Bar News - July 20, 2016
BIA Committee Chair Explains LLC Act Amendments
By: John Cunningham
Eleven amendments to the New Hampshire Revised Limited Liability Company Act were signed into law in June, and a few will have a major impact on LLCs. What follows is a brief overview of the Revised LLC Act and an explanation the major amendments. The full text of the amendments can be found on the website of the NH Legislature.
Most New Hampshire LLCs are small businesses, and most of them have formed their LLCs without the assistance of LLC lawyers and don’t have written operating agreements among their members. Rather, most of their agreements are oral or by course of dealing. The primary purpose of the Revised Act – and of the amendments discussed below – is to be as user-friendly as possible to small New Hampshire businesses. Thus, among other things:
- Its drafters have tried to make the terms of the Revised Act and amendments to it as clear and simple as possible; and
- To the maximum extent possible, they have respected not only written operating agreements but also agreements that are oral or are based on the members’ course of dealing.
However, the Revised Act is also intended to provide members of New Hampshire LLCs with maximum flexibility in tailoring operating agreements to meet members’ needs and interests. The major way the Revised Act achieves this goal is by providing “default” provisions that may be overridden by LLC members in their operating agreements.
Amendment concerning the meaning of the term “member.” Revised Section 14 provides that the term “member” does not include former members, members who have transferred all of their membership rights to other persons, or members that have transferred all of their membership rights except their basic economic rights. (All section references in this article are to sections of the Revised Act as set forth in RSA 304-C).
Amendment concerning “authorized persons.” It was unclear whether in person, by mail on online, anyone except an LLC member or manager could validly file documents with the Secretary of State on behalf of an LLC. Amended Section 28, V makes clear that any “authorized person” – clearly including an LLC’s lawyer – may validly make such a filing.
Amendment concerning amendments of operating agreements. Section 40 before its amendment provided that not only written operating agreements but also oral operating agreements and operating agreements by course of dealing would be valid. Revised Section 40 clarifies, by providing that unless the operating agreement provides otherwise, oral and course-of-dealing amendments to operating agreements will also be valid.
Amendment concerning member voting requirements. Amended Section 67, I clarifies that unless the operating agreement provides otherwise, matters reserved for decision by the members shall be decided by majority vote of the members (i.e., not by members on a per capita basis, but rather, by members holding a majority of member votes).
Amendment concerning allocations of profits and losses. Under, respectively, Sections 89 and 91 of the Revised Act, allocations of LLC profits and losses mean apportionments of these profits and losses on an LLC’s book. Distributions mean actual transfers of apportioned LLC assets to their members. Revised Section 90, II states that unless the operating agreement provides otherwise, LLC profits and losses must be allocated among the members on the basis of their contributions to the LLC, except to the extent that these contributions have been returned to them.
Amendment concerning limitations on distributions. Under Section 93 before its amendment, an LLC could not lawfully make distributions of its profits and other assets to its members unless it met a solvency test and a net worth test. To meet the net worth test, an LLC might need a potentially expensive business appraisal. Amended Section 93 eliminates the net worth test.
Amendment concerning effect of distributions on capital contributions. Section 95, II was ambiguous as to whether a distribution by an LLC could be deemed to reduce the capital contributions of the distributee. Amended Section 95, II makes clear that an LLC distribution will not have this effect unless it is specifically identified in writing as a return of capital.
Amendment concerning fiduciary rights of dissociated members and their transferees. Under Section 99, it was arguably unclear whether, under the implied contractual covenant of good faith and fair dealing, former members and their transferees – e.g., the widows of deceased members who succeeded to deceased members’ LLC interests – were entitled to contend in the Superior Court that the LLC and the remaining members owed them fiduciary duties concerning their LLC interests or otherwise. Amended Section 99 makes clear this entitlement.
Amendment concerning member withdrawal. Before its amendment, Section 132, I (a) incorrectly referred to an LLC member’s voluntary abandonment of the member’s membership rights as a “resignation.” Amended Section 132, I (a) identifies this action as a “withdrawal.”
Amendment concerning right of members to dissent. Under amended Section 161, I(c) (1), members will not have dissenters’ rights if the alteration or abolishment of the distribution right in question results from a dilution through the admission of other members or the LLC’s acceptance of additional contributions.
Amendment to provide for domestications. New Section 205 provides that “foreign” (i.e., non-New Hampshire) LLCs may become “domestic” (i.e., New Hampshire) LLCs and that domestic LLCs may become foreign LLCs by filing domestication forms. Section 205 thus eliminates any need for foreign or domestic LLCs to achieve these changes by creating new entities in the transferee jurisdiction and merging into these entities. Section 205 mirrors the domestication provisions recently included in the New Hampshire Business Corporation Act.
John Cunningham is of counsel to McLane Middleton. He chairs the New Hampshire Business and Industry Association committee that drafted the New Hampshire Revised Limited Liability Company Act and the amendments discussed in this article.