revised uniform limited liability company act revised uniform limited liability company act

138 Pages·2006·0.44 MB·English

by  Daniel Kleinberger

D R A F T

FOR APPROVAL

REVISED UNIFORM LIMITED LIABILITY
COMPANY ACT

NATIONAL CONFERENCE OF COMMISSIONERS

ON UNIFORM STATE LAWS

MEETING IN ITS ONE-HUNDRED-AND-FIFTEENTH YEAR
HILTON HEAD, SOUTH CAROLINA
JULY 7-14, 2006

REVISED UNIFORM LIMITED LIABILITY
COMPANY ACT

WITH PREFATORY NOTE AND COMMENTS

Copyright 82006
By
NATIONAL CONFERENCE OF COMMISSIONERS
ON UNIFORM STATE LAWS

______________________________________________________________________________
The ideas and conclusions set forth in this draft, including the proposed statutory language and comments, have not been passed
upon by the National Conference of Commissioners on Uniform State Laws or the Drafting Committee. They do not necessarily
reflect the views of the Conference and its Commissioners, or the Drafting Committee and its Members and Reporters. Proposed
statutory language may not be used to ascertain the intent or meaning of any promulgated final statutory proposal.
DRAFTING COMMITTEE ON REVISIONS TO UNIFORM LIMITED LIABILITY
COMPANY ACT
The Committee appointed by and representing the National Conference of Commissioners on
Uniform State Laws in revising this Act consists of the following individuals:
DAVID S. WALKER, Drake University Law School, 2507 University Ave., Des Moines, IA
50311, Chair
REX BLACKBURN, 1673 West Shoreline Dr., Suite 200, P.O. Box 7808, Boise, ID 83707
ANN E. CONAWAY, Widener University, School of Law, 4601 Concord Pike, Wilmington, DE
19803
DONALD K. DENSBORN, 8888 Keystone Crossing, Suite 1400, Indianapolis, IN 46240-4609
STEVEN G. FROST, 111 W. Monroe St., Suite 1500, Chicago, IL 60603-4080
HARRY J. HAYNSWORTH, IV, 2200 IDS Center, Minneapolis, MN 55402
MICHAEL HOUGHTON, P.O. Box 1347, 1201 N. Market St., 18th Floor, Wilmington, DE
19899
HARRIET LANSING, 313 Judicial Center, 25 Rev. Dr. Martin Luther King Jr. Blvd., St. Paul,
MN 55155
EDWIN E. SMITH, 150 Federal St., 21st Floor, Boston, MA 02110-1726
CARTER G. BISHOP, Suffolk University Law School, 120 Tremont St., Boston, MA 02108-
4977, Co-Reporter
DANIEL S. KLEINBERGER, William Mitchell College of Law, 875 Summit Ave., St. Paul,
MN 55105, Co-Reporter

EX OFFICIO
HOWARD J. SWIBEL, 120 S. Riverside Plaza, Suite 1200, Chicago, IL 60606, President
DALE G. HIGER, 1302 Warm Springs Ave., Boise, ID 83712 Division Chair

AMERICAN BAR ASSOCIATION ADVISOR
ROBERT R. KEATINGE, 555 17th St., Suite 3200, Denver, CO 80202-3979

AMERICAN BAR ASSOCIATION SECTION ADVISORS
WILLIAM J. CALLISON, Suite 3200, 1700 Lincoln St., Denver, CO 80203, ABA Business Law
Section Advisor
WILLIAM H. CLARK, JR., One Logan Square, 18th and Cherry Streets, Philadelphia, PA
19103-6996, ABA Business Law Section Advisor
THOMAS EARL GEU, University of South Dakota, School of Law, 414 Clark St., Suite 214,
Vermillion, SD 57069-2390, ABA Real Property, Probate and Trust Law Section Advisor
JON T. HIRSCHOFF, One Landmark Square, Suite 1400, Stamford, CT 06901, ABA Business
Law Section Advisor
ROBERT KRAPF, One Rodney Square, 920 King St., P.O. Box 551, Wilmington, DE 19899,
ABA Real Property, Probate and Trust Law Section Advisor
PAUL L. LION, III, 755 Page Mill Rd., Palo Alto, CA 94304-1018, ABA Business Law Section
Advisor, California State Bar
SCOTT E. LUDWIG, 200 Clinton Ave. W., Suite 900, Huntsville, AL 35801-4900, ABA
Business Law Section Advisor
JOHN R. MAXFIELD, 555 17th St., Suite 3200, P.O. Box 8749, Denver, CO 80201, ABA Tax
Section Advisor
ELIZABETH STONE MILLER, Baylor Law School, 1114 S. University Parks Dr., 1 Bear Pl
#97288, Waco, TX 76706, ABA Business Law Section Advisor
SANDRA K. MILLER, Widener University School of Business Administration, One University
Place, Chester, PA 19013-5792, ABA Business Law Section Advisor
BARRY B. NEKRITZ, 8000 Sears Tower, 233 S. Wacker Dr., Chicago, IL 60606, ABA Real
Property, Probate and Trust Law Section Advisor
THOMAS E. RUTLEDGE, 2000 PNC Plaza, 500 W. Jefferson St., Louisville, KY 40202-2874,
ABA Business Law Section Advisor

EXECUTIVE DIRECTOR
WILLIAM H. HENNING, University of Alabama School of Law, Box 870382, Tuscaloosa, AL
35487-0382, Executive Director

Copies of this Act may be obtained from:

NATIONAL CONFERENCE OF COMMISSIONERS ON UNIFORM STATE LAWS
211 E. Ontario Street, Suite 1300
Chicago, Illinois 60611
312/915-0195
www.nccusl.org
REVISED UNIFORM LIMITED LIABILITY COMPANY ACT

TABLE OF CONTENTS

PREFATORY NOTE......................................................................................................................1

[ARTICLE] 1
GENERAL PROVISIONS
SECTION 101. SHORT TITLE....................................................................................................4
SECTION 102. DEFINITIONS.....................................................................................................4
SECTION 103. KNOWLEDGE; NOTICE.................................................................................12
SECTION 104. NATURE, PURPOSE, AND DURATION OF LIMITED LIABILITY
COMPANY.......................................................................................................................14
SECTION 105. POWERS...........................................................................................................15
SECTION 106. GOVERNING LAW..........................................................................................17
SECTION 107. SUPPLEMENTAL PRINCIPLES OF LAW.....................................................18
SECTION 108. NAME................................................................................................................18
SECTION 109. RESERVATION OF NAME.............................................................................19
SECTION 110. OPERATING AGREEMENT; SCOPE, FUNCTION AND LIMITATIONS. 20
SECTION 111. OPERATING AGREEMENT; EFFECT ON LIMITED LIABILITY
COMPANY AND PERSONS BECOMING MEMBERS...............................................28
SECTION 112. OPERATING AGREEMENT; EFFECT ON THIRD PARTIES AND
RELATIONSHIP TO RECORDS EFFECTIVE ON BEHALF OF LIMITED
LIABILITY COMPANY..................................................................................................29
SECTION 113. OFFICE AND AGENT FOR SERVICE OF PROCESS...................................32
SECTION 114. CHANGE OF DESIGNATED OFFICE OR AGENT FOR SERVICE OF
PROCESS.........................................................................................................................33
SECTION 115. RESIGNATION OF AGENT FOR SERVICE OF PROCESS.........................34
SECTION 116. SERVICE OF PROCESS...................................................................................34

[ARTICLE] 2
FORMATION; CERTIFICATE OF ORGANIZATION AND OTHER FILINGS
SECTION 201. FORMATION OF LIMITED LIABILITY COMPANY; CERTIFICATE
OF ORGANIZATION......................................................................................................36
SECTION 202. AMENDMENT OR RESTATEMENT OF CERTIFICATE OF
ORGANIZATION............................................................................................................37
SECTION 203. SIGNING OF RECORDS TO BE DELIVERED FOR FILING TO
[SECRETARY OF STATE].............................................................................................38
SECTION 204. SIGNING AND FILING PURSUANT TO JUDICIAL ORDER.....................39
SECTION 205. DELIVERY TO AND FILING OF RECORDS BY [SECRETARY OF
STATE]; EFFECTIVE TIME AND DATE.....................................................................40
SECTION 206. CORRECTING FILED RECORD.....................................................................42
SECTION 207. LIABILITY FOR INACCURATE INFORMATION IN FILED RECORD.....43
SECTION 208. CERTIFICATE OF EXISTENCE OR AUTHORIZATION.............................44
SECTION 209. ANNUAL REPORT FOR [SECRETARY OF STATE]...................................46

[ARTICLE] 3
RELATIONS OF MEMBERS AND MANAGERS
TO PERSONS DEALING WITH LIMITED LIABILITY COMPANY
SECTION 301. NO AGENCY POWER OF MEMBER AS MEMBER....................................48
SECTION 302. STATEMENT OF AUTHORITY.....................................................................50
SECTION 303. STATEMENT OF DENIAL..............................................................................54
SECTION 304. LIABILITY OF MEMBERS AND MANAGERS............................................54

[ARTICLE] 4
RELATIONS OF MEMBERS TO EACH OTHER AND
TO LIMITED LIABILITY COMPANY
SECTION 401. BECOMING A MEMBER................................................................................57
SECTION 402. FORM OF CONTRIBUTION...........................................................................59
SECTION 403. LIABILITY FOR CONTRIBUTIONS..............................................................59
SECTION 404. SHARING OF AND RIGHT TO DISTRIBUTIONS BEFORE
DISSOLUTION................................................................................................................60
SECTION 405. LIMITATIONS ON DISTRIBUTION..............................................................61
SECTION 406. LIABILITY FOR IMPROPER DISTRIBUTIONS...........................................63
SECTION 407. MANAGEMENT OF LIMITED LIABILITY COMPANY.............................64
SECTION 408. INDEMNIFICATION AND INSURANCE......................................................67
SECTION 409. STANDARDS OF CONDUCT FOR MEMBERS AND MANAGERS...........68
SECTION 410. RIGHT OF MEMBERS, MANAGERS, AND DISSOCIATED
MEMBERS TO INFORMATION....................................................................................74

[ARTICLE] 5
TRANSFERABLE INTERESTS AND RIGHTS OF TRANSFEREES AND CREDITORS
SECTION 501. MEMBER’S TRANSFERABLE INTEREST...................................................78
SECTION 502. TRANSFER OF TRANSFERABLE INTEREST.............................................78
SECTION 503. CHARGING ORDER........................................................................................80
SECTION 504. POWER OF PERSONAL REPRESENTATIVE OF DECEASED MEMBER.84

[ARTICLE] 6
MEMBER’S DISSOCIATION
SECTION 601. MEMBER’S POWER TO DISSOCIATE; WRONGFUL DISSOCIATION...85
SECTION 602. EVENTS CAUSING DISSOCIATION.............................................................86
SECTION 603. EFFECT OF PERSON’S DISSOCIATION AS A MEMBER..........................89
[ARTICLE] 7
DISSOLUTION AND WINDING UP
SECTION 701. EVENTS CAUSING DISSOLUTION..............................................................91
SECTION 702. WINDING UP....................................................................................................93
SECTION 703. KNOWN CLAIMS AGAINST DISSOLVED LIMITED LIABILITY
COMPANY.......................................................................................................................95
SECTION 704. OTHER CLAIMS AGAINST DISSOLVED LIMITED LIABILITY
COMPANY.......................................................................................................................96
SECTION 705. ADMINISTRATIVE DISSOLUTION..............................................................98
SECTION 706. REINSTATEMENT FOLLOWING ADMINISTRATIVE DISSOLUTION...99
SECTION 707. APPEAL FROM REJECTION OF REINSTATEMENT................................100
SECTION 708. DISTRIBUTION OF ASSETS IN WINDING UP LIMITED LIABILITY
COMPANY’S BUSINESS.............................................................................................100

[ARTICLE] 8
FOREIGN LIMITED LIABILITY COMPANIES
SECTION 801. GOVERNING LAW........................................................................................102
SECTION 802. APPLICATION FOR CERTIFICATE OF AUTHORITY..............................102
SECTION 803. ACTIVITIES NOT CONSTITUTING TRANSACTING BUSINESS...........103
SECTION 804. FILING OF CERTIFICATE OF AUTHORITY.............................................105
SECTION 805. NONCOMPLYING NAME OF FOREIGN LIMITED LIABILITY
COMPANY.....................................................................................................................105
SECTION 806. REVOCATION OF CERTIFICATE OF AUTHORITY.................................106
SECTION 807. CANCELLATION OF CERTIFICATE OF AUTHORITY............................107
SECTION 808. EFFECT OF FAILURE TO HAVE CERTIFICATE OF AUTHORITY........107
SECTION 809. ACTION BY [ATTORNEY GENERAL].......................................................108

[ARTICLE] 9
ACTIONS BY MEMBERS
SECTION 901. DIRECT ACTION BY MEMBER..................................................................109
SECTION 902. DERIVATIVE ACTION.................................................................................110
SECTION 903. PROPER PLAINTIFF......................................................................................110
SECTION 904. PLEADING......................................................................................................110
SECTION 905. SPECIAL LITIGATION COMMITTEE.........................................................111
SECTION 906. PROCEEDS AND EXPENSES.......................................................................113

[ARTICLE] 10
MERGER, CONVERSION, AND DOMESTICATION
SECTION 1001. DEFINITIONS...............................................................................................114
SECTION 1002. MERGER.......................................................................................................116
SECTION 1003. ACTION ON PLAN OF MERGER BY CONSTITUENT LIMITED
LIABILITY COMPANY................................................................................................117
SECTION 1004. FILINGS REQUIRED FOR MERGER; EFFECTIVE DATE......................117
SECTION 1005. EFFECT OF MERGER.................................................................................119
SECTION 1006. CONVERSION..............................................................................................121
SECTION 1007. ACTION ON PLAN OF CONVERSION BY CONVERTING LIMITED
LIABILITY COMPANY................................................................................................122
SECTION 1008. FILINGS REQUIRED FOR CONVERSION; EFFECTIVE DATE.............122
SECTION 1009. EFFECT OF CONVERSION........................................................................123
SECTION 1010. DOMESTICATION.......................................................................................125
SECTION 1011. ACTION ON PLAN OF DOMESTICATION BY DOMESTICATING
LIMITED LIABILITY COMPANY..............................................................................126
SECTION 1012. FILINGS REQUIRED FOR DOMESTICATION; EFFECTIVE DATE......126
SECTION 1013. EFFECT OF DOMESTICATION.................................................................127
SECTION 1014. RESTRICTIONS ON APPROVAL OF MERGERS, CONVERSIONS,
AND DOMESTICATIONS............................................................................................129
SECTION 1015. [ARTICLE] NOT EXCLUSIVE....................................................................129

[ARTICLE] 11
MISCELLANEOUS PROVISIONS
SECTION 1101. UNIFORMITY OF APPLICATION AND CONSTRUCTION....................130
SECTION 1102. RELATION TO ELECTRONIC SIGNATURES IN GLOBAL AND
NATIONAL COMMERCE ACT...................................................................................130
SECTION 1103. SAVINGS CLAUSE......................................................................................130
SECTION 1104. APPLICATION TO EXISTING RELATIONSHIPS....................................130
SECTION 1105. REPEALS......................................................................................................131
SECTION 1106. EFFECTIVE DATE.......................................................................................131
REVISED UNIFORM LIMITED LIABILITY COMPANY ACT

PREFATORY NOTE
Background to this Act:
Developments Since the Conference Considered and Approved the Original
Uniform Limited Liability Company Act (ULLCA)

The Uniform Limited Liability Company Act (“ULLCA”) was conceived in 1992 and
first adopted by the Conference in 1994. By that time nearly every state had adopted an LLC
statute, and those statutes varied considerably in both form and substance. Many of those early
statutes were based on the first version of the ABA Model Prototype LLC Act.

ULLCA’s drafting relied substantially on the then recently adopted Revised Uniform
Partnership Act (“RUPA”), and this reliance was especially heavy with regard to member-
managed LLCs. ULLCA’s provisions for manager-managed LLCs comprised an amalgam
fashioned from the 1985 Revised Uniform Limited Partnership Act (“RULPA”) and the Model
Business Corporation Act (“MBCA”). ULLCA’s provisions were also significantly influenced
by the then-applicable federal tax classification regulations, which classified an unincorporated
organization as a corporation if the organization more nearly resembled a corporation than a
partnership. Those same regulations also made the tax classification of single-member LLCs
problematic.

Much has changed. All states and the District of Columbia have adopted LLC statutes,
and many LLC statutes have been substantially amended several times. LLC filings are
significant in every U.S. jurisdiction, and in many states new LLC filings approach or even
outnumber new corporate filings on an annual basis. Manager-managed LLCs have become a
significant factor in non-publicly-traded capital markets, and increasing numbers of states
provide for mergers and conversions involving LLCs and other unincorporated entities.

In 1997, the tax classification context changed radically, when the IRS’ “check-the-box”
regulations became effective. Under these regulations, an “unincorporated” business entity is
taxed either as a partnership or disregarded entity (depending upon the number of owners) unless
it elects to be taxed as a corporation. Exceptions exist (e.g., entities whose interests are
publicly-traded), but, in general, tax classification concerns no longer constrain the structure of
LLCs and the content of LLC statutes. Single-member LLCs, once suspect because novel and of
uncertain tax status, are now popular both for sole proprietorships and as corporate subsidiaries.

In 1995, the Conference amended RUPA to add “full-shield” LLP provisions, and today
every state has some form of LLP legislation (either through a RUPA adoption or similar
revisions to a UPA-based statute). While some states still provide only a “partial shield” for
LLPs, many states have adopted “full shield” LLP provisions. In full-shield jurisdictions, LLPs
and member-managed LLCs offer entrepreneurs very similar attributes and, in the case of
professional service organizations, LLPs may dominate the field.
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ULLCA was revised in 1996 in anticipation of the “check the box” regulations and has
been adopted in a number of states. In many non-ULLCA states, the LLC statute includes
RUPA-like provisions. However, state LLC laws are far from uniform.

Eighteen years have passed since the IRS issued its gate-opening Revenue Ruling 88-76,
declaring that a Wyoming LLC would be taxed as a partnership despite the entity’s corporate-
like liability shield. More than eight years have passed since the IRS opened the gate still further
with the “check the box” regulations. It is an opportune moment to identify the best elements of
the myriad “first generation” LLC statutes and to infuse those elements into a new, “second
generation” uniform act.

The Revised Uniform Limited Company Act is drafted to replace a state’s current LLC
statute, whether or not that statute is based on ULLCA. The new Act’s noteworthy provisions
include

[[[insert description of major points]]]

The new Act also has a very noteworthy omission; it does not authorize “series LLCs.” A
a “Progress Report on the Revised Uniform Limited Liability Company Act,” published in the
March 2006 issue of the newsletter of the ABA Committee on Partnerships and Unincorporated
Business Organizations, contained the following explanation for this decision:

A series LLC “authorizes an extraordinary type of membership interest -- one that
neither pertains to nor partakes of an entire LLC but rather is associated with and
segregated to a compartmentalized set of assets, profits, losses, and liabilities.”
An LLC statute that authorizes series LLCs permits “an LLC to compartmentalize
its operations and create ‘internal’ shields to protect assets associated with one
aspect of the business from claims pertaining to others. Under [a series provision],
an LLC may associate specified assets and operations with a particular series of
membership interests and limit claims and obligations pertaining to those interests
and operations to the specified assets.”

Originally devised by sophisticated Delaware lawyers for their “funds” clients,
series are now being (mis)used to subdivide assets of operating businesses and to
provide unwarranted hopes of low cost “asset protection.” No one quite knows
what will happen under bankruptcy law when a series becomes insolvent. Nor
does anyone know whether the courts of a non-series state will respect the
“internal shields” of a series LLC. Most LLC statutes provide that “foreign law
governs” the liability of members of a foreign LLC. However, those provisions
are irrelevant [to a foreign series LLC] because they pertain to the liability of a
member for the obligations of the LLC. For a series LLC, the pivotal question is
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entirely different – namely, whether some assets of an LLC should be immune
from some of the creditors of the LLC.

What’s good for Delaware and highly sophisticated deals is not necessarily good
for the LLC law of other states. A philosophy that works wonders for “high end”
transactions may be bad medicine for the thousands of more prosaic but
nonetheless important closely held businesses that choose to house themselves
within LLCs.

PUBOGRAM, Vol. XXIII, no. 2 at 7, 8-9 (citations omitted).
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