Introduction. In the Spring of 2014, Minnesota adopted the Minnesota Revised Uniform Limited Liability Company Act (the

Transcription

1 Overview

2 Introduction In the Spring of 2014, Minnesota adopted the Minnesota Revised Uniform Limited Liability Company Act (the New LLC Act ) which h was unanimously approved in both the Minnesota House and Minnesota Senate. This is the most significant development in the law governing g Minnesota limited liability companies since the LLC was first recognized as a domestic entity in The New LLC Act is derivative of the Revised Uniform Limited Liability Company Act ( RULLCA ), which was adopted by at least 11 other states.

3 When All LLCs formed in Minnesota on or after August 1, 2015 will automatically be subject to the New LLC Act. Effective January 1, 2018, all Minnesota LLCs will be governed by the New LLC Act regardless of when they were created. In the meantime, after August 1, 2015, any existing LLC may elect to opt-in to the New LLC Act subject to the terms and provisions of its operating agreement or bylaws.

4 Why The former version of the MN LLC Act, 322B is based on its corporate counterpart and predecessor 302A. Minnesota was one of only 2 states (North Dakota being the other state) that used a corporate model LLC as opposed to a partnership model. As a result, in multi-state business dealings the Minnesota Act was a fish out of water and generally couldn t compete with other state s t LLC Acts. Simply put, the New LLC Act essentially falls into line and blends in with many other state s LLC Acts. A more thorough reason for the change in Acts includes recognition that Minnesota courts have earned a reputation as being very protective of shareholders and members. The Prior LLC Act created statutory protections that offer wide latitude to the court in enforcement, but give the company little latitude in defining the duty of care and what can be expected of the company and its members insofar as these standards may differ from the statutory default or a court s perception of equity. This framework has made predicting the outcomes of shareholder or member disputes difficult, even with a well-drafted set of organizational documents.

5 Why (cont.) Businesses and their owners usually seek to maximize predictability. As a consequence, many sophisticated investors and organizers have actively avoided participating in Minnesota entities. In fact, many venture capitalists and angel investors required that Minnesota entities be reorganized in more management-friendly jurisdictions like Delaware to avoid the uncertainty that comes with the former protective regime. As Minnesota businesses embrace the new LLC act, investors who may have been reluctant to invest in Minnesota businesses may become more likely to do so.

6 What The New LLC Act will change the way LLCs operate and may encourage more businesses to subject themselves to Minnesota jurisdiction. Most ostensibly, the changes include (i) simplified Articles of Organization; (ii) the elimination of the member control agreement (effectively, the bylaws and the member control agreements will be combined into one Operating Agreement ); and (iii) the elimination of dissenters rights claims by members. Substantive changes under the New LLC Act include its enabling of the members to contractually agree to: 1) reduce or eliminate the duty of loyalty and the duty of care and to define the contractual obligation of good faith and fair dealing (all subject to the caveat such limitations or definitions must not be manifestly unreasonable ); 2) reduce the grounds for judicial relief of oppressive conduct; and 3) provide restraints and presumptions concerning derivative actions and special litigation committees.

7 What (cont.) In addition, other notable changes include: 1) The creation of the shelf LLC. An LLC that does not have a member but which is nevertheless recognized under the statute as a separate person. The Shelf LLC is created upon the filing of the Articles of Organization by the Organizer. The use of Shelf LLC s may assist with name registration and expedite filing requirements before actual business operations are conducted, so a LLC may hit the ground running. 2) Recognition of Charging Orders. The Prior LLC Act does not address charging orders. The New LLC Act provides for charging order protection at 322C.503 3where a charging gorder is a lien on the judgment debtor s transferable interest, and that the LLC is required to pay over to the person to which the charging order was issued any distribution that would otherwise be paid to the judgment debtor.

8 What (cont.) 3) Distribution Default Rule Changes. Under the Prior LLC Act, absent a member control agreement to the contrary, an LLC s profits and losses and distributions are allocated to the Members in proportion to their respective capital contributions. The New LLC Act does not specifically allocate profits and losses on a capital contribution basis but instead the default rule allocates distributions prior to dissolution on a per capita basis (each member has an equal share). Upon liquidation, distributions are allocated to the members first to reflect previously unreturned contributions and then on a per capita basis. 4) Governance Structure. This topic is addressed in greater detail later, but in sum under the New LLC Act an LLC may be Board Managed, Manager Managed or as the new default rule provides, Member-Managed. 5) Voting Rights. The New LLC Act provides, absent an operating agreement to the contrary, each member in a member-managed LLC has equal voting rights in the management of the LLC. Of course, this default per-capita rule may be amended by a written agreement (we often see voting tied to capital contributions).

9 Governance Options The New LLC Act invites a governance structure more akin to a partnership model than the historic corporate model where the business and affairs of an LLC were required to be managed under the direction of a board of governors. Accordingly, under 322C members of an LLC will have three choices to determine how their LLC will be governed. The default governance structure of a 322C LLC is member-managed. The other choices are managermanaged or the existing board managed structure.

10 Member-Managed LLC (default choice) Member-managed LLCs are managed by and under the control of the members equally, unless the LLC's operating agreement affirmatively provides otherwise. That is the New LLC Act provides each member has an equal right or vote in the business and affairs of the LLC. Generally, when members disagree upon a course of conduct, the matter will be decided by a majority of the members. This is an important departure from the Prior Act where voting power generally mirrored a member s capital contributions i to the LLC. Accordingly, the importance of an operating agreement is amplified in multi member LLC s (especially since the member-managed LLC is the default rule).

11 Member-Managed LLC (cont.) Potentially as important, under a member-managed LLC, each of the members will be burdened with fiduciary duties attendant to their ownership of the LLC. Under the Prior Act a member would not have a fiduciary duty to the LLC unless he or she was also a governor or manager of the LLC.

12 Manager-Managed LLC The New LLC Act provides that the Members may choose to be manger-managed. That is any matter relating to the activities of the company is decided exclusively by the managers and [e]ach manager has equal rights in the management and conduct of the activities of the company, and a difference arising among managers as to a matter in the ordinary course of the activities of the company may be decided by a majority of the managers. Nevertheless, unless otherwise provided in the LLC s operating Agreement the consent of all members is required to: sell, lease, exchange, or otherwise dispose of all, or substantially all, of the company's property, with or without the good will, outside the ordinary course of the company's activities; approve a merger, conversion, or domestication; undertake any other act outside the ordinary course of the company's activities; and amend the operating agreement. The Members may modify this consent requirement by the adoption of an operating agreement containing such over-rides, except as limited by Minn. Stat. 322C.0110

13 Manager-Managed LLC (cont.) The New LLC Act provides each manager has equal rights in the management and conduct of the LLC s activities and differences among the managers as to a matter in the ordinary course of the LLC sconduct shall be decided by a majority of the managers. A Manager need not be a Member, in fact, unlike under the Prior Act where Governors were required to be natural person s, Managers may be entities or natural persons.

14 Board-Managed LLC To best assist in the transition from 322B to 322C, the New LLC Act maintained the essence of the board-managed LLC provisions of the Prior Act (board managed LLC s are not provided for under RULLCA). If a board-managed LLC is created or maintained, then "[t]he activities and affairs of a limited liability company are to be managed by and under the direction of a board of governors, which shall consist of one or more governors as determined by members holding a majority of the voting power of the members." Minn. Stat. 322C.0407, subd. 4. The New LLC Act provides the following for board-managed LLCs: the board acts only through an act of the board; no individual governor has any right or power to act for the limited liability company; and only officers, managers, or other agents designated by the board or through a process approved by the board have the right to act for the limited liability company, and that right extends only to the extent consistent with the terms of the designation.

15 Conclusion Under the New LLC Act, members can eliminate the board of governors by choosing to have their LLC s governed as member-managed or manager-managed. Such Members can effectively increase member/manager accountability and also reduce the need for certain corporate formalities by avoiding certain aspects of the the corporate governance structure. Members can determine amongst themselves to create a governance structure where managers have exclusive responsibility for business decisions (manager-managed) or where the members themselves make the business decisions (member-managed). Of course, there may be instances where the corporate culture is deemed best. In such cases the members may elect to be governed by a board.