New Jersey recently enacted legislation revising Title 42:2C, the New Jersey Limited Liability Company Act, originally passed in 1993, to model, in large part, the revised Uniform Limited Liability Company Act. The new Act (the “Revised Act”) goes into effect on March 18, 2013.
For the most part, the New Jersey State Bar Committee that drafted the Revised Act modeled the legislation after the Uniform Revised Act but did make certain changes to reflect New Jersey custom and practice. Much of the LLC landscape remains the same, but there are several “takeaways” on which clients and practitioners should focus in evaluating the Revised Act.
1. Effective Date. The Revised Act will go into effect on March 18, 2013 for all limited liability companies formed on or after that date. In addition, from that date, any existing New Jersey limited liability company can elect to be covered by the Revised Act. As of March 1, 2014, the Revised Act will automatically cover all New Jersey LLCs, whenever formed. Revised Act, 42:2C-91.
2. Formation Process. The formation process for limited liability companies has not changed. Essentially, the same terminology will be in place and the same information is required in order to form a limited liability company. Revised Act, 42:2C-18.
3. Operating Agreements. Under the prior Act, an Operating Agreement was required to be in writing. However, under the Revised Act, companies are not required to have an Operating Agreement, and Operating Agreements can be written, oral or implied. Revised Act, 42:2C-2. This ability to “prove” an Operating Agreement from different evidential sources is significant. Because many of the “default” provisions of the Revised Act are different than the current law, LLCs without clear written Operating Agreements may face unanticipated results in the event there is a dispute among the members. For example, in the absence of a clear provision in the Operating Agreement, distributions to members and disassociated members are, by default, per capita and not by capital account or economic interest. Revised Act, 42:2C-34(a). A similar result can occur if there are no clear provisions on allocations of gains and losses. As a result, it is strongly recommended that all New Jersey LLCs review the status of their Operating Agreements as they move forward, especially before the March 1, 2014 date.
4. Statements of Authority. One new concept under the Revised Act is that limited liability companies may elect to file Statements of Authority, which can establish, as well as limit, the authority of certain individuals. Revised Act, 42:2C-28. Forms will be promulgated by the New Jersey Division of Revenue before the effective date of the Revised Act. There is no requirement to file Statements of Authority, although banks and other lending institutions may require Statements of Authority to be of record in order to confirm the authority of the parties executing any required loan documentation.
5. Non-Profit Purpose. The Revised Act clarifies that LLCs may be formed for any purpose, including a non-profit purpose. Revised Act, 42:2C-4.
6. Deadlocks and Disputes. The provisions in the Revised Act regarding company deadlocks and the resolution of disputes, including oppression litigation, have been generally made consistent with the corporate statute. Revised Act, 42:3C-48. Previously, remedies for oppression were imported from the corporate statute by the courts as a result of the lack of any definitive provisions under the prior Act. These new provisions will be of significant help in guiding practitioners in the event company deadlocks and disputes arise.
7. Dissolution and Winding Up. The dissolution procedure under the Revised Act is somewhat different than the existing Act; it is a two-step process, including filing a Certificate of Dissolution and, later, upon the completion of the dissolution process, filing a Certificate of Termination. Revised Act, 42:3C-49. In addition, the statute provides a clear process for a dissolved LLC to give written notice of its dissolution to known and unknown creditors through direct notice and through publication in a newspaper of general circulation. Known claimants must file a claim within 120 days and then face a 90-day filing requirement if the LLC rejects the claim in writing. Significantly, even unknown claims will be barred if an action is not filed within five years after the publication date. Revised Act, 42:2C-50-51.
8. Disassociation. The prior LLC Act granted rights to members to obtain fair value with certain adjustments upon disassociation. The Revised Act does not grant such a right to withdrawing (disassociated) members absent an appropriate provision in the Operating Agreement. Revised Act, 42:2C-34(b).
9. Duties among Members. Finally, the Revised Act sets forth, in some particularity, provisions regarding good faith and fair dealing among members, and among managers and members, and imposes a duty of loyalty and due care upon managers in the case of manager-managed LLCs. Members do not generally have a duty of loyalty to one another, only one of due care. Revised Act, 42:2C-39. In addition, certain provisions that affect the ability to limit these duties in the Operating Agreement will require significant planning. Revised Act, 42:2C-11.
Conclusion. Because the Revised Act adds some new concepts and changes certain default provisions for issues not addressed in an Operating Agreement, we recommend that all Operating Agreements be reviewed with the Revised Act in mind. If you have any questions concerning the Revised Act, please contact any of your Buchanan corporate counselors, and we will be happy to assist you.