Minnesota’s Revised Limited Liability Company Act
The Minnesota Revised Uniform Limited Liability Company Act, Minnesota Statutes Chapter 322C, became effective August 1, 2015. The Revised Act is the most significant revision to the law governing Minnesota Limited Liability Companies since the LLC was first recognized as an entity in Minnesota in 1993.
Transition for New and Existing LLCs.
Limited Liability Companies (“LLCs”) formed on or after August 1, 2015 will be governed by the Revised Act. LLCs that were formed prior to that date can “opt-in” and elect to be governed under the Revised Act at any time. Those that do not will automatically become subject to the Revised Act on January 1, 2018.
Reasons for Change.
In general, the Revised Act is intended to create greater flexibility to address certain areas of governance and liability, with the goal to make Minnesota’s statute more consistent with the majority of other states and, as a result, more attractive for use in multi-state transactions. Minnesota’s previous LLC Act, Minnesota Statutes Chapter 322B, provided for a traditional corporate governance structure that differs from the LLC Acts of most other states. The Revised Act adopts a partnership model for LLCs which is consistent with the LLC statutes in the vast majority of states. As a result, when transactions involved significant parties outside of Minnesota, many were reluctant to agree to use an entity formed under the Minnesota Act due to the unique corporate approach to governance and the perception that Minnesota’s LLC Act offered unusually wide statutory protections for its members.
The most significant changes to the previous LLC Act that were implemented by the Revised LLC Act can be broken down into three categories: (1) changes to the default rules pertaining to governance and the inclusion of a “manager-managed” LLC option; (2) changes to the default rules pertaining to organization, distributions and other matters, all of which can be changed in the Operating Agreement; and (3) increased flexibility in defining fiduciary duties and minimizing the likelihood of a lawsuit for oppressive conduct of members, officers and governors, so as to maxmize the predictability of outcomes for these parties.
Under the Revised Act, an LLC can be member-managed, manager-managed or board-managed. The default structure is member management. Previously, under 322B, the default structure was board management. The following are the default provisions that apply under each structure unless changed in the Operating Agreement:
- If member-managed, each member of the LLC has equal voting rights — i.e., per capita, as opposed to voting based on capital contributions or units held, which is more typical.
- Undertaking acts outside of the ordinary course of the company’s activities and amending the Operating Agreement require the consent of all members.
- Each manager has equal rights in the management. Differences among the managers are decided by a majority of the managers.
- Managers are selected and may be removed by a majority of the members.
- Managers make all operational decisions, other than the following which require the unanimous consent of the members: (i) the sale, lease, exchange, or disposition of all or substantially all of the LLC’s property; (ii) approving a merger, conversion or domestication; (iii) undertaking any other act outside the ordinary course of the LLC’s business; and (iv) amending the Operating Agreement.
- This is similar to the corporate governance structure typically used under the previous LLC Act.
- Engaging in acts outside the ordinary course of the LLC’s activities and amending the Operating Agreement require the consent of all members.
Organization, Operation and Distribution Default Rules.
Following is a general summary of some of the substantive changes made by the Revised LLC Act. Again, these are the default provisions which will apply unless the Operating Agreement or Articles say otherwise.
Articles of Organization. The Articles of Organization are simplified and only need to contain the name of the LLC, the address of the initial registered office, and the name and address of the Organizer. All other matters should be addressed in the Operating Agreement:
Operating Agreement. The term “Member Control Agreement” is no longer used and has been replaced with the term “Operating Agreement”. The Operating Agreement is the method to alter the default rules in the Revised Act. Operating Agreements do not need to be in writing and can be oral or implied among the members. The possibility of having an oral or implied Operating Agreement makes it important to include an integration clause in the written Operating Agreement, stating that the written agreement will control over all other or prior and/or oral agreements.
Statements of Authority. The Revised Act permits the filing of a Statement of Authority with the Secretary of State, similar to what has been permitted under the Partnership Act. A Statement of Authority gives third parties notice that the listed person is authorized to bind the LLC.
Voting. Each Member has equal rights in the management, i.e., one vote per member, not based on capital contributions or units owned. Under the old Act, the default rule provided that voting power was in proportion to capital contributions made or units owned.
Distributions. As with voting, operating distributions are made in equal shares to the members — i.e., per capita, not according to contributions made or units owned. Distributions on liquidation are made (i) first to each person owning a transferable interest (i.e. financial rights) in the amount of unreturned contributions, and then (ii) in equal shares (per capita) among all members. The default provision under the old Act required distributions in accordance with capital contributions made or units owned.
Cumulative Voting/Pre-Emptive Dissenter’s Rights. Cumulative voting, pre-emptive rights and dissenter’s rights concepts are not the default and are not referred to in the Revised Act. These member rights, which existed under the previous Act, can be included in the Operating Agreement.
Piercing the Corporate Veil. Failure to observe formalities relating exclusively to the management of an LLC’s internal affairs is no longer grounds to pierce the corporate veil.
Allocation of Profit and Loss. The Revised LLC Act does not specifically address allocation of profits and losses. The commentary to the Revised Act states that this is a matter of applicable tax law and accounting requirements, which should be the source of guidance on this issue. The default provision under the old Act was to allocate profits and losses among the members in proportion to the contributions made.
Defining and Limiting Fiduciary Duties.
As with the previous LLC Act, the Revised Act imposes on members, managers and governors, fiduciary duties of loyalty and care. Under the Revised LLC Act, the LLC may, in its Operating Agreement, reduce, restrict, or eliminate the duties of loyalty and care, and define the contractual obligation of good faith and fair dealing, so long as any restrictions or modifications are not “manifestly unreasonable” and further provided the duty of care cannot be altered to authorize or permit intentional misconduct or knowing violation of law. In addition, under the Revised Act, the Operating Agreement may specify the method by which a specific act or transaction, that would otherwise violate the duty of loyalty, may be authorized by disinterested persons after full disclosure of all material facts. As a result, under the Revised Act, the members may create a governance structure that protects and better defines their common objectives without the uncertainty that existed under the broader language of the previous Act.
What Does It Mean for You?
For newly formed LLCs, keep in mind that this is not an all-inclusive analysis of the changes between Chapter 322B and the Revised Act, Chapter 322C, but summarizes some of the more notable points a business owner should be aware of when organizing an LLC under the Revised Act. Many of the default governance, operation and distribution provisions are not what are typically used. Most LLCs will want to change the default terms in its Operating Agreement.
LLCs in existence prior to August 1, 2015 may continue to operate under the old Act until January 1, 2018, when all LLCs will automatically become subject to the Revised Act. LLCs formed under the old Act may want to take the initiative to opt into the Revised Act and amend their Operating Agreements prior to August 2018, particularly if a modification to the Member Control Agreement needs to be made before that time for other business reasons. Any LLC that does not so elect, should carefully examine its Member Control Agreements and Bylaws prior to August 2018 to determine whether the Revised Act’s default rules will have any unintended results under its current documents.
1 The LLC Act provides that the court will decide whether a provision in an Operating Agreement is “manifestly unreasonable”. In making this determination the court: (1) shall make its determination as of the time that challenged term became part of the Operating Agreement and by considering only circumstances existing at that time; (2) may invalidate the term only if in light of the purpose and activities of the Limited Liability Company, it is readily apparent that: (i) the objective of the term is unreasonable; or (ii) the term is an unreasonable means to which achieve the provisions objective. MN Stat Section 322C.0110, Subd. 8.