On September 19, 2012, with little fanfare, a new law was enacted in New Jersey which significantly changes many of the legal principles underlying the organization, governance and operation of limited liability companies. Under the “phase-in” provisions of the new law, known as the New Jersey Revised Uniform Limited Liability Company Act, or “RULLCA”, there was no immediate impact on existing limited liability companies (i.e. those formed prior to enactment of RULLCA). That grace period expires on March 1, 2014. On that date, the existing LLC law enacted in 1993 is repealed and, ready or not, RULLCA applies to all existing New Jersey limited liability companies.
The changes wrought by RULLCA are significant but not revolutionary. In many respects the law is merely a necessary modernization which keeps New Jersey on par with other business-friendly jurisdictions across the country. Existing limited liability companies with well-drafted operating agreements are well-advised to conduct a thorough review of that document to ensure that their existing arrangements do not run afoul of any prohibitions in RULLCA. More importantly, they should evaluate the potential impact of new “default” rules, especially those relating to voting and distribution rights and fiduciary duties of members and managers.
Among the issues impacted by RULLCA are:
- Operating Agreements. RULLCA recognizes oral Operating Agreements, as well as terms that are implied through a course of dealing. In view of this, the importance of a clear and comprehensive operating agreement as a tool to minimize disputes and surprises cannot be overstated.
- Per Capita Voting Rights, Profit Allocations and Non-Liquidating Distributions. In the absence of a contrary provision in an operating agreement, RULLCA specifies that voting rights, as well as non-liquidating allocations of profits and cash distributions are on a “per capita” rather than a “ownership percentage” basis. Under the RULLCA default rule, in an LLC with two members, one of whom contributed 90% of the capital of the company, and the other 10%, each member has an equal vote in the operation of the company’s business, and each is entitled to 50% of any interim profit allocation and profit distribution. The “true-up” to initial capital contributions is deferred until liquidation.
- Statements of Authority. RULLCA now permits companies to approve and file “statements of authority” with the State filing office and, in the case of real estate, in the office where real estate records are maintained. These statements are likely to become a standard feature in real estate closings. Operating agreements should define an internal process for approval of such statements especially in companies whose main business activity involves real estate.
- Economic Rights on “Dissociation”. Under existing law, upon resignation, a member was entitled to receive payment of “fair value” for the member’s interest in the company. RULLCA makes clear that a withdrawing owner is no longer entitled to receive payment of fair value, but simply retains its ongoing right to receive profit allocations and cash distributions.
- Fiduciary Duties. RULLCA imposes “default” duties of care and loyalty and a covenant of good faith and fair dealing. Because those duties are not imposed under the existing LLC statute and there is a dearth of applicable case law in New Jersey addressing these concerns, many if not most operating agreements are silent on the topic, or alternatively, they contain a wholesale “disclaimer” of any fiduciary duties which is likely to be considered unenforceable under RULLCA. Under the default provisions in RULLCA, members or managers (depending upon the management structure of the entity) may not compete with the LLC and or engage in “self-interested transactions” with the company, such as lending money or leasing property.
- Remedies for Deadlock and Oppression. RULLCA borrows from New Jersey’s corporate statute and permits an “oppression” remedy to minority owners of membership interests in an LLC. Under certain circumstances, those owners may now seek a court order dissolving the company on the grounds that the persons in control of the company have acted in an illegal or oppressive manner. While this remedy may not be unduly restricted in an operating agreement, majority members should be aware of the existence of this remedy, and its implications for decision-making and governance of the entity.
- Charging Orders. RULLCA specifies that a creditor may obtain a “charging order” upon a debtor’s LLC interest. Because the statute authorizes “foreclosure” of a charging order, New Jersey may be considered slightly less desirable as an asset protection state. However, in a continuing nod the “pick your partner” principle, the purchaser at the foreclosure sale obtains only an economic interest in the company, and would not be member.
Stark & Stark’s business and transactional attorneys are here to help our clients navigate both the obvious and more nuanced implications of RULLCA for their business. If you would like to schedule an appointment to review your operating agreement, please contact Rachel Stark at 609.895.7348.
DISCLAIMER: This article is for general information purposes only. It does not constitute legal advice, and may not be used and relied upon as a substitute for legal advice regarding a specific legal issue or problem. Advice should be obtained from a qualified attorney licensed to practice in the jurisdiction where that advice is sought.