Revisions to the Minnesota LLC Statute. What Does it Mean?

Screen shot 2013-08-16 at 10.29.43 AMOn August 1, 2015, the Revised Minnesota LLC Act will go into effect.  This law impacts all LLCs in Minnesota. This is the most significant change affecting Minnesota LLC law since LLCs were first permitted in Minnesota.

The Revised Act will automatically affect all LLCs formed in Minnesota on and after August 1, 2015 and will affect all LLCs in Minnesota as of January 1, 2018 at which time the old act will be repealed.  All previously formed LLCs can elect to be governed by the new statute prior to 2018 by taking affirmative steps to do so.

If you have an existing LLC, you should contact an attorney to discuss what steps you should take to update your documents. If you do not do so, you could run into a problem where effective 2018 your current documents do not operate in the manner you intended.  There is no time like the present to address the needed changes.

Significant aspects of the Revised Act includes the following changes:

  • A Change Toward Partnership Model

The original statute was patterned significantly after the Minnesota’s corporations statute meaning that its default rules are a corporate structure with members, a board of governors (shareholders, a board of directors, and officers in a corporation). The Revised Act defaults to member management (more like a partnership), but permits manager management and board management.

  • Changes to Governing Documents; Expanded Definition of Operating Agreement

The original statute contemplates an LLC will have a member control agreement and bylaws (combined or as one document). The member control agreement  must be in writing and must be executed by all persons who, at the time of execution, are members or have executed contribution agreements with the LLC.

The Revised Act loosens this approach. It contemplates an “operating agreement” serving as the governing document, addressing the (1) relationships among the members as members and between the members and the LLC; (2) the rights and duties of the manager or governor; (3) the activities of the LLC and the conduct of those activities; and (4) amendments to the operating agreement. Under the Revised Act the operating agreement is initially entered into by all the members of the LLC (including a sole member), but is not limited to written agreements, as it also includes oral agreements, agreements implied by conduct, and any combination of these forms. This should be a benefit to less formal LLCs where articles are filed but no formal agreement is ever entered into. This does mean it is recommended that you simply have an oral agreement.

  • Management/Governance Structures

The default structure under original statute contemplates a Board of Governors. The Revised Act’s default structure is member management, although the act also permits forms of management that look more like a corporation. This will allow existing LLCs to continue management as they have.

  • Voting Rights

The Revised Act changes the presumption on voting rights. In the absence of an agreement, voting rights under the Revised Act will be on a per capita basis (each member has one vote), whereas the original statute allocates voting rights in accordance with the value of capital contributions or percentage interest. This provision of the Revised Act looks more like a partnership.

  • Authority to Bind LLC

The original statute does not specifically address the agency of members, but it does require that an LLC have one or more natural persons exercising the functions of the offices, of chief manager, and treasurer. The Revised Act provides that a member is not an agent of an LLC solely by reason of being a member, i.e., there is no apparent statutory authority. Agency issues and the authority to bind an LLC will be governed by the operating agreement and agency law.  This means that the conduct of the members will be more important than the governing documents.

  • Statements of Authority

The Revised Act permits an LLC to file statements of authority similar to those that may be filed under the Partnership Act. These affect only the power of a person to bind an LLC to persons that are not members. The Revised  Act contains rules for filing these statements with the Secretary of State, limiting authority conferred under such a statement, revoking the statement, giving effect to authority to transfer real estate, etc., as well as filing Statements of Denial (of authority). This provision helps the LLC control the changes to the statute with respect to authority. 

  • Duties of Members, Managers, and Board Members

Under Chapter 322B governors are to discharge their duties in good faith, in a manner the governor reasonably believes to be in the best interests of the LLC (the duty of loyalty), and with the care an ordinarily prudent person in a like position would exercise under similar circumstances (the duty of care). These duties are not waivable, although subject to significant restrictions, to a governor’s personal liability to the LLC or its members for monetary damages for certain breaches of fiduciary duty. The members are subject to these duties to the extent that they act in place of the Board.

The Revised Act imposes fiduciary duties of loyalty and care, and spells out what these duties entail absent permitted modification in the operating agreement. The Revised Act does permit an LLC, through its operating agreement, to restrict or eliminate certain aspects of the duty of loyalty and to identify specific types or categories of activities that do not violate that duty, so long as these modifications are not manifestly unreasonable. The duty of care also can be altered so long as the operating agreement does not authorize intentional misconduct or knowing violation of law. Other fiduciary duties that may apply may be altered and particular aspects of such duties may be eliminated.  This will be an important change for you to discuss with your attorney.

  • Indemnification and Exculpation

 

The Revised Act similar to the old statute permits an LLC, through its operating agreement, to eliminate or limit a member’s, manager’s, or governor’s liability to the LLC and members for money damages except for: (1) breach of the duty of loyalty; (2) a financial benefit received by the member or manager to which the member or manager is not entitled; (3) making improper distributions; (4) intentional infliction of harm on the company or a member; or (5) intentional violation of criminal law.

  • Rights to Distributions and Allocations of Profits and Losses

Under the old statute, unless a written member control agreement provides otherwise, profits and losses and distributions are allocated in proportion to the capital contributions. The Revised Act does not allocate profits and losses, but allocates distributions prior to dissolution on a per capita basis (each member has an equal share). Upon liquidation, distributions are allocated to the members first to reflect previously unreturned contributions and then on a per capita basis. Under the Revised Act, the allocation of profits and losses is considered a conceptual matter to be dealt with in the agreement or under applicable tax law. This is a significant change that needs to be addressed against your current agreements and arrangements prior to implementation of the new law and makes it important that you have agreements in place.

  • Oppression Remedies/Judicial Dissolution and Intervention

The old statute has extensive provisions regarding judicial intervention, equitable remedies, and judicial dissolution that looks a lot like the corporations statute. The Revised Act mirrors the uniform act, permitting a court to order dissolution or other remedy (including a forced buy-out) if: (1) the conduct of all or substantially all of the LLC’s activities is unlawful; (2) it is not reasonably practicable to carry on the LLC’s activities in conformity with the articles of organization and the operating agreement; or (3) the managers, governors, or those members in control of the LLC: (i) have acted, are acting, or will act in a manner that is illegal or fraudulent; or (ii) have acted or are acting in a manner that is oppressive and was, is, or will be directly harmful to the applicant.

Minnesota’s version of the Revised Act (which differs from the Uniform Act) contains a definition of “oppressive conduct” that is intended to guide courts in resolving these disputes in a manner that is consistent with the agreements the LLC members have amongst themselves. The Revised Act states explicitly that conduct is not “oppressive” solely because there is reason of a good faith disagreement as to the content, interpretation, or application of the LLC’s operating agreement.

  • Shelf LLCs

The old statute permits an LLC to exist with some authority prior to the admission of members. This authority is further limited under the Revised Act. Until an LLC has or has had at least one member, the LLC lacks the capacity to do any act or carry on any activity except: (1) delivering to the secretary of state for filing a statement of change, an amendment to the certificate, a statement of correction, an annual report, and a statement of termination; (2) admitting a member; and (3) dissolving. When the LLC later has at least one member, it may ratify acts or activities that occurred when the LLC lacked capacity under these shelf LLC provision.