Starting January 1, 2018, all Minnesota limited liability companies (whether active now or to be formed in the future) will be subject to a new law, Chapter 322C of Minnesota Statutes, known as the Minnesota Revised Uniform Limited Liability Company Act. This law change impacts all owners of Minnesota LLCs but is particularly important to the owners of Minnesota LLCs formed prior to August 1, 2015 as these LLCs, if still governed under the old law, Chapter 322B of Minnesota Statutes, will become automatically subject to the new law beginning January 1, 2018.
The new law significantly modifies the rules underlying the operations and governance of an LLC.
How does the new law differ from the old law?
There are several important differences to be aware of between the new law and the old law:
- Management Structure. Under the old law, the default for LLCs was a corporation-style management structure with a board of governors (directors) and managers (officers). The new law takes a more partnership-style approach where the default is a member-managed structure. In a member-managed structure, unless modified in the LLC’s operating agreement, each member, no matter the amount of that member’s ownership, has authority to act on behalf of and bind the LLC to third parties. The new law also gives LLCs flexibility to elect in their operating agreement to be board-managed ( as under the old act) or manager-managed instead of the default member-managed structure.
- Governing Documents. The old law required LLCs to have a member control agreement in writing, signed by all the LLC’s owners. The new law changes the terminology from “member control agreement” to “operating agreement” but, more importantly, also states that any “agreements” among the LLC’s owners govern the LLC. This means that in addition to a written operating agreement signed by all the owners, any writing, including unsigned emails, letters, etc., undocumented oral agreements and promises and even historical course of dealing, conduct and norms may also govern the LLC. To avoid disputes and uncertainty, it is important that the LLC’s operating agreement contain a “merger clause” stating that only the written, signed operating agreement governs the LLC and specifically excludes all other unsigned agreements, promises, correspondences and conduct.
- Voting Rights. Under the old law, unless a member control agreement provided differently, the default was for voting percentages of owners to be based on the value of their capital contributions. The default under the new law provides one vote to each owner regardless of capital contributed (i.e., a “per capita” basis). In other words, previously an owner who contributed 95% of the LLC’s cash would receive 95% of the votes. Under the new law’s default rule, that same 95% owner will receive only one vote for his or her ownership – meaning 50% voting power if there are two owners, 20% voting power if there are 5 owners, 10% voting power if there 10 owners, etc. The new law’s default rule is just that, though – a default – and can be modified through an operating agreement.
- Profits/Distribution Rights. The old law’s default rule allocated both profit distributions and liquidating distributions at the termination of the LLC proportionally based on the value of owner’s capital contributions. As in the case of voting rights, the new law’s default rule allocates profit distributions among owners on an equal share, per capita basis. Liquidating distributions under the new law’s default rules are disbursed to the owners until each owner has received its unreturned capital contribution back, but then any remaining proceeds are distributed to the owners in equal shares. Again, the new law’s default rule on distributions is only a default and can be modified in an operating agreement.
- Dissenters’ Rights. The old law permitted owners to dissent to certain corporate events (e.g., merger, asset sale, liquidation, etc.) and receive a “fair value” buyout, typically through a court-mandated appraisal process. The new law does away with dissenters’ rights altogether. This is generally a good result for LLC entity itself and majority owners. Minority owners should take particular care now to ensure their interests are protected, as they will no longer be able to rely upon statutory dissenters’ rights to prevent oppression.
- Statutory Authority. Under the old law, only the managers (officers) of the LLC had authority to act for and bind the LLC. As mentioned above, the new law provides authority by default to all the LLC’s members – even minority members holding 1% or less ownership. An operating agreement can limit or eliminate this authority for minority members. An LLC may also file statements of authority with the Minnesota Secretary of State to give non-members authority.
- Fiduciary Duties and Indemnification. Both the old law and new law impose fiduciary duties upon and provide indemnification for members, managers and governors, including for duties of loyalty and care. However, the new law permits the operating agreement to have greater flexibility to modify, define and limit these rights and obligations.
What should I do now?
If you have not done so already, you should contact John R. Remakel or any other corporate attorney at Monroe Moxness Berg PA to review your existing LLC governing documents to ensure compliance before the new law becomes effective January 1, 2018. This would also be a good opportunity to make any changes to the ownership and management information of your LLC that may have become outdated.