- The New Jersey Limited Liability Company (LLC) Act is flexible in many ways giving members of an LLC freedom to negotiate and create a form of operating agreement that which works best for its members.
- As I have written previously, not everyone who forms or joins an LLC reduces their agreement to writing, which creates the potential for disagreements.
- New Jersey law recognizes this reality and has included provisions that address what happens when LLC members do business informally and without a written governing document. These laws are called “default provisions” and resolve those member issues by statue when required.
Introduction to the NJ RULLA Act
Almost all of the default provisions in the New Jersey Revised Uniform Limited Liability Company Act, commonly known as (NJ-RULLCA) may be altered, unless the law makes them non-waivable or non-changeable. The NJ-RULLCA statutes provide that the law(s) “is to be liberally construed to give the maximum effect to the principle of freedom of contract and to the enforceability of operating agreements.
Here are the lists of the non-waivable provisions of the NJ-RULLCA.
- Litigation
A limited liability company (LLC) has the right to sue and to be sued in its own name. An operating agreement cannot limit an LLC’s right to engage in litigation.
- Applicable Law
NJ-RULLCA compels New Jersey law be applied to govern 1) the internal affairs and operations of a New Jersey LLC, and 2) the liability of a member as member and/or a manager for the debts, obligations, or other liabilities of an LLC. An operating agreement may not vary this law.
- The Powers of the Court
A court has the power to enter orders regarding the signing and filing of records. An operating agreement cannot interfere with the court’s power in this regard.
- Fiduciary Duties of Members and Managers
Members of a member-managed LLC and managers of a manager-managed LLC have a fiduciary duty of loyalty and care. NJ-RULLCA provides that an operating agreement may not omit or waive the duty of loyalty, the duty of care, or any other fiduciary duty imposed upon company principles but does allow and provides (if not manifestly unreasonable), an operating agreement to restrict or eliminate a duty of loyalty, alter (but not eliminate) the duty of care, and alter or eliminate any other fiduciary duties, meaning fiduciary duties under the common law.
- Good Faith and Fair Dealing
The members and manager(s) must always discharge their duties and exercise their rights under the operating agreement and NJ-RULLCA in good faith and fair dealing. An operating agreement may not eliminate this obligation, altogether but, if not highly and clearly unreasonably, it can dictate standards by which to measure the performance of the obligation.
- Information Rights
Members, managers and even dissociated members have certain rights to receive information about the LLC. An operating agreement may limit and restrict such rights to provide and/or receive information, but may not do so unreasonably. In addition, an LLC may impose reasonable restrictions and conditions on access to and use of records and information, including designating information as confidential and imposing nondisclosure and safeguarding obligations on the recipient.
So what makes a restriction unreasonable? A Court might consider: 1) the danger or other problem the restriction seeks to avoid, 2) the purpose for which the information is sought, and 3) whether, in light of both the problem and the purpose, the restriction is reasonably tailored.
- Judicial Dissolution
A court has the power and authority to dissolve an LLC on various statutory grounds. An operating agreement may not vary the court’s power to judicially dissolve a New Jersey LLC under these grounds. However, an operating agreement can limit judicial interference and involvement to dissolution only; for example, it can provide that a court cannot enter an order for the sale and purchase of LLC interests.
- Winding Up a Dissolved LLC
An LLC in dissolution must wind up its business as provided in NJ-RULLCA. An operating agreement may not vary this requirement. For example, an LLC cannot continue its business indefinitely and cannot make distributions to members in lieu of payments to creditors.
- Rights of Third Parties
An operating agreement may restrict the rights of third parties, such as creditors.
- Indemnification and Exculpation
NJ-RULLCA provides for an LLC’s indemnification of members, managers and others. However, an operating agreement may alter and even eliminate such indemnification. An operating agreement may also eliminate a member or manager’s personal liability to the LLC and its members for money damages. However, under no circumstances may an operating agreement permit indemnification or exculpation of a member or manager for certain “bad acts”, such as breaching the duty of loyalty, receiving and improper personal benefit, making improper distributions, intentionally inflicting harm on the LLC or a member, or intentionally violating criminal law.
So there you have it a brief introduction and summary of those provisions of New Jersey Law that prohibit certain provisions that might be found in some LLC operating agreements.
To discuss your NJ LLC matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com. Please ask us about our video conferencing consultations if you are unable to come to our office.
By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold Township, Monmouth County, New Jersey LLC Law Attorney