United States: Non-Waivable Provisions Under The New Jersey Revised Uniform Limited Liability Company Act

Almost all of the default provisions in the New Jersey Revised Uniform Limited Liability Company Act (NJ-RULLCA)1 may be altered, except as otherwise provided in Section 11 of the statute.2 Indeed, NJ-RULLCA provides that it "is to be liberally construed to give the maximum effect to the principle of freedom of contract and to the enforceability of operating agreements."3 This article identifies and explains the statutory default provisions that may not be altered under Section 11 of the statute, the so-called 'non-waivable' provisions.

Litigation

A limited liability company (LLC) has the capacity to sue and be sued in its own name.4 An operating agreement may not vary an LLC's right to engage in litigation.5

The Uniform Law Commission (ULC) August 19, 2015 Comments (2015 Comments) to its Revised Uniform Limited Liability Company Act (RULLCA) state that an LLC is an entity distinct from its members and that its members lack the power to alter that characteristic.6 This provision is likely a carryover from the ULC's general partnership act, which provides that a partnership is distinct from its partners. It is not a controversial provision.

Applicable Law

NJ-RULLCA provides that New Jersey law governs: 1) the internal affairs of a New Jersey LLC, and 2) the liability of a member as member and a manager as manager for the debts, obligations, or other liabilities of an LLC.7 An operating agreement may not vary this applicable law.8

The ULC 2015 comments state that an operating agreement may lawfully incorporate by reference the provisions of another state's LLC statute.9 For example, an operating agreement of a New Jersey LLC may incorporate by reference Delaware's LLC statute. New Jersey law would still govern the agreement, but Delaware's LLC statute and the operating agreement would govern the members of the LLC to the extent not prohibited by NJ-RULLCA. As noted in the ULC 2015 comments, this approach raises complex drafting issues and is rarely, if ever, a good idea.

Court Power

A court has the power to enter orders regarding the signing and filing of records.10 An operating agreement cannot interfere with the court's power in this regard.11

Fiduciary Duties

Members of a member-managed LLC and managers of a manager-managed LLC have fiduciary duties of loyalty and care.12 Although NJ-RULLCA provides that an operating agreement may not eliminate the duty of loyalty, the duty of care, or any other fiduciary duty,13 it further provides that, if not manifestly unreasonable,14 an operating agreement may restrict or eliminate the duty of loyalty,15 alter (but not eliminate) the duty of care,16 and alter or eliminate any other fiduciary duties, meaning fiduciary duties under the common law.17

Good Faith and Fair Dealing

The members and, if applicable, the managers must discharge their duties and exercise their rights under the operating agreement and NJ-RULLCA consistent with the contractual obligation of good faith and fair dealing.18 An operating agreement may not eliminate this obligation,19 but, if not manifestly unreasonable, it may prescribe standards by which to measure the performance of the obligation.20

Information Rights

Members, managers and even dissociated members have certain rights to receive information about the LLC.21 An operating agreement may restrict such rights, or the duties to provide such information, but may not do so unreasonably.22 In addition to restrictions or conditions in an operating agreement, an LLC may impose reasonable restrictions and conditions on access to and use of records and information, including designating information as confidential and imposing nondisclosure and safeguarding obligations on the recipient.23

The ULC 2015 comments note that in determining whether a restriction is reasonable, a court might consider: 1) the danger or other problem the restriction seeks to avoid, 2) the purpose for which the information is sought, and 3) whether, in light of both the problem and the purpose, the restriction is reasonably tailored.24

Judicial Dissolution

A court has the power and authority to dissolve an LLC on various statutory grounds.25 An operating agreement may not vary the court's power to judicially dissolve a New Jersey LLC under these statutory grounds.26 However, an operating agreement can limit the remedies the court has the power to impose to dissolution only; for example, it can provide that a court cannot enter an order for the sale and purchase of LLC interests.27

Winding Up a Dissolved LLC

An LLC in dissolution must wind up its business as provided in NJ-RULLCA.28 An operating agreement may not vary this requirement.29 For example, an LLC cannot continue its business indefinitely and cannot make distributions to members in lieu of payments to creditors.

Direct or Derivative Action

NJ-RULLCA provides members with the right to maintain direct and derivative actions.30 An operating agreement may not unreasonably restrict such rights.31 The ULC 2015 comments note that reasonable provisions in an operating agreement include forum selection, mediation prior to litigation, arbitration of direct and derivative claims, waiver of jury trial and a demand in all derivative cases. By contrast, the ULC 2015 comments note that it would be unreasonable, by way of example, for an operating agreement to require a would-be derivative plaintiff to make demand regardless of futility.32

Approval of Extraordinary Action

NJ-RULLCA requires the members to unanimously approve extraordinary action, such as a merger, conversion or domestication.33 Nothing in the statute prevents an operating agreement from altering this unanimity requirement to a simple majority or supermajority requirement.

However, if a merger, conversion or domestication will result in the members having personal liability as the owners of the surviving, converted or domesticated company, then the members will have the right to unanimously approve the action.34 For example, if an LLC for some reason wants to convert to a general partnership, it must receive the unanimous approval of the members since they would have unlimited personal liability as partners in the general partnership. In such situations, an operating agreement may not restrict a member's right to approve such a merger, conversion or domestication.35

Rights of Third Parties

An operating agreement may restrict the rights of a member and manager,36 as well as a dissociated person and transferee,37 but not the rights of third parties, such as creditors.38

Indemnification and Exculpation

NJ-RULLCA provides for an LLC's indemnification of members, managers and others.39 However, an operating agreement may alter and even eliminate such indemnification.40 An operating agreement may also eliminate a member or manager's personal liability to the LLC and its members for money damages.41 However, under no circumstances may an operating agreement permit indemnification or exculpation of a member or manager for certain 'bad acts,' such as breaching the duty of loyalty,42 receiving an improper personal benefit, making improper distributions,43 intentionally inflicting harm on the LLC or a member,44 or intentionally violating criminal law.45

Conclusion

Section 11 provides that certain provisions of NJ-RULLCA cannot be altered—the so-called non-waivable provisions. However, as noted, many of the non-waivable provisions may, in fact, be altered as provided in NJ-RULLCA.

Footnotes

1. N.J.S.A. 42:2C-1 et seq.

2. N.J.S.A. 42:2C-11(C), as modified by N.J.S.A. 42:2C-11(D) Through 42:2C-11(G).

3. N.J.S.A. 42:2C-11(I).

4. N.J.S.A. 42:2C-5.

5. N.J.S.A. 42:2C-11(C)(1).

6. ULC 2015 Comment to Section 105(C)(2). NJ-RULLCA is Based on the ULC's July 20, 2011 Version of RULLCA. See http://www.Uniformlaws.Org/Shared/Docs/Limited%20liability%20company/Ullca_Final_06rev.Pdf. Since then, the ULC Has Revised RULLCA and its Comments. The current version of RULLCA is dated Aug. 19, 2015. See Http://Www.Uniformlaws.Org/Shared/Docs/Limited%20liability%20company/ULLCA_Final_2014_2015aug19.Pdf. N.J.S.A. 42:2C-11 is based on Section 110 of the 2011 version, which was revised and renumbered as Section 105 in the 2015 version. A table with cross-references of N.J.S.A. 42:2C-11, 2011 RULLCA Section 110 and 2015 RULLCA Section 105 accompanies this article.

7. N.J.S.A. 42:2C-6.

8. N.J.S.A. 42:2C-11(C)(2).

9. ULC 2015 Comment to Section 104(1).

10. N.J.S.A. 42:2C-21.

11. N.J.S.A. 42:2C-11(C)(3).

12. N.J.S.A. 42:2C-39(A) & -39(I)(1). See N.J.S.A. 42:2C-39(B) (Duty of Loyalty) and N.J.S.A. 42:2C-39(C) (Duty of Care).

13. N.J.S.A. 42:2C-11(C)(4).

14. NJ-RULLCA addresses how a court is to determine whether a term in an operating agreement is manifestly unreasonable, but there is no case law explaining the term or its application. See Gianfranco A. Pietrafesa, The Manifestly Unreasonable Standard Under NJ-RULLCA, NJSBA Business Law Section Newsletter, Vol. 38, No. 1 ( July 2014).

15. N.J.S.A. 42:2C-11(D)(1). In addition to eliminating or altering the duty of loyalty, an operating agreement may identify the specific types or categories of activities that do not violate the duty of loyalty. N.J.S.A. 42:2C-11(D) (2). For example, in a real estate holding company, the operating agreement will often provide that the ownership of other real estate by the members does not violate the aspect of the duty of loyalty prohibiting a member from competing with the LLC. See N.J.S.A. 42:2C-39(B)(3). See Also Gianfranco A. Pietrafesa, The Duty Of Loyalty Under The New Jersey Revised Uniform Limited Liability Company Act, 290 N.J. Lawyer Mag. 12 (Oct. 2014).

16. N.J.S.A. 42:2C-11(D)(3). Although an operating may alter the duty of care, it cannot authorize intentional misconduct or knowing violations of law, which is not surprising. Id.

17. N.J.S.A. 42:2C-11(D)(4). It is not clear whether there are any other fiduciary duties, but a court may conclude that a member or manager has the duty to maintain the confidentiality of the LLC's confidential information and the duty to make certain disclosures to the LLC, its managers and members.

18. N.J.S.A. 42:2C-39(D).

19. Every contract in New Jersey includes an implied covenant of good faith and fair dealing, which is identical to the contractual obligation of good faith and fair dealing; therefore, it makes sense that the contractual obligation of good faith and fair dealing cannot be eliminated. Note that the obligation includes the exercise of rights and the discharge of duties under NJ-RULLCA (in addition to those under the operating agreement), which makes sense since the statute serves as the default operating agreement in the absence of an operating agreement. See N.J.S.A. 42:2C-11(B) ("To The Extent That The Operating Agreement Does Not Otherwise Provide For A Matter Described In Subsection A. Of This Section, This Act Governs The Matter").

20. N.J.S.A. 42:2C-11(D)(5). There is no case law explaining the concept of prescribing standards to measure performance of the contractual covenant of good faith and fair dealing. See Gianfranco A. Pietrafesa, Standards To Measure Good Faith And Fair Dealing Under NJ-RULLCA, 216 N.J.L.J. 362 (May 5, 2014). See ULC 2015 Comment to RULLCA §105(C)(6) for examples of contract provisions purporting to create standards to measure performance of the contractual covenant of good faith and fair dealing.

21. N.J.S.A. 42:2C-40.

22. N.J.S.A. 42:2C-11(C)(6).

23. N.J.S.A. 42:2C-40(G).

24. ULC 2015 Comment to RULLCA 105(C)(8).

25. N.J.S.A. 42:2C-48(A)(4) & (5). These statutory grounds include, but are not limited to, it being not reasonably practicable to carry on the LLC's business in conformity with the operating agreement, N.J.S.A. 42:2C-48(A)(4)(B), and oppression of one or more members by the managers or controlling members, N.J.S.A. 42:2C-48(A)(5)(B).

26. N.J.S.A. 42:2C-11(C)(7).

27. ULC 2015 Comment to RULLCA 701(B) ("...[N.J.S.A. 42:2C-48(B)] Can Be Overridden By The Operating Agreement. Thus, The Members May Agree To Restrict Or Eliminate A Court's Power To Craft A Lesser Remedy, Even To The Extent Of Confining The Court (And Themselves) To The All-Or-Nothing Remedy Of Dissolution.").

28. N.J.S.A. 42:2C-49(A) & -49(B)(1).

29. N.J.S.A. 42:2C 11(C)(8).

30. N.J.S.A. 42:2C-67 through -72.

31. N.J.S.A. 42:2C-11(C)(9).

32. See ULC 2015 Comments to Section 105(C)(11).

33. N.J.S.A. 42:2C-75(A), -79(A) & -83(A)(1).

34. N.J.S.A. 42:2C-86(A).

35. N.J.S.A. 42:2C-11(C)(10). An operating agreement cannot sidestep such a unanimous vote requirement through a provision allowing an amendment of the agreement with less than the unanimous consent of the members. See N.J.S.A. 42:2C-86(B).

36. N.J.S.A. 42:2C-11(C)(11).

37. Id.; N.J.S.A. 42:2C-13(B). For example, an operating agreement may restrict a transferee of a transferable interest from becoming a member unless the transferee satisfies certain conditions, such as agreeing to be bound to the terms of the operating agreement.

38. N.J.S.A. 42:2C-11(C)(11). As noted, an operating agreement may limit the power of a court to dissolution of an LLC as opposed to the grant of lesser remedies for oppression. See Supra N.27.

39. N.J.S.A. 42:2C-38.

40. N.J.S.A. 42:2C-11(G).

41. Id.

42 However, As Noted, An Operating Agreement May Eliminate The Duty Of Loyalty. Supra N.15.

43 See N.J.S.A. 42:2C-36.

44 This prohibition against indemnifying or exculpating a member or manager for intentionally inflicting harm on a member includes oppressive conduct.

45 N.J.S.A. 42:2C-11(G).
Table of Applicable Provisions under NJ-RULLCA v. 2011 RULLCA and 2015 RULLCA

NJ-RULLCA RULLCA (7-20-11) RULLCA (8-19-15)
NJ law based on this version Current version
42:2C-11(c)(1) 110(c)(1) 105(c)(2)
42:2C-11(c)(2) 110(c)(2) 105(c)(1)
42:2C-11(c)(3) 110(c)(3) 105(c)(4)
42:2C-11(c)(4) 110(c)(4) 105(c)(5)
42:2C-11(c)(5) 110(c)(5) 105(c)(6)
42:2C-11(c)(6) 110(c)(6) 105(c)(8)
42:2C-11(c)(7) 110(c)(7) 105(c)(9)
42:2C-11(c)(8) 110(c)(8) 105(c)(10)
42:2C-11(c)(9) 110(c)(9) 105(c)(11)
42:2C-11(c)(10) 110(c)(10) 105(c)(13)
42:2C-11(c)(11) 110(c)(11) 105(c)(15)
42:2C-11(g) 110(g) 105(c)(7)

Originally published by New Jersey State Bar Association Business Law Section.

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
Check to state you have read and
agree to our Terms and Conditions

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.

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 by clicking here .

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.

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.