By: Michael Mather
This time of the year is filled with family, food, laughter, and cheer. But this year, Minnesota limited liability companies should add one more thing to their holiday "to-do" list: a review of their operating agreements, bylaws, and other governance documents. Why? Because changes to the Minnesota limited liability company rules are afoot.
Passed in 2014, the Minnesota Revised Limited Liability Company Act — codified as Chapter 322Ci — had, up to this point, only applied to newly-formed Minnesota LLCs and those that voluntarily opted in. However, as of January 1, 2018, Chapter 322C will govern all Minnesota LLCs.
What does this mean? Out with the old (Minn. Stat. Chapter 322B) and in with the new (Chapter 322C).
What Is Changing?
Until now Minnesota LLC has been governed by Chapter 322B. Originally modeled after the traditional corporation structure, Chapter 322B was cluttered with complex default rules and strict formalities. While providing a detailed skeleton to work from, the chapter often failed to provide the flexibility touted by the hybrid corporation-partnership structure, and many small and informal LLCs (whether intentionally or not) failed to comply with the strict governance rules.
To remedy these concerns, the Minnesota legislature enacted Chapter 322C. As a "second generation statute," Chapter 322C is designed to give provide flexibility and personalization sought by limited liability members while aligning Minnesota law more closely with other limited liability acts nationwide.
How Does It Change?
Chapter 322C includes several notable revisions to the old structure of Chapter 322B.
Perhaps the most visible change is the simplification of LLC governance documents. In addition to the Articles of Organization, LLCs formed under Chapter 322B use a number of governance documents, including operating agreements, bylaws, member voting control agreements, and so on.ii Chapter 322C strips away the complexity and combines all governance documents into a single operating agreement.iii
Chapter 322C also relaxes the rules of agreement creation. While Chapter 322B required agreements to be in writing and signed by the members,iv under Chapter 322C an operating agreement can be oral, written, implied by a course of dealing, or some combination.v
To ease the transition, Chapter 322C provides that any corporate governance documents that exist as of January 1, 2018 shall be treated as a single document and deemed the LLCs "operating agreement."vi
Under Chapter 322B, Minnesota LLCs were governed by a Board of Governors.vii Similar to shareholders in a corporation, LLC members elect a Board of Governors, who appoint or elect managers to run the business. LLC members could opt to act outside the Board of Governors, but it was not the standard structure.
In contrast, Chapter 322C revises the default rules to provide a member-managed structure, while preserving the ability to opt into a manager-managed or Board of Governor-managed structure.viii This revision not only strips away many of the formalities of the Chapter 322B structure that were often ignored by smaller and informal LLCs, it also brings Minnesota law more in line with limited liability company acts nationwide.
Default Voting and Distribution Rights
Chapter 322C incorporates drastic changes to the default rules for non-dissolution distributions and voting power among the members. Under Chapter 322B, a member's distribution and voting rights were in proportion to the value of their capital contributions.ix In contrast, Chapter 322C provides for equal non-dissolution distribution and voting rights among all members, irrespective of their proportional member share.x
Chapter 322C eliminates all dissenters' rights created by Chapter 322B, including the right to demand an equitable buyout.
Chapters 322B and 322C impose the fiduciary duties of loyalty and care upon members, managers, and governors.xi However, Chapter 322C expands upon these duties and establishes the standards of conduct.xii
More importantly, Chapter 322C allows LLCs to modify – and some circumstances completely eliminate – fiduciary duties altogether, provided such action complies with the members' wishes and is not "manifestly unreasonable."xiii
Will These Changes Apply Automatically? Not Necessarily.
While the changes incorporated into Chapter 322C will be welcomed, LLCs must act to take full advantage of the revised law.
Despite the seemingly clear pronouncement of the "repeal" of Chapter 322B, Chapter 322C preserves much of Chapter 322B for LLCs formed before August 1, 2015.xiv These provisions include:
- Preservation of the LLC's requirement to maintain the corporate records listed in Section 322B.373, subd. 1 at its principle place of business for review and inspection;
- Preservation of the Chapter 322B rules governing acceptance and valuation of capital contributions;
- Preservation of the Chapter 322B rules providing for pro rata sharing of distributions and voting rights; and
- Preservation of the dissenters' rights except for the right to demand an equitable buyout.
To avoid these carry-overs LLCs must update their operating agreements to specifically disclaim these provisions. xv
What Does This Mean?
These revisions represent a wholesale revision of the rules governing Minnesota LLCs. Several key provisions of Chapter 322B, however, are preserved. Thus, if and to what extent these changes apply to a specific LLC demands on that LLC's specific structure.
With this framework, LLC members may consider several factors to ensure the business utilizes the revised laws in the way that best meets its needs. These considerations include:
- Reviewing all corporate governance documents, including any operating agreements, bylaws, member control agreements, and other governance documents to ensure compliance with the revised statutes;
- Considering combining all corporate governance documents into a single operating agreement;
- Reviewing the governance structures established by Section 322C.0407 to determine which structure best meet its business needs ; and
- Revising its operating agreement to disclaim any Chapter 322B rules preserved by Chapter 322C to the extent necessary.
These first steps should help Minnesota's LLCs adapt to the new law and continue to thrive in 2018 and beyond.
1 See Minn. Stat. § 322C.0101, et al.
ii See e.g. Minn. Stat. §§ 322B.366, 322B.37, 322B.373, and 322B.603.
iii Minn. Stat. § 322C.0110.
iv See Minn. Stat. §§ 322B.366, 322B.37, and 322B.373.
v Minn. Stat. § 322C.0102 subd. 17.
vi Minn. Stat. § 322C.1204, subd. 3.
vii Minn. Stat. § 322B.606, subd. 1.
viii Minn. Stat. § 322C.0407.
ix Minn. Stat. § 322B.356, subd. 2 and 322B.50.
x Minn. Stat. §§ 322C.0404 and 322C0407, subd. 2.
xi Minn. Stat. § 322B.663; Minn. Stat. § 322C.0409.
xii Minn. Stat. § 322C.0110.
xiv Minn. Stat. § 322C.1204, subd. 3.