Members of New Jersey Limited Liability companies (LLCs), take note. Legislation goes into effect on March 1, 2014 that will change the playing field for minority and majority LLC members alike. What you need to know:
Minority Members: The Revised Uniform Limited Liability Company Act (“RULLCA”), N.J.S.A. 41:2C-1 et seq. will allow minority members, regardless of the date their New Jersey LLC was formed, to take action if they suspect illegal or fraudulent activity and in cases of oppression. Specifically, the Act provides a statutory remedy “if the managers or those members in control of the company have acted, are acting, or will act in a manner that is illegal or fraudulent or have acted or are acting in a manner that is oppressive and was, is, or will be directly harmful to the applicant.” N.J.S.A. 42:2C-48(5)(a), (b). This language closely tracks the language that has been in effect for years with regard to closely held corporations; this is the first time it applies to LLCs.
While illegal and fraudulent activity are easily understood, what exactly is meant by oppression? This term has been defined as the “frustration of reasonable expectations,” which can include actions of a monetary or non-monetary nature that place the minority member’s investment at risk or personally target the minority member. Previously, the only option a dissatisfied minority member had was to resign and take the “fair value” of his or her interest. RULLCA changes that. What happens in the case of oppression or illegal of fraudulent conduct? The court is vested with expansive powers to remedy the harm caused, including the appointment of provisional directors or a custodian, the sale of any member’s entire interest to the company or to another member, and even the complete dissolution of the LLC.
Majority Members: Under the new RULLCA guidelines, the normal duties that a managing member owes to minority members may be restricted or even eliminated by the operating agreement. Because the Act explicitly states that it is to be “liberally construed to give the maximum effect to the principle of freedom of contract and to the enforceability of operating agreements,” LLC shareholders can craft an operating agreement that will carefully outline the obligations of the majority member to the minority members, minimizing the chances that a minority member will prevail in litigation against the managing member for oppression or breach of fiduciary duty.
Now, before March 1, 2014, is a good time to review your existing operating agreements or to prepare new ones. Consult a qualified commercial litigator for help in preparing these agreements or defending or prosecuting cases that fall under RULLCA.
Mark Soifer is a member of the Commercial Litigation practice group at Cooper Levenson Attorneys at Law. For more information, contact firstname.lastname@example.org or (609) 572-7530.