Important New Law Affecting All New Jersey Limited Liability Companies Takes Effect March 1, 2014
Beginning this Saturday, March 1, 2014, all limited liability companies formed in New Jersey will be impacted by the Revised Uniform Limited Liability Company Act, N.J.S.A. 42:2C-1 through N.J.S.A. 42:2C-17 (the “Revised Act”), enacted on September 19, 2012. As of March 1st, New Jersey’s existing law governing limited liability companies will be repealed and replaced by the Revised Act.
Like New Jersey’s superseded LLC law, the Revised Act governs any matter not addressed by an LLC’s operating agreement, but it differs from the superseded law in several material ways. First, the Revised Act provides that an LLC’s operating agreement can be in writing, oral, or implied based on the operations of the LLC. Under the superseded law, the LLC’s operating agreement had to be in writing. Second, while an LLC had a limited duration under the superseded law, under the Revised Act, LLC’s will have perpetual duration.
In addition, under the superseded LLC Act, the fiduciary duties of a member or manager can be eliminated or restricted in the LLC’s operating agreement. Under the Revised Act, however, an LLC’s operating agreement cannot eliminate or restrict the member’s or manager’s fiduciary duties unless the termination or restriction is “not manifestly unreasonable.” To this end, the Revised Act provides that while an LLC’s operating agreement may eliminate or limit a member or manager’s liability to the LLC and members for money damages, the operating agreement may not eliminate or limit liability for: (1) breach of the duty of loyalty; (2) receiving a financial benefit by the member or manager to which the member or manger is not entitled; (3) improper distribution; (4) intentional infliction of harm on the LLC or a member; or (5) intentional violation of criminal law.
The Revised Act also creates additional benefits for LLCs and their members, including permitting an LLC to file a statement of authority with the Division of Revenue in the Department of Treasury setting forth those individuals or entities with the authority (or lack thereof) to execute agreements relating to the transfer of real estate and any other transactions on behalf of the LLC. This helps to alleviate any ambiguities regarding which members of the LLC have authority to bind the LLC. Importantly, the Revised Act also provides protection for an oppressed member of an LLC by providing members with new rights and remedies previously unavailable under the superseded law. For example, under the Revised Act, an oppressed member may require the LLC and the other members to purchase his or her membership interest in the LLC. The oppressed member may also seek a court order dissolving the LLC on the grounds that the managers or controlling members have acted in a manner that is oppressive and was, is, or will be directly harmful to the oppressed member.
Finally, the Revised Act creates certain, default benefits for members and managers, unless those benefits are altered or eliminated pursuant to the terms of the operating agreement. For example, under the Revised Act, an LLC is required to indemnify and hold harmless any manger or member against any liability, a requirement not previously found under the superseded law. In addition, the Revised Act provides that, unless otherwise modified in the operating agreement, any distributions to members before the dissolution and winding down of the LLC must be made to members in equal shares. On the other hand, a resigning member of an LLC is no longer entitled to the “fair value of his limited liability company interest as of the date of resignation” under the Revised Act. Instead, a resigning member will be considered to have disassociated himself as a member and will continue to have rights only as an economic interest holder, a significant departure from the superseded law.
The above are some of the material changes to the law regarding limited liability companies. The Revised Act, however, is complex and implements substantial changes affecting all New Jersey limited liability companies. To maximize the benefits afforded under the Revised Act, while minimizing the potential pitfalls, you should consult with an attorney versed in the provisions of the Revised Act about your LLC.
As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice. For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.