreasonable Standard. As noted, RULLCA allows an operating agreement to alter or eliminate certain fiduciary duties, but only if doing so is not manifestly unreasonable. This is an issue of law determined by the court as of the time the parties entered into the operating agreement by taking into considering the circumstances existing at that time. The court may invalidate a provision only if, in light of the purposes and activities of the LLC, it is readily apparent that the objective of the provision is unreasonable or an unreasonable means to achieve its objective.
  • Authority to Bind. Under RULLCA, the authority to bind an LLC depends on the type of management. In a manager-managed LLC, the managers have the exclusive authority to decide matters in the ordinary course of business, but the members have the authority to decide extraordinary matters (e.g., mergers and sale of assets). In a member-managed LLC, the members obviously decide all matters since there are no managers. However, a person's status as a member by itself does not make him an agent of, or establish his authority to bind, the LLC. Instead, agency law will determine whether a member had the authority to bind the LLC. Under the old law, in a member-managed LLC, a person's status as a member gave him the authority to bind the LLC. In a manager-managed LLC, the manager's authority was set forth in the operating agreement. At a minimum, under RULLCA, an operating agreement should identify the management of the LLC as member-managed or manager-managed.
  • Oppression. RULLCA provides protection for oppressed members of an LLC by providing them with rights and remedies previously unavailable to them under the old law. These rights and remedies are similar to those available to oppressed minority shareholders of corporations under the New Jersey Business Corporation Act (BCA). In cases of oppression, a court may order a remedy other than dissolution, such as appointing a custodian or provisional manager or requiring the LLC to purchase the interest of the oppressed member.
  • Indemnification. Indemnification is mandatory for members, managers, employees and agents of an LLC under certain circumstances, similar to the BCA. The operating agreement may alter or even eliminate this mandatory indemnification. By comparison, the old law merely provided discretionary indemnification for members and managers.
  • No Buyout on Resignation. A member who resigns or withdraws from an LLC is not entitled to a payment of fair value for his interest in the LLC. Instead, he remains a dissociated member entitled to distributions, but loses the right to vote and manage the LLC. Under the old law, a resigning member was entitled to have his interest purchased by the LLC for fair value. If desired, an operating agreement can address this issue by requiring adequate notice of resignation, a method to determine fair value for his interest, and a buyout paid over time.
  • Conversion and Domestication. RULLCA allows a corporation or other form of entity to convert to an LLC in a straightforward manner and an out-of-state LLC to easily domesticate into a New Jersey LLC. The old law did not include any provision for conversion or domestication. Instead, to convert, practitioners were required to form an LLC and then merge the corporation or other entity into the LLC, a two-step process. To domesticate, practitioners were required to form a New Jersey LLC and then file papers in New Jersey and the other state to merge the out-of-state LLC into the New Jersey LLC, a three-step process. Unfortunately, conversion is unavailable until legislation is enacted amending the BCA and partnership statutes to authorize it.
  • Right to Information. The old law identified specific categories of documents and information available for inspection by the members, and a member had the right, subject to reasonable standards, to obtain the documents and information upon reasonable demand for any purpose reasonably related to the member's interest as member of the LLC. RULLCA does not include such categories of documents and information, and it allows a member to inspect and copy any record maintained by the LLC, or any other member, regarding the LLC's business and financial condition to the extent material to the member's rights and duties. In addition, when a member is required to vote on a matter, the LLC must provide all information that is material to the member's decision to vote. The operating agreement can alter, but may not unreasonably restrict, a member's right to obtain LLC records.
  • Oral and Implied Operating Agreements. RULLCA allows oral and implied operating agreements. As noted, if an issue is not addressed in an operating agreement, the default provisions of RULLCA will apply. For that reason, practitioners should continue to counsel clients to have a written operating agreement, which can address and modify the default provisions of RULLCA and minimize or eliminate the necessity to prove their oral or implied agreements in court. By comparison, under the old law, an operating agreement had to be written, although an agreement was not required.
  • Perpetual Duration. Under the old law, an LLC had a 30-year life unless the certificate of formation stated that it had a perpetual life. Under RULLCA, all LLCs, including those formed under the old law, have perpetual life. However, if a certificate of formation included a termination date for the LLC, the certificate must be amended to give it perpetual life.
  • Members and managers of LLCs may be surprised by the changes in the law and the default provisions, such as equal voting, equal distributions, fiduciary duty of loyalty prohibiting competition and self dealing, and resigning members remaining as dissociated members. In light of these significant changes in the law, practitioners should alert clients about the new LLC law and advise them that operating agreements should be reviewed and, if necessary, amended to avoid the default provisions in RULLCA.

Reprinted with permission from the March 3, 2014 edition of New Jersey Law Journal.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions