On April 8, 2014, Governor Dayton signed into law the Minnesota Revised Uniform Limited Liability Company Act which will be codified in new Chapter 322C of the Minnesota Statutes (the “MRULLC”). The MRULLC will become effective on August 1, 2015 for all Limited Liability Companies (“LLC”) formed on or after that date. LLCs in existence on July 31, 2015 will remain governed by the present Minnesota LLC Act, Chapter 322B (“Chapter 322B”), but may elect after that date to be governed by the New Act. Any Chapter 322B LLCs that have not elected to be governed by the New Act will automatically become subject to the New Act on January 1, 2018.
Significant aspects of the MRULLC, compared to Chapter 322B, include the following:
Model change toward partnership
Chapter 322B closely resembles the Minnesota Business Corporation Act. Chapter 322Bs default rules establish a corporate structure, with members, a board of governors and managers more analogous to shareholders, a board of directors and officers in a corporation. The MRULLC defaults to member management (similar to a partnership), but permits manager management and board management. Board management is to permit existing LLCs to continue with their current structures.
Chapter 322B contemplates that an LLC will have a member control agreement and bylaws, which are sometimes separate documents and sometimes combined. The member control agreement, which is similar to a partnership agreement, must be in writing and must be executed by all person who, at the time of execution, are members or have executed contribution agreements with the LLC.
The MRULLC takes a slightly different approach. The MRULLC assumes there is an operating agreement serving as the governing document. The operating agreement addresses: (1) relations among members as member, and between members and the LLC; (2) the rights and duties of those acting in the capacity of manager or governor; (3) the activities of the LLC and the conduct of those activities; and (4) the conditions and methods for amended the operating agreement. Under the MRULLC the operating agreement is initially entered into by all the members of the LLC (including a sole member), but is not limited to written agreements, as it also includes oral agreements, agreements implied by conduct, and any combination of these forms. This should be a benefit to less formal LLCs where articles are filed but no formal agreement is ever entered into. The reasons for having a written agreement and spelling out such matters as to how the agreement may be amended remain strong, however.
The default structure under Chapter 322B is a Board of Governors, similar to a Board of Directors in corporations. The default structure under the MRULLC is member management, although the fact also permits manager management and board management. These provisions will permit any prior LLC to operate with its management structure as it did prior to becoming a 322C, LLC. Under Chapter 322B, there must be at least one natural person exercising the position of Chief Manager and treasurer. Under the MRULLC there is no such requirement. The managers in a manager managed LLC may be either individuals or entities. In a board managed LLC, however, board members must be individuals just as was required under Chapter 322B.
The MRULLC changes the presumptions on voting rights. Under the MRULLC, in the absence of an agreement, voting rights will be on a per capita basis (each member has one vote). Under Chapter 322B the presumption is that voting rights are allocated in accordance with the value of capital contributions. The MRULLC is in line with partnership default rules.
Authority to Bind
Chapter 322B does not specifically address the agency of members, but it does require that an LLC have one or more natural persons who exercise the function of Chief Manager and Treasurer. Subject to the management control agreement, Chapter 322B specifically delegates the power to actively manage the LLC to the Chief Manager. The MRULLC provides that a member is not an agent of an LLC solely by reason of being a member (ie. there is no apparent statutory authority). Agency issues and the authority to bind an LLC will be governed by the operating agreement and agency law. The MRULLC does not require the appointment or designation of any particular manager, but does contain default rules similar to those found in Chapter 322B governing the status of who the board may designate to offices.
Standards of conduct and other duties
Under Chapter 322B governors are to discharge their duties in good faith, in a manner the governor reasonably believes to be in the best interests of the LLC (ie. the duty of loyalty) and with the care an ordinarily prudent person in a similar position would exercise under similar circumstances. (ie. the duty of care). These duties are not waivable.
As with Chapter 322B, the MRULLC imposes on members, managers and governors fiduciary duties of loyalty and care. The MRULLC states what these duties entail absent permitted modification in the operating agreement. The MRULLC does permit an LLC, through its operating agreement, to restrict or eliminate certain aspects of the duty of loyalty and to identify specific types of categories of activities that do not violate that duty, so long as these modifications are not “manifestly unreasonable.” The duty of care can also be changed so long as the operating agreement does not authorize intentional misconduct or knowing violation of law.
Under Chapter 322B, unless a written member control agreement provides otherwise, profits and losses and distributions are allocated in proportion to the capital contributions. The MRULLC does not specifically allocate profits and losses. Rather, the MRULLC 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. Under the MRULLC, the allocation of profits and losses is considered a conceptual matter to be dealt with in the agreement or under applicable tax law.
No preemptive rights
Under 322B, the members of an LLC automatically have preemptive rights (the right of a member to maintain their proportional ownership of the LLC) unless the governing documents or board provide otherwise. However, the MRULLC does not address preemptive rights. If the members wish to maintain their preemptive rights under the MRULLC, the issue will need to be addressed in the operating agreement.
Rights to Transfer Ownership
In the absence of a restriction in a member control agreement, Chapter 322B permits a member to transfer financial rights without the consent of any other member and to transfer governance rights to anyone who is already a member. Any other transfer is only permitted if all the members other than the transferor unanimously approve. The MRULLC also divide membership rights into economic rights (called “transferrable interest”) and governance rights. Unless restricted by an operating agreement, a member may transfer some or all of the “transferrable interest”, but may not transfer other rights (ie. voting, management, information rights) only with the consent of all other members.
Under 322B a member may dissent and obtain payment for the fair value of the member’s interest in an LLC in the event of certain company actions. The MRULLC does not provide for statutory rights of dissenting members. As a result, as of January 1, 2018, the current statutory dissenter’s rights will be eliminated with the expiration of Chapter 322B. LLC owners will need to consider whether they wish to retain dissenter’s rights and make plans to expressly include such rights in LLC operating agreements.
Judicial Intervention and Oppressive conduct
Chapter 322B has extensive provisions detailing when and how a court may become involved in disputes among members, what considerations it may take into account, and how it may go about imposing equitable remedies, including involuntary dissolution or compelled buy-outs. The MRULLC is more expansive and permits a court to order dissolution or some other remedy, including a forced buy out.
Chapter 322B permits an LLC to exist with some authority prior to the admission of members. The organizer may name the first board of governors and the organizer may take actions to transact business or as may be necessary or appropriate to complete the organization of the LLC. This authority is more limited under the MRULLC. Under the MRULLC, until an LLC has at least one member, the LLC lacks the capacity to do any act or carry on any activity except: (1) delivering to the secretary of state for filing a statement of change, an amendment to the certificate, a statement of correction, an annual report, and a statement of termination; (2) admitting a member; and (3) dissolving. When the LLC later has at least one member, it may ratify acts or activities that occurred when the LLC lacked capacity under these shelf LLC provisions.