As previously discussed in Governor Dayton Approves Minnesota Adoption of Revised Uniform Limited Liability Company Act, on April 11, 2014, Minnesota Governor Mark Dayton signed into law the Minnesota Revised Uniform Limited Liability Company Act (“MRULLCA”). MRULLCA becomes effective August 1, 2015. Below are common questions about how MRULLCA will affect Minnesota LLCs.
When does MRULLCA affect new Minnesota LLCs?
Minnesota LLCs formed after August 1, 2015 will be governed by MRULLCA immediately.
What about existing Minnesota LLCs?
Minnesota LLCs formed before August 1, 2015 will be governed by MRULLCA on January 1, 2018, when MRULLCA replaces the Minnesota Limited Liability Company Act (“322B”).
Can existing Minnesota LLCs adopt MRULLCA early?
Existing Minnesota LLCs may elect to adopt MRULLCA in anticipation of January 1, 2018. In fact, it is recommended they do so to create a smooth transition to MRULLCA.
What are some of the major changes under MRULLCA?
Major changes under MRULLCA include the adoption of an operating agreement as the principal governance document, new management options, codification of fiduciary duties, treatment of dissenters or appraisal rights, and factors in “piercing the corporate veil.”
What is an operating agreement?
Under MRULLCA, an operating agreement is “the agreement, whether or not referred to as an operating agreement and whether oral, in a record, implied, or in any combination thereof, of all of the members of a limited liability company.” Minn. Stat. § 322C.0102, subd. 17. Essentially, it is a contract by and between the members and the LLC. It consolidates many of the rights and duties previously contained within the LLC’s articles of organization, bylaws, or member control agreement into a single contract that displaces MRULLCA’s statutory defaults.
How is management of an LLC different under MRULLCA?
Under MRULLCA, an LLC may be member-managed, manager-managed, or board-managed. Minn. Stat. § 322C.0407. This is a change from 322B. 322B was drafted to mirror the Minnesota Business Corporations Act, requiring an LLC “to be managed by or under the direction of a board of governors.” Minn. Stat. § 322B.606. By default, an LLC is member-managed under MRULLCA. In a member-managed LLC, the management and conduct of the LLC are vested in the members. All members have an equal right to the management and control of the LLC.
If the members vote to operate as a manager-managed or board-managed LLC, they must elect the initial managers or Board of Governors. A manager-managed LLC operates similarly to a member-managed LLC, except the manager does not need to be a member of the LLC, and the managers can only approve those matters within the ordinary course of the LLC’s business. Matters outside the ordinary course, such as the sale of all or substantially all of the assets of the LLC or amending the operating agreement, require the consent of all members before the managers may act. The board-managed option is unique to MRULLCA, as it is not commonly found in other states that have adopted the Revised Uniform Limited Liability Company Act. It allows Minnesota LLCs to elect the same management structure they enjoyed under 322B.
How are member contributions and ownership interests different under MRULLCA?
Unless otherwise provided in the operating agreement, all members’ financial and governance rights are determined per capita, regardless of contribution value. Minn. Stat. § 322C.0407. Previously, a member’s ownership interest in an LLC was based upon the value of the member’s contribution. For example, if Jane contributed $750 to XYZ LLC and John contributed $250, Jane would hold a 75% financial and governance ownership interest and John would hold a 25% interest. In the example above, both Jane and John would hold 50% interests in XYZ LLC under MRULLCA, unless otherwise specified in the operating agreement.
How have fiduciary duties changed under MRULLCA?
MRULLCA has codified the prior Minnesota common law principles of the duty of care, duty of loyalty, and duty of good faith and fair dealing owed by and between the members, managers, or board and the LLC. However, the LLC’s operating agreement may alter the above duties so long as the alteration is not “manifestly unreasonable.” Alterations of the duty of care cannot authorize intentional misconduct or knowing violation of law. Minn. Stat. § 322C.0110, subd. 4 (3). Similarly, the duty of loyalty may not be eliminated, but the operating agreement can “identify specific types or categories of activities that do not violate the duty.” Minn. Stat. § 322C.0110.
The operating agreement may also “specify the method by which a specific act or transaction that would otherwise violate the duty of loyalty may be authorized or ratified by one or more disinterested and independent persons after full disclosure of all material facts.” Id. The duty of good faith and fair dealing will continue to apply to protect minority members as it did under 322B. It will, however, be judged by the language of the operating agreement and whether any restriction is manifestly unreasonable.
How will a court determine what is “manifestly unreasonable”?
What is manifestly unreasonable is based upon the facts in existence at the time the parties entered into the operating agreement and only circumstances existing at that time. Minn. Stat. § 322C.0110, subd. 8. The court does not benefit from hindsight. It may only invalidate a provision for being manifestly unreasonable if the objective of the term is unreasonable or if the term is an unreasonable means to achieve the provision’s objective. Id.
Do dissenter or appraisal rights exist under MRULLCA?
MRULLCA does not provide for statutory dissenter or appraisal rights. Dissenters, however, may be granted similar equitable relief if the proposed action is found to be “oppressive” under Minn. Stat. § 322C.0701. Oppressive conduct under § 322C.0701 is similar to conduct that is unfairly prejudicial to a member’s reasonable expectations under Minn. Stat. § 322B.833. MRULLCA does not, however, provide a specific remedy for oppressive conduct. Instead, the court may, in its discretion, order any alternative remedy that would be appropriate under all facts and circumstances of the case, other than dissolution. The operating agreement may define specific rights or remedies for oppressive conduct, the member’s reasonable expectations, or any dissenter or appraisal rights.
How will the courts interpret existing case law, such as “piercing the corporate veil”?
To the extent existing case law does not contradict MRULLCA, the courts will apply it as precedent. See Minn. Stat. § 322C.0107 (“Unless displaced by particular provisions of this chapter, the principles of law and equity supplement [MRULLCA].”). There are, however, provisions in MRULLCA that expressly provide the court will not apply existing case law. For example, under MRULLCA, “[t]he failure of a limited liability company to observe formalities relating exclusively to the management of its internal affairs is not a ground for imposing liability on the members, managers, or governors.” Minn. Stat. § 322C.0304, subd. 2. As a result, the case law that states the conditions and circumstances under which the corporate veil of a corporation may be pierced does not apply where an LLC fails to observe formalities relating to the management of its internal affairs. Id. at subd. 3.
The above are only some of the important changes under MRULLCA. For more information on MRULLCA, and why it may be beneficial to implement an operating agreement that reflects the new act in advance of January 1, 2018, contact the business law attorneys of Trepanier MacGillis Battina P.A.
About the Author:
Minnesota business attorney James C. MacGillis advises clients on corporate and business law matters such as limited liability company formation, corporate governance, and business disputes. Jim may be reached at 612.455.0503 or firstname.lastname@example.org. Trepanier MacGillis Battina P.A. is a Minnesota business law firm located in Minneapolis, Minnesota.