New Jersey Adopts Revised Uniform LLC Act

October 19, 2012 | Comments Off on New Jersey Adopts Revised Uniform LLC Act
Posted by John L. Sikora

On September 19, 2012, New Jersey Governor Chris Christie signed the New Jersey Revised Uniform Limited Liability Company Act (the “Revised Act”) into law.  Certain of the substantive changes contained in the Revised Act as compared to the predecessor statute are as follows:

Fiduciary Duties and Obligations of Members and Managers

The Revised Act imposes a duty of loyalty and duty of care upon the members of a member-managed LLC; if the LLC is manager-managed, the Revised Act imposes these duties upon the managers, but not the members.  The Revised Act also imposes an obligation on members and managers of good faith and fair dealing in the discharge of their duties under the Revised Act and the LLC’s operating agreement.  Further, the Revised Act prohibits the operating agreement from eliminating the duties of loyalty and care and the obligation of good faith and fair dealing, although the operating agreement may limit the foregoing in certain circumstances as long as the limitation is not “manifestly unreasonable”; for example, the operating agreement may alter the duty of care, except to authorize intentional misconduct or knowing violation of law.

Limitation on Distributions

The prior LLC act prohibited an LLC from making a distribution to a member if, generally, the LLC’s liabilities would exceed the fair value of its assets after giving effect to the distribution.  The Revised Act prohibits distributions if, after giving effect to the distribution, the LLC cannot pay its debts as they become due or the LLC’s total assets would be less than the sum of its total liabilities.  The LLC’s liabilities include amounts needed to satisfy any preferential rights of members that are payable upon the dissolution of the LLC and are superior to the rights of those persons receiving the distribution.

Indemnification of Members and Managers

By default, the Revised Act provides that an LLC is required to indemnify agents of the LLC, including members of a member-managed LLC, managers of a manager-managed LLC, and officers and employees of the LLC, from and against debts and liabilities incurred by the agent in the course of the agent’s activities on behalf of the LLC and against expenses to the extent that such agent has been successful on the merits in a proceeding brought against the agent by reason of the fact that the agent served as an agent of the LLC or another enterprise at the LLC’s request.  An agent also will be indemnified for expenses incurred in the successful defense of any such proceeding.  However, these indemnification obligations can be limited or eliminated in the operating agreement.

Exculpation of Members and Managers

The Revised Act permits the operating agreement to limit or eliminate a member or manager’s liability to the LLC and other members for money damages, except that the operating agreement cannot limit or eliminate liability for breach of duty of loyalty, receiving an improper financial benefit, consenting to or receiving an improper distribution, intentional infliction of harm upon the LLC or a member, or intentional violation of criminal law.

Forced Dissolution for Minority Oppression

Similar to the New Jersey Business Corporation Act, the Revised Act provides that the New Jersey Superior Court can issue an order to dissolve an LLC upon the application of a member that the managers or members who are in control of the LLC have acted in a manner that is oppressive and directly harmful to the applicant.

Conversion and Domestication

The Revised Act provides for conversion, whereby a New Jersey LLC can convert to a different form of New Jersey business organization, and vice versa.  The Revised Act also provides for domestication, whereby a New Jersey LLC can become a foreign LLC governed by the laws of a different state, and vice versa.  The LLC statute of the state into which or from which an LLC wishes to convert or domesticate, respectively, must also authorize conversion or domestication, as the case may be.

Effective Date

The Revised Act will go into effect on March 18, 2013 for all LLCs formed after that date and any existing LLC that elects to be governed by the Revised Act by an amendment to its operating agreement.  Beginning in March 2014, the Revised Act will be applicable to all LLCs regardless of election.

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