Jay Sachetti joined Jeff O’Brien, partner at Husch Blackwell and Dyanne Ross-Hanson, president of Exit Planning Strategies talked about the market for mergers and acquisitions, exit planning opportunities for companies that don’t end up for sale and how companies can maximize their eventual sale price during an early October panel at the first Upsize on Tap event at Summit Brewing Co. in St. Paul.
When the state Legislature passed a law requiring employers to provide paid leave and safe time for employees, Justin Bieganek started hearing differing details from friends, colleagues and peers.
On January 1, 2018, a new law governing limited liability companies (LLCs) in Minnesota, Chapter 322C, will take effect for LLCs formed before August 1, 2015.
The Minnesota Legislature passed Chapter 322C, which replaced Chapter 322B, to modernize the LLC statute. Lawmakers hoped doing so would encourage businesses to organize under Minnesota law.
Chapter 322C has applied to newly formed LLCs since August 1, 2015, but those created prior to that date were given a window of time in which to voluntarily opt-in to the new law on their own terms. That window expires on January 1, 2018, when Chapter 322C will automatically apply to all Minnesota LLCs, regardless of whether that result is intended or desired.
The prior law in Minnesota, Chapter 322B, was based on a “corporate-style” understanding of LLCs in which the members elected a board of governors to oversee the company and its managers, the same way that shareholders elect a board of directors to oversee a corporation and its officers.
The best course of action is to update the LLC’s existing deal documents (including articles of organization, member control agreement, bylaws, and perhaps a separate buy-sell agreement) and turn them into a singular operating agreement that works under Chapter 322C and carries forward the business arrangements among the owners.
However, there is no legal requirement to make this update, and entrepreneurs may wonder whether doing so is really worth the time and financial resources doing so requires. While that will always come down to individual choices and risk tolerances, here are four practical reasons to make changes:
If your LLC’s member control agreement does not include a requirement that any amendment must be in writing and signed by the members, then as of January 1, 2018 the business arrangement reflected in the member control agreement could be subject to modification by reason of a series of conversations, or by a pattern of conduct.
This is because while Chapter 322B required a member control agreement to be in writing to be enforceable, Chapter 322C specifically states that the operating agreement need not be in writing. This can be corrected in the Chapter 322C operating agreement itself.
Chapter 322C allows for LLCs that are managed by a “manager,” which could be another company. This change is significant for two reasons.
First, the manager-managed structure hasn’t been available before and is an enticing structure for companies that could benefit from strong centralized operational control with additional passive owners or investors. This might be appropriate for many real estate development projects, or for companies that will be managing capital, or for any number of other businesses.
Second, for businesses that use multiple special purpose entities, this change allows for management to be consolidated in a single management company, whereas under the prior law each individual LLC needed to have actual people holding officer and board roles.
Chapter 322B provided a number of rules in the statute that automatically applied to LLCs. These rules were often not included in written member control agreements (because they didn’t need to be).
Some of those rules are not part of Chapter 322C, which means that an LLC only gets the benefit of those rules if they are specifically included in the operating agreement under the new law. As an example, under the prior law the members of an LLC, by acting unanimously, could exercise any power that would normally rest in the hands of the board.
That provision is not included within Chapter 322C. If an LLC doesn’t update its documents, it won’t get the benefit of that member-authority rule.
The fiduciary duties – that is, the legal obligations of persons managing the LLC – under Chapter 322C differ from those that applied under Chapter 322B.
For example, under Chapter 322C, there is an express requirement that a person with a management role in the LLC (which, depending on the structure of the LLC, could be a board member, a manager, or a member) must refrain from competing with the LLC.
This was not part of Chapter 322B and could cause problems for many businesses in which individual LLCs are used as part of an overall business structure, because the board members of each LLC will owe a duty not to compete with the LLC as of January 1, 2018.
Luckily, fiduciary duties under Chapter 322C can be modified in the operating agreement to eliminate or limit this non-compete component.
Chapter 322C departs from prior law in its approach to LLC governance, uses new and different terms, includes new rules that were not a part of prior law, and excludes some rules that were a part of prior law.
In light of the scope and breadth of the changes, the deal reflected in your LLC documents may be very difficult to interpret after the New Year.
What’s worse, any problem interpreting existing LLC documents through the lens of Chapter 322C will likely go undiscovered until there is some crisis event – perhaps a major disagreement among the members – that illuminates the problem at a time when it is too late to correct it.
Contact: David Jenson is a partner at the Minneapolis law firm Stinson Leonard Street: 612.335.1464;
da**********@*****on.com; www.stinson.com.
