New Jersey Has Revamped the LLC Law: Is Your New Jersey LLC Ready for the Changes?

On September 19, 2012, the Governor signed into law the New Jersey Revised Uniform Limited Liability Company Act (the “RULLA”). RULLA replaces the current NJ LLC Act, making substantial changes to the laws governing limited liability companies (“LLCs”) in New Jersey. These changes will have a substantial effect on all NJ LLCs and their members. In order to avoid the pitfalls and dangers, your NJ LLC must be aware of the changes.

Does RULLA Apply to My LLC?

The new statute will apply eventually to all NJ LLCs. RULLA will not apply to any LLCs until March 19, 2013, no matter what date the NJ LLC was formed. An LLC is “formed” on the date when the Certificate of Formation is filed with the State. RULLA will apply to new LLCs formed on or after March 19, 2013. However, RULLA will also apply to all LLCs (whenever formed) by March 19, 2014. By way of example, if your NJ LLC was formed prior to today, or is formed on or before March 18, 2013, RULLA will apply to your LLC effective March 19, 2014. If you form a NJ LLC on or after March 19, 2013, RULLA applies to that LLC.

What Changes does RULLA Make, as Compared to the Prior LLC Law?

RULLA makes substantial revisions to the current LLC law. Some changes include: calculation of members’ distributions, voting rights, fiduciary duties amongst members and managers, rights of resigning/terminated members, and indemnification of members by the LLC. Are these issues really important? YES. These are some of the most commonly “litigated” issues for LLCs. Most importantly, RULLA now provides an oppression claim for members that did not previously exist under the LLC Act and New Jersey case law. Prior to RULLA, oppression claims would frequently arise in the context of closely-held corporations where, for example, the “oppressed” shareholder’s role/participation in the corporation was being improperly limited/eliminated, where the “oppressed” shareholder’s right to receive distributions is being harmed, or where the “oppressed” shareholder’s voting rights were being thwarted. Under RULLA, the oppression remedy is extended to members of an LLC (not just minority shareholders in a corporation). These are just a few of the significant changes that will take effect under RULLA.

Regarding members’ voting rights under RULLA, ordinary matters are decided by a majority of the members with each member having one vote. This represents a significant change from the current law. Current law mandates that all matters are decided by a majority of the profit percentages. Thus, for example, under the current law, a single member entitled to 51% of the LLC’s profits would have a majority even where there were three (3) or more members. However, under RULLA, that same single member would not have a majority of the voting rights despite being entitled to 51% of the LLC’s profits.

Regarding distributions under RULLA, each member of an LLC is entitled to an equal share of the profits (or losses) unless the Operating Agreement provides for something different. This represents a significant change from the current law, which provides that profits (and losses) amongst members were determined based on the value of each member’s capital contribution.

Regarding resignation of members, the current law permits a resigning member to obtain a fair value buyout of his equity interest. In contrast, under RULLA, the resigning member continues to own his equity interest and continues to receive distributions, though he is considered a dissociated member. Significantly, like many of the other default provisions contained in RULLA, a member’s rights upon resignation may be modified in the LLC’s Operating Agreement. Thus, it is very important that an LLC have a well-drafted Operating Agreement that not only contemplates a member’s resignation, but accurately sets forth the rights of a resigning member.

Furthermore, the Act expressly adds fiduciary duties of care, loyalty, and good faith and fair dealing amongst members and managers. The current law does not address fiduciary duties amongst members and managers of an LLC, and the case law on this issue, to date, is unclear at best. Members should be made aware of their fiduciary duties. In addition, Members should consider changes to their current Operating Agreements to address the fiduciary duty change in law.

Importantly, despite these substantial changes, the Act preserves the rights of members of an LLC to decide how they will govern their company. Accordingly, in many cases, an LLC and its members may “contract around” these default provisions in RULLA. Thus, it is extremely important that NJ LLCs, both those currently in existence and those to be formed, have a well-written Operating Agreement to minimize the possibility of disputes arising amongst members/managers, and to ensure there are no surprises regarding a member’s rights and obligations.

In addition, unlike the current law, RULLA provides “oppressed” members of an LLC with a legal claim against his/her oppressing co-members and the LLC. Under the current LLC Act, a member of an LLC who’s reasonable expectations are being frustrated by another member, does not have a legal claim against his oppressors. RULLA substantially changes this by expressly adding an oppression claim to the statute similar to the oppression claim presently available to shareholders of a corporation under New Jersey’s Business Corporation Act. RULLA permits an “oppressed” member to petition the Court for redress, and the Court’s authority to fashion a remedy short of dissolving the LLC is expanded under RULLA. While the legality of a waiver of a member’s oppression claim rights has not yet been decided, members of an LLC may include waiver language in the Operating Agreement to fashion their own rights/remedies in the event of oppression.

The importance of having a well-drafted Operating Agreement takes on added significance under RULLA. RULLA contemplates enforcement of oral Operating Agreements through verbal representations, promises and the conduct of the members of an LLC. Thus, in the absence of a well-crafted Operating Agreement, members of an LLC may be held to obligations arising pursuant to oral representations and the implied conduct of the parties. This can cause significant disputes between members of an LLC resulting in costly litigation. To avoid such disputes and surprise, your LLC must have a well-drafted Operating Agreement that governs the rights and obligations of its members and managers.

Do not leave your LLC’s governance and operations to chance

The attorneys at Frier Levitt have substantial experience preparing Operating Agreement so that your LLC has the certainty and peace of mind that only a well-crafted Operating Agreement provides. For more information regarding RULLA and how Frier Levitt can assist you in preparing or revising your LLC’s Operating Agreement in light of dramatic changes under RULLA, please contact Frier Levitt today.