New Jersey Enacts the Revised Uniform Limited Liability Company Act
Corporate & Finance Alert
October 5, 2012
New Jersey Enacts the Revised Uniform Limited Liability Company Act Corporate & Finance Alert (Lawrence A. Goldman) October 5, 2012 Governor Chris Christie signed into law the New Jersey Revised Uniform Limited Liability Company Act (the “Act”, P.L. 2012, c. 50, N.J.S.A. 42:2C-1 et seq.) on September 19, 2012. The Act will be effective 180 days following enactment (March 18, 2013). The Act is substantially in the form of the Revised Uniform Limited Liability Company Act which was promulgated by the National Conference of Commissioners of Uniform State Laws (“NCCUSL”) in July 2006. The Act supersedes the New Jersey Limited Liability Company Act which became effective on January 26, 1994 (the “Old Act”) and was subsequently amended several times. Prior to March 1, 2014, the Act governs New Jersey LLCs (i) formed on or after March 18, 2013, and (ii) electing in their operating agreement to be governed by the Act. From March 1, 2014, the Act governs all New Jersey LLCs.
All 50 states and the District of Columbia have statutes authorizing the formation of LLCs, although the statutes differ from state to state. As of today, six other states (California, Idaho, Utah, Wyoming, Nebraska and Iowa) and the District of Columbia have enacted a new limited liability company act modeled on RULLCA.
In promulgating RULLCA, NCCUSL recognized several significant developments since the adoption of the first generation LLC statutes in the early 1990s. Most importantly, first generation statutes were significantly influenced by then applicable federal income tax classification regulations which classified an unincorporated organization as a corporation if the organization more nearly resembled a corporation than a partnership. In addition, in many states new LLC filings began to exceed new corporation filings on an annual basis; manager-managed LLCs became a significant factor in non-publicly traded capital markets; and LLCs were increasingly used in mergers and acquisitions, business reorganizations and other business transactions.
Significant Features of the Revised LLC Act
The following is a summary of some of the significant changes made in the Act as compared to the Old Act:
- Operating agreements. The Act permits operating agreements to be oral, written or implied, based upon how the company has operated. The Old Act required operating agreements to be in writing.
- Profits, losses and distributions. Unless otherwise agreed, allocations of profits and losses are on a per capita basis and distributions are on a per capita basis. The Old Act’s default rule on allocations and distributions was on the basis of the agreed value of members’ contributions to the company.
- Statements of authority. The Act permits an LLC to file statements of authority with the State and, in the case of real estate, in the office where real estate records are maintained, as a means of designating who has authority to sign documents, without disclosing to third parties the entirety of an operating agreement.
- Economic rights on dissociation. Under the Old Act, a member could resign from the company and, absent an agreement to the contrary, be entitled to receive the fair value of the member’s interest in the company. Under the Act, a resigning owner is no longer entitled to receive the fair value of an LLC interest. Rather, the resigning owner is dissociated as a member and only holds only economic rights.
- Remedies for deadlock and oppression. The Act provides remedies for oppressed minority owners. It permits a member to seek a court order dissolving the company on the grounds that the persons in control of the company have acted in a manner that is oppressive and was, is, or will be harmful to the member. The Act also provides for the remedy of the appointment of a custodian.
- Domestication and conversion. The Act provides enhanced flexibility for domesticating, merging and converting an entity, other than a New Jersey LLC, if permitted by the law of the state under which it was formed. The Act also provides for flexibility in conversions, such as allowing a corporation to become an LLC.
- Fiduciary duties. The Act delineates the extent to which an operating agreement can define, alter or even expressly eliminate aspects of fiduciary duties of LLC members and control persons. Moreover, the Act codifies major fiduciary duties, but does not purport to do so exhaustively.
- Shelf LLCs. The Act permits the filing of a certificate of formation without having at least one member, but states that the LLC is formed when the company has at least one member.