New Limited Liability Company Act Enacted in New Jersey

by Pepper Hamilton LLP
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Governor Christie signed into law last month the Revised Uniform Limited Liability Company Act (the Revised Act), which is the first significant overhaul of New Jersey’s laws governing limited liability companies since the current New Jersey Limited Liability Company Act (the Current Act) was enacted in 1993. The Revised Act, which repeals and replaces the Current Act, will take effect in March 2013 for all new limited liability companies, and in March 2014 for all existing limited liability companies.

The Revised Act affects every limited liability company organized or operating in New Jersey, and modifies the Current Act in a number of significant ways. Notable changes include:

  • Perpetual Duration A limited liability company formed under the Revised Act will be presumed to have perpetual duration, unless otherwise specified in the company’s operating agreement. Like New Jersey corporations, limited liability companies in New Jersey no longer have to affirm in their formation documents their desire to have perpetual existence.
     
  • Operating Agreements As modified by the Revised Act, operating agreements would no longer be required to be written to be effective—such agreements among limited liability company members can be oral, written or even implied. This change offers members enhanced flexibility by permitting them to form oral or implied agreements based on how the company has been operated/governed in the past. Additionally, although New Jersey limited liability companies are deemed to be member-managed, the Revised Act gives companies the flexibility to provide for different management structures in their operating agreements.
     
  • Voting Rights of Members At present, the Current Act specifies that the members owning a majority of the limited liability company’s ownership interests have the controlling vote on all company matters. Under the Revised Act, members are deemed to have equal voting rights (regardless of each such member’s ownership interest in the company) and a majority vote of the members shall be controlling as to all ordinary matters. For a company whose members have different ownership interest percentages, including an alternate voting provision in the company’s operating agreement would be advisable to avoid the application of the equal voting method set forth in the Revised Act.
     
  • Authority to Bind the Company The Revised Act confirms that a "member is not an agent of a limited liability company solely by reason of being a member." However, as a way to provide proof of a certain member’s or agent’s authority to bind a company, the Revised Act includes a provision that permits a limited liability company to file a "statement of authority" with the relevant filing office (e.g., state treasurer, county clerk’s office, etc.) to confirm the individual’s authority to bind the company in certain business transactions, such as those involving financing or real property transfers.
     
  • Allocation of Profits and LossesThe Current Act provides for profits and losses to be allocated on the basis of the agreed-upon value of the contributions made by each member. The default provision of the Revised Act is that profits and losses shall be allocated on a per capita basis. For a company whose members’ capital contributions are not equal, setting forth an alternate allocation method in the company’s operating agreement will likely be the favored course of action.
     
  • Rights of Members Upon WithdrawalUnder the Current Act, when a member withdraws as a member of a New Jersey limited liability company, all management and voting rights of such member cease and the member is entitled to receive the fair value of his or her limited liability company interest as of the date of such withdrawal. According to the Revised Act, however, only the management and voting rights of a member shall automatically cease upon such withdrawal; such member’s economic rights, including the right to receive distributions, do not automatically terminate. Members of New Jersey limited liability companies will want to be sure that their operating agreements sufficiently handle the valuation and purchase/sale of members’ equity interests in the event of a withdrawal.
     
  • Fiduciary Duties The Current Act makes no direct mention of fiduciary duties and relies on case law to create such duties. The Revised Act integrates the concepts of fiduciary duty of care and loyalty and the obligation of good faith and fair dealing. However, so long as the result is not "manifestly unreasonable," a limited liability company’s operating agreement may restrict or eliminate particular aspects of these duties.
     
  • Indemnification Obligations The Revised Act requires limited liability companies to indemnify and hold harmless their members, managers, officers, agents, and employees under certain specified circumstances. This is a departure from the Current Act, which provides for discretionary—not mandatory—indemnification obligations. Note, however, that under the Revised Act, companies are allowed to alter or eliminate many of these indemnification obligations in their operating agreements.
     
  • Member Oppression Mirroring the law governing New Jersey corporations, the Revised Act incorporates a provision that authorizes the New Jersey Superior Court, upon the application of a limited liability company’s member, to either dissolve the company or appoint a provisional manager upon a finding that (i) the company’s activities or conduct is unlawful, or (ii) the controlling managers or members have acted in an illegal or fraudulent manner, or in a manner that is oppressive and harmful to other members. Such rights and remedies are not presently available to members under the Current Act.
     
  • Conversion and DomesticationThe Revised Act lays out a clear and simple process for the conversion of a New Jersey limited liability company into another form of corporate entity (and vice versa), as well as the process for foreign limited liability companies to domesticate and become New Jersey limited liability companies.

This Revised Act modernizes the state’s limited liability company law and will make New Jersey’s law consistent with the limited liability law of other states that have enacted similar revisions. This law also provides New Jersey limited liability companies with additional flexibility and helpso make New Jersey a more business-friendly location to organize and maintain a business.

Considering the Revised Act’s significant departure in a number of instances from the Current Act, companies creating new limited liability companies early next year should consider the effects of these changes when planning their new ventures. In addition, while existing limited liability companies have some more time to consider these changes, they too should take a look at their existing operating agreements, and consider amendments to take advantage of the changes in the law, once it takes effect.

Pepper Hamilton attorneys in the Princeton office would be pleased to discuss the Revised Act with you and to answer any questions that you may have about its application to prospective and/or current New Jersey limited liability companies.

 

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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