New Jersey Adopts Revised Uniform Limited Liability Company Act: An Overview of Significant Changes

by Jeffrey M. Shapiro and Eileen Overbaugh

Excerpt:

On March 18, 2013, the Revised Uniform Limited Liability Company Act (the "Revised Act") becomes effective and replaces New Jersey's existing Limited Liability Company Act (the "Current Act") with respect to all limited liability companies formed on or after that date. On March 1, 2014, the Revised Act will also replace the Current Act with respect to all limited liability companies previously formed under the Current Act, unless a previously formed limited liability company adopts an amendment to its operating agreement to be governed by the Revised Act prior to March 1, 2014. With its adoption of the new law, New Jersey joins a handful of other states that have enacted a form of the Revised Act.

This Article contains an overview of significant differences between the Current Act and the Revised Act. This summary is not intended to be exhaustive and practitioners are encouraged to review the Revised Act carefully.

Fiduciary Duties

Under the Current Act, duties of members and managers of limited liability companies are based largely on common law, but can also "be expanded or restricted by provisions in an operating agreement". In contrast, under the Revised Act, the duties of loyalty and care, and the covenant of good faith and fair dealing are codified. In a member-managed limited liability company, each member owes the company and the other members a duty of loyalty and a duty of care. A member must also act in accordance with the obligation of good faith and fair dealing. In a manager-managed limited liability company, the duty of loyalty and the duty of care apply to the managers and not the members and the covenant of good faith and fair dealing applies to both the members and the managers.

However, under the Revised Act, if it is not "manifestly unreasonable," an operating agreement may restrict or eliminate fiduciary duties owed by a member or manager. Specifically, the operating agreement may: (i) restrict or eliminate the duty of loyalty; (ii) identify types or categories of activities that do not violate the duty of loyalty; (iii) alter the duty of care, except that the operating agreement may not authorize intentional misconduct or a knowing violation of law; (iv) alter any other fiduciary duty, including eliminating the particular aspects of that duty; and (v) prescribe the standards to measure the performance of good faith and fair dealing. In addition, 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 or ratified by disinterested and independent persons after full disclosure of all material facts. Note, though, that the Revised Act expressly provides that elimination of the duties of care and loyalty are limited.

Access the full version of this article with your lexis.com ID. Additional fees may be incurred.

If you do not have a lexis.com ID, you can purchase this commentary and additional Emerging Issues Commentaries from the LexisNexis Store.

Lexis.com subscribers can access the complete set of Emerging Issues Analyses for Corporate Law and the Corporate Area of Law page.

For more information about LexisNexis products and solutions connect with us through our corporate site.

Jeffrey M. Shapiro is a partner in the Corporate Department at Lowenstein Sandler LLP and co-author of the definitive treatise on New Jersey corporate law and practice, New Jersey Corporations and Other Business Entities.

Eileen Overbaugh is an associate in the Corporate Department at Lowenstein Sandler LLP.