ABA’s Revised Prototype Limited Liability Company Act May 2011

On May 1, 2011, the Editorial Board LLCs, Partnerships and Unincorporated Entities Committee, Business Law Section, of the American Bar Association published its proposed Revised Prototype Limited Liability Company Act.  The following is the Committee’s summary its proposed LLC act:

1. Articles of Organization Changed to Certificate of Formation.

The term “articles of organization” has been changed to “certificate of formation” to better align the Act with current limited liability company acts.

2. Operating Agreement Changed to Limited Liability Company Agreement.

In an effort to better signify the nature of the agreement among the members by referring to the agreement in a manner consistent with the general and limited partnership statutes (which refer to the agreement of the partners as the “partnership agreement”), the term “limited liability company agreement” has been used in lieu of the term “operating agreement.”

3. Consolidation of Provisions on Limited Liability Company Agreement Override.

Following the RUPA formulation and subsequent uniform act formulations, the Act places in one section (section 110) the various provisions that may not be modified by the limited liability company agreement. This centralization allows for the elimination of the phrase “unless otherwise provided in the limited liability company agreement” or similar phrases throughout the Act and the ambiguity that results in the absence of the proper override language. Therefore, all provisions within the Act are default provisions that may be modified by the limited liability company agreement unless modifications are prohibited under section 110.

4. Elimination of Manager-Managed and Member-Managed Dichotomy and Statutory Actual and Apparent Authority.

The Act changes significantly the original Prototype Act in that it eliminates the member-managed and manager-managed bifurcation of management structures and the statutorily conferred actual and apparent authority of members and managers in those paradigms. Instead, the Act provides that a person’s actual or apparent authority to bind the limited liability company will be determined with reference to the limited liability company agreement, decisions of the members in accordance with the limited liability company agreement or the default rules of the Act, a statement of authority, or law other than the Act such as the common law of agency. This approach allows drafters to provide for managers, officers, boards of directors, and other forms of governance that were difficult if not impossible to accomplish under the original Prototype Act.

5. Fiduciary Duties or Standards of Conduct; Express Authorization to Eliminate Fiduciary Duties by Agreement.

The Act does not specify or define fiduciary duties or standards of conduct. Those matters are determined by the limited liability company agreement and other applicable law. The Act provides great contractual flexibility with respect to these matters by permitting the limited liability company agreement to expand, restrict, or eliminate default fiduciary duties.

The Act does not permit the agreement to eliminate the implied contractual covenant of good faith and fair dealing.

6. Limitations on Distributions and Liability for Improper Distributions.

The Act includes a provision specifying limits on distributions and imposing liability on a member to the limited liability company for an improper distribution under specified circumstances. Although the RPLLCA Editorial Board recognized that this matter could be left to the general law of fraudulent conveyance, the RPLLCA Editorial Board included a provision on improper distributions in the Act because most state limited liability company acts include provisions addressing this issue. As is the case in many state limited liability company statutes (e.g., the statutes of Delaware, Virginia, Colorado, and Texas), the Act phrases the limitation on distributions and the liability that may be imposed with respect to an impermissible distribution in terms of distributions to a “member.” The RPLLCA Editorial Board discussed the question of whether the provisions apply to transfers of property to persons who are not members (either dissociated members or assignees) at the time of distribution. The definition of “distribution” (transfer of money or other property from a limited liability company, or series thereof, to another person on account of a limited liability company interest) would clearly apply to a transfer of money or property to an assignee of the member who initially owned the interest or where the member who owned the interest has dissociated. As the RPLLCA Editorial Board considered this issue, it determined that the statutory drafting to clarify the issue of the application of this provision to non-members could be difficult, would require further consideration, including its effect on other parts of the Act, and may be unnecessary. In contrast, the drafting committee of the original Prototype Act concluded that wrongful distributions by a limited liability company should be covered by the general law of fraudulent conveyances, and the original Prototype Act does not include any provisions imposing restrictions on distributions or liability in connection with a wrongful distribution.

7. Limited Liability Company Interest.

The limited liability company interest continues to be personal property under the Act, and the assignment of the limited liability company interest is governed by the default rules that allow for the transfer of the financial rights or the rights of distribution attributable to the limited liability company interest.

8. UCC Considerations.

The Act facilitates the enforceability of transfer restrictions in the limited liability company agreement by specifically overriding § 9-406 and § 9-408 of the Uniform Commercial Code.

9. Charging Order.

The charging order provisions have been changed to provide for a charge upon the right to distributions attributable to the limited liability company interest upon which a charge has been made only after the limited liability company is notified of the charging order. The limited liability company may also discharge the liability by depositing any distributions that may have been distributable to the holder of the charged limited liability company interest with the court that issued the charging order. The payment to the court discharges the liability of the limited liability company with respect to the distribution. The charging order provisions also provide for a mechanism to allow the judgment creditor and judgment debtor to resolve disputes over distributions and payments and to eliminate the responsibility of the limited liability company to do anything other than deposit the monies with the court.

In addition, the charging order provision provides that it is the exclusive remedy and the judgment creditor shall have no right to foreclose, under the Act or any other law, upon the charging order, the charging order lien, or the judgment debtor’s limited liability company interest. In addition, no judgment creditor or judgment debtor shall have any right to obtain possession or otherwise exercise legal remedies with respect to the property of the limited liability company.

10. Dissociation.

The term “dissociation” has been adopted by the Act in response to utilization of that term under RUPA, ULPA, and other uniform acts. Even though the nomenclature has been changed, the result is the same under the Act in that a person who is dissociated as a member (ceases to be a member) shall have no right to participate in the activities and affairs of the limited liability company and is entitled only to receive the distribution to which that member would have been entitled had that member not been dissociated. Thus, consistent with the original Prototype Act, a person who ceases to be a member is no longer entitled to informational rights or other rights of management.

11. Delinquency.

The concept of delinquency is a new concept to the Act. The concept was intended to provide the Secretary of State an efficient mechanism to designate as “delinquent” a limited liability company that has not complied with certain requirements of the Act (e.g., the filing of an annual report). The designation of delinquency does not constitute a dissolution of the limited liability company. This approach was derived from the Colorado Corporations and Associations Act and avoids many of the issues associated with the administrative dissolution provisions in many state limited liability company acts.

12. Dissolution.

The dissolution provisions were modified slightly to align with the typical dissolution provisions provided under other limited liability company acts.

13. Reinstatement.

A new concept of reinstatement after dissolution was added to the Act. While this concept is new to the Act, it is not necessarily new to unincorporated entity acts. For example, RUPA § 802(b) permits the partners to reinstate the dissolved general partnership upon certain actions of the partners and dissociated partners. Likewise, the Act allows the members and/or owners of the limited liability company interests to reinstate the limited liability company with the potential of retroactive effect if it does not interfere with third parties’ rights.

14. Foreign Limited Liability Company.

In order to streamline the application procedure required under the original Prototype Act for a foreign limited liability company to qualify to transact business, the Act simply provides for the delivery of a statement of foreign qualification for filing with the Secretary of State. Thus, the procedure in the Act eliminates any implication that qualification involves approval of an application and discretion on the part of the Secretary of State.

15. Derivative Actions.

The original Prototype Act did not provide for derivative actions. The Act provides an extensive set of provisions dealing with derivative actions derived from the RMBCA and the Colorado Limited Liability Company Act.

16. Merger and Conversion.

More fulsome merger and conversion provisions were added to the Act. Although there are similarities between the merger and conversion provisions in the Act and those of RULLCA, the provisions in the Act merge the concepts of conversion and domestication and leave merger and conversion as the two primary methods for reorganizing the limited liability company and other entities.

17. Series.

Series provisions were provided throughout the Act in an effort to acknowledge a number of jurisdictions that have added series to their statutes. The Act permits a limited liability company to establish, by way of its limited liability company agreement, one or more designated series of assets with which certain members might be associated.

The series provisions were generally derived from and inspired by the Delaware Limited Liability Company Act and the Texas Limited Liability Company Law.

Series provisions are primarily contained in Article 11 but are also included throughout the Act.

18. Reservation of the Power of the State to Alter or Repeal the Act.

The Act expressly provides that any provision of the Act may be amended or repealed and that all limited liability companies and their members and agents are subject to those changes. This provision allows the state from time to time to make amendments that would apply to limited liability companies that were formed before the enactment of the amendment. This provision was added in anticipation of thoughtful but regular updates to the Act.

2016-11-16T08:23:46+00:00 February 28th, 2012|LLCs & Corporations|0 Comments

About the Author:

The author of this article is Richard Keyt, an Arizona limited liability company attorney who has formed 5,400+ LLCs. His Silver & Gold LLC packages include the $85 expedited filing fee, a custom Operating Agreement and 170 book called the Arizona LLC Operations Manual. Connect with Richard at 480-664-7478 or on Google+

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