ASSEMBLY, No. 2875

 

STATE OF NEW JERSEY

 

INTRODUCED MARCH 24, 1997

 

 

By Assemblymen STUHLTRAGER and RUSSO

 

 

An Act concerning limited liability companies, amending P.L.1973, c.367 and amending and supplementing P.L.1993, c.210.

 

    Be It Enacted by the Senate and General Assembly of the State of New Jersey:

 

    1. Section 11 of P.L.1993, c.210 (C.42:2B-11) is amended to read as follows:

    11. a. In order to form a limited liability company, one or more authorized persons must execute a certificate of formation. The certificate of formation shall be filed in the office of the Secretary of State and set forth:

    (1) The name of the limited liability company;

    (2) The address of the registered office and the name and address of the registered agent for service of process required to be maintained by section 6 of this act;

    (3) That the limited liability company has two or more members;

    (4) If the limited liability company is to have perpetual existence, regardless of whether the limited liability company is subject to any dissolution contingencies, then the word “perpetual” shall be stated; if the limited liability company is to have a specific date of dissolution, regardless of whether the limited liability company is subject to any dissolution contingencies, the latest date on which the limited liability company is to dissolve; and

    (5) Any other matters the members determine to include therein.

    b. A limited liability company is formed at the time of the filing of the initial certificate of formation in the office of the Secretary of State or at any later date or time specified in the certificate of formation if, in either case, there has been substantial compliance with the requirements of this section. A limited liability company formed under this act shall be a separate legal entity, the existence of which as a separate legal entity shall continue until cancellation of the limited liability company's certificate of formation.

(cf: P.L.1993, c.210, s.11)

    2. Section 14 of P.L.1993, c.210 (C.42:2B-14) is amended to read as follows:

    14. a. A certificate of formation shall be canceled upon the dissolution and the completion of winding up of a limited liability company, [or at any other time there are fewer than two members,] or upon the filing of a certificate of merger or consolidation if the limited liability company is not the surviving or resulting entity in a merger or consolidation.

    b. A certificate of cancellation shall be filed in the office of the Secretary of State to accomplish the cancellation of a certificate of formation upon the dissolution and the completion of winding up of a limited liability company [or at any other time there are not two members] and shall set forth:

    (1) The name of the limited liability company;

    (2) The date of filing of its certificate of formation;

    (3) The reason for filing the certificate of cancellation;

    (4) The future effective date or time (which shall be a date or time certain) of cancellation if it is not to be effective upon the filing of the certificate; and

    (5) Any other information the person filing the certificate of cancellation determines.

    c. A certificate of formation shall not be canceled, and no certificate of cancellation shall be required to be filed, when a limited liability company has only one member, and the certificate of formation shall remain valid when a limited liability company has only one member, if within 90 days of the date on which the limited liability company first had only one member, one or more additional members are admitted. If no additional member is admitted within that 90 day period, the certificate of formation of that limited liability company shall be canceled and a certificate of cancellation shall be filed on and as of the end of that 90 day period.

(cf: P.L.1993, c.210, s.14)

 

    3. Section 18 of P.L.1993, c.210 (C.42:2B-18) is amended to read as follows:

    18. A certificate of formation filed in the office of the Secretary of State is notice that the entity formed in connection with the filing of the certificate of formation is a limited liability company formed under the laws of this State and is notice of all other facts set forth therein which are required or permitted to be set forth in a certificate of formation by paragraphs (1) and (2) of subsection a. of section 11 of this act. If any provision of an operating agreement is inconsistent with the information contained in the certificate of formation of that limited liability company, as amended, on file with the office of the Secretary of State, the operating agreement shall be controlling except with respect to any third party who can show actual and reasonable reliance to the detriment of that third party, upon the information contained in the certificate of formation.

(cf: P.L.1993, c.210, s.18)

 

    4. Section 22 of P.L.1993, c.210 (C.42:2B-22) is amended to read as follows:

    22. a. An operating agreement may provide for classes or groups of members having such relative rights, powers and duties as the operating agreement may provide, and may make provision for the future creation in the manner provided in the operating agreement of additional classes or groups of members having such relative rights, powers and duties as may from time to time be established, including rights, powers and duties senior to existing classes and groups of members. An operating agreement may provide for the taking of an action, including the amendment of the operating agreement, without the vote or approval of any member or class or group of members, including an action to create under the provisions of the operating agreement a class or group of limited liability company interests that was not previously outstanding.

    b. An operating agreement may grant to all or certain identified members or a specified class or group of the members the right to vote, separately or with all or any class or group of managers or members, on any matter. Voting by members may be on a per capita, number, financial interest, class, group or any other basis. [In the absence of any provision in the operating agreement, voting by members shall be on a per capita basis.]

    c. An operating agreement which grants a right to vote may set forth provisions relating to notice of the time, place or purpose of any meeting at which any matter is to be voted on by any manager or class or group of managers, waiver of any such notice, action by consent without a meeting, the establishment of a record date, quorum requirements, voting in person or by proxy, or any other matter with respect to the exercise of any such right to vote.

(cf: P.L.1993, c.210, s.22)

 

    5. Section 24 of P.L.1993, c.210 (C.42:2B-24) is amended to read as follows:

    24. A [person ceases to be a] member [of] shall be dissociated from a limited liability company upon the [happening] occurrence of any of the following events:

    a. Unless otherwise provided in an operating agreement, or with the written consent of all members,

    (1) the limited liability company receives notice of the member’s resignation as a member, or on a later date specified by the member;

    (2) an event agreed to in the operating agreement as causing the member’s dissociation;

    (3) a member:

    [(1) Makes an assignment for the benefit of creditors;

    (2) Files a voluntary petition in bankruptcy;

    (3) Is adjudged bankrupt or insolvent, or has entered against him an order for relief, in any bankruptcy or insolvency proceeding;

    (4) Files a petition or answer seeking for himself any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any statute, law or regulation;

    (5) Files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against him in any proceeding of this nature;

    (6) Seeks]

    (a) becomes a debtor in bankruptcy;

    (b) executes an assignment for the benefit of creditors;

    (c) seeks, consents to or acquiesces in the appointment of a trustee, receiver or liquidator of the member or of all or [any substantial part of his] substantially all of that member’s properties; or

    (d) fails, within 90 days after the appointment, without the member’s consent or acquiescence, of a trustee, receiver or liquidator of the member or of all or substantially all of that member’s properties, to have the appointment vacated or stayed, or fails within 90 days after the expiration of a stay to have the appointment vacated; or

    b. [Unless otherwise provided in an operating agreement, or with the written consent of all members, 120 days after the commencement of any proceeding against the member seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any statute, law or regulation, if the proceeding has not been dismissed, or if within 90 days after the appointment without his consent or acquiescence of a trustee, receiver or liquidator of the member or of all or any substantial part of his properties, the appointment is not vacated or stayed, or within 90 days after the expiration of any such stay, the appointment is not vacated.]

    (1) the member’s expulsion pursuant to the operating agreement;

    (2) the member’s expulsion by the unanimous vote of the other members if:

    (a) it is unlawful to carry on the limited liability company without that member;

    (b) there has been a transfer of all or substantially all of that member’s transferable interest in the limited liability company, other than a transfer for security purposes, or a court order charging the member’s interest;

    (c) within 90 days after the limited liability company notifies a corporate member that it will be expelled because it has filed a certificate of dissolution or the equivalent, its charter has been revoked, or its right to conduct business has been suspended by the jurisdiction of its incorporation, there is no revocation of the certificate of dissolution or no reinstatement of its charter or its right to conduct business; or

    (d) a limited liability company that is a member has been dissolved and its business is being wound up;

    (3) on application by the limited liability company or another member, the member’s expulsion by judicial determination because:

    (a) the member engaged in wrongful conduct that adversely and materially affected the limited liability company’s business;

    (b) the member willfully or persistently committed a material breach of the operating agreement; or

    (c) the member engaged in conduct relating to the limited liability company business which makes it not reasonably practicable to carry on the business with the member as a member of the limited liability company;

    (4) in the case of a member who is an individual:

    (a) the member’s death;

    (b) the appointment of a guardian or general conservator for the member; or

    (c) a judicial determination that the member has otherwise become incapable of performing the member’s duties under the operating agreement;

    (5) in the case of a member that is a trust or is acting as a member by virtue of being a trustee of a trust, distribution of the trust’s entire transferable interest in the limited liability company, but not merely by reason of the substitution of a successor trustee;

    (6) in the case of a member that is an estate or is acting as a member by virtue of being a personal representative of an estate, distribution of the estate’s entire transferable interest in the limited liability company, but not merely by reason of the substitution of a successor personal representative; or

    (7) termination of a member who is not an individual, partnership, corporation, trust or estate.

(cf: P.L.1993, c.210, s.24)

 

    6. (New section) Upon a member’s dissociation, the dissociated member has, subject to section 39 of P.L.1993, c.210 (C.42:2B-39), only the rights of an assignee of a member’s limited liability interest.

 

     7. Section 27 of P.L.1993, c.210 (C.42:2B-27) is amended to read as follows:

    27. a. (1) Unless otherwise provided in an operating agreement, the management of a limited liability company shall be vested in its members in proportion to the then current percentage or other interest of members in the profits of the limited liability company owned by all of the members, the decision of members owning more than 50 percent of the then current percentage or other interest in the profits controlling; (2) provided, however, that if an operating agreement provides for the management, in whole or in part, of a limited liability company by [a manager] one or more managers, the management of the limited liability company, to the extent so provided, shall be vested in the manager or managers who shall be chosen by the members in the manner provided in the operating agreement. The [manager] managers shall also hold the offices and have the responsibilities accorded to [him] them by the members and set forth in an operating agreement. Subject to section 37 of this act, a manager shall cease to be a manager as provided in an operating agreement.

    b. (1) If a limited liability company is managed by its members, unless otherwise provided in the operating agreement, each member shall have the authority to bind the limited liability company. In addition, unless otherwise provided in the operating agreement, or to the extent that a court of competent jurisdiction determines that the operating agreement is without effect in this regard, each member in a limited liability company managed by its members shall also have the authority to file for insolvency or reorganization under appropriate State or federal law, so long as that filing has the prior approval of members then owning more than 50 percent of the interests in the profits of the limited liability company.

    (2) If the limited liability company is managed by a manager or managers, the managers shall, in addition to all other authority accorded by the operating agreement, have the authority to file for insolvency or reorganization under appropriate State or federal law, unless otherwise provided in the operating agreement, except to the extent a court of competent jurisdiction determines that the operating agreement is without effect in this regard.

(cf: P.L.1993, c.210, s.27)

 

    8. Section 39 of P.L.1993, c.210 (C.42:2B-39) is amended to read as follows:

    39. a. Except as provided in this act, upon resignation any resigning member is entitled to receive any distribution to which he is entitled under an operating agreement and, if not otherwise provided in an operating agreement, he is entitled to receive, within a reasonable time after resignation, the fair value of his limited liability company interest as of the date of resignation based upon the net present value of his right to share in distributions from the limited liability company, less all applicable valuation discounts, unless the operating agreement provides for another distribution formula. If the resignation of a member violates an operating agreement, in addition to any remedies otherwise available under applicable law, a limited liability company may recover from the resigning member damages for breach of the operating agreement and offset the damages against the amount otherwise distributable to the resigning member.

    b. As used in subsection a. of this section, “all applicable valuation discounts” shall include discounts for lack of liquidity, relative size of holding, absence of any trading market and comparable factors.

(cf: P.L.1993, c.210, s.39)

 

    9. Section 44 of P.L.1993, c.210 (C.42:2-44) is amended to read as follows:

    44. a. A limited liability company interest is assignable in whole or in part except as provided in an operating agreement. The assignee of a member's limited liability company interest shall have no right to participate in the management of the business and affairs of a limited liability company except as provided in an operating agreement and upon:

    (1) The approval of all of the members of the limited liability company other than the member assigning his limited liability company interest; or

    (2) Compliance with any procedure provided for in the operating agreement.

    b. Unless otherwise provided in an operating agreement:

    (1) An assignment entitles the assignee to share in the profits and losses, to receive the distribution or distributions, and to receive the allocation of income, gain, loss, deduction, or credit or similar item to which the assignor was entitled, to the extent assigned;

    (2) A member ceases to be a member and to have the power to exercise any rights or powers of a member upon assignment of all of his limited liability company interest; and

    (3) The pledge of, or granting of a security interest, lien or other encumbrance in or against, any or all of the limited liability company interest of a member shall not cause the member to cease to be a member or to have the power to exercise any rights or powers of a member.

    c. An operating agreement may provide that a member's interest in a limited liability company may be evidenced by a certificate of limited liability company interest issued by the limited liability company.

    d. Unless otherwise provided in an operating agreement and except to the extent assumed by agreement, until an assignee of a limited liability company interest becomes a member, the assignee shall have no liability as a member solely as a result of the assignment.

    e. An assignee shall have no authority to seek or obtain a court order dissolving or liquidating a limited liability company.

(cf: P.L.1993, c.210, s.44)

 

    10. Section 45 of P.L.1993, c.210 (C.42:2B-45) is amended to read as follows:

    45. On application to a court of competent jurisdiction by any judgment creditor of a member, the court may charge the limited liability company interest of the member with payment of the unsatisfied amount of the judgment with interest. To the extent so charged, the judgment creditor has only the rights of an assignee of the limited liability company interest. An action by a court pursuant to this section does not deprive any member of the benefit of any exemption laws applicable to his limited liability company interest. A court order charging the limited liability company interest of a member pursuant to this section shall be the sole remedy of a judgment creditor, who shall have no right under P.L.1993, c.210 (42:2B-1 et seq.) or any other State law to interfere with the management or force dissolution of a limited liability company or to seek an order of the court requiring a foreclosure sale of limited liability company interest. Nothing in this section shall be construed to affect in any way the rights of a judgment creditor of a member under federal bankruptcy or reorganization laws.

(cf: P.L.1993, c.210, s.45)

 

    11. Section 48 of P.L.1993, c.210 (C.42:2B-48) is amended to read as follows:

    48. A limited liability company is dissolved and its affairs shall be wound up upon the first to occur of the following:

    a. [At] Unless the certificate of formation specifies that the limited liability company is perpetual, at the time specified in an operating agreement, or 30 years from the date of the formation of the limited liability company if no [such] specified time for dissolution and winding up, regardless of any dissolution contingencies, is set forth in the operating agreement;

    b. Upon the happening of events specified in an operating agreement;

    c. The written consent of all members, which includes written consent of the sole remaining member of a limited liability company;

    d. [The death, retirement, resignation, expulsion, bankruptcy or dissolution of a member or the occurrence of any other event which terminates the continued membership of a member in the limited liability company unless the business of the limited liability company is continued either by the consent of all the remaining members within 90 days following the occurrence of any such event or pursuant to a right to continue stated in the operating agreement] Ninety days after the date on which the limited liability company has only one member, unless at least one additional member is admitted within 90 days after the date on which the limited liability company had only one member; or

    e. The entry of a decree of judicial dissolution under section 49 of this act.

(cf: P.L.1993, c.210, s.48)


    12. Section 50 of P.L.1993, c.210 (C.42:2B-50) is amended to read as follows:

    50. a. Unless otherwise provided in an operating agreement, a manager who has not wrongfully dissolved a limited liability company or, if there is no manager, the members or a person approved by the members or, if there is more than one class or group of members, then by each class or group of members, in either case, by members who own more than 50 percent of the then current percentage or other interest in the profits of the limited liability company owned by all of the members or by the members in each class or group, as appropriate, may wind up the limited liability company's affairs; but the [Court of] Chancery Division, General Equity Part of Superior Court, upon cause shown, may wind up the limited liability company's affairs upon application of any member or manager, his legal representative or assignee, and in connection therewith, may appoint a liquidating trustee.

    b. Upon dissolution of a limited liability company and until the filing of a certificate of cancellation as provided in section 14 of this act, the persons winding up the limited liability company's affairs may, in the name of, and for and on behalf of, the limited liability company, prosecute and defend suits, whether civil, criminal or administrative, gradually settle and close the limited liability company's business, dispose of and convey the limited liability company's property, discharge or make reasonable provision for the limited liability company's liabilities, and distribute to the members any remaining assets of the limited liability company, all without affecting the liability of members and managers and without imposing liability on a liquidating trustee.

(cf: P.L.1993, c.210, s.50)

 

    13. (New section) a. Each domestic and foreign limited liability company shall file an annual report with the office of the Secretary of State, setting forth:

    (1) the name and address of the limited liability company;

    (2) the name and address of the registered agent of the limited liability company; and

    (3) the name and addresses of the managing members or managers, as the case may be.

    b. If no annual report is filed as required by this section for two consecutive years,

    (1) the certificate of a domestic limited liability company shall be transferred to an inactive list maintained by the Secretary of State. A limited liability company on the inactive list shall remain a limited liability company and the limited liability of its members and managers shall not be affected by its transfer to this list. The name of a limited liability company on the inactive list shall, subject to any other rights that limited liability company may have to its name, be available for use by any other limited liability company, including a newly-formed limited liability company.

    (2) the certificate of a foreign limited liability company may be revoked by the Secretary of State.

 

    14. Section 2 of P. L.1973, c.367 (C.54:50-13) is amended to read as follows:

    2.    Until all taxes owing by it have been paid, or provided for as set forth in section 4 of P.L.1973, c.367 (C.54:50-15):

    a. no domestic or foreign corporation shall merge or consolidate into a foreign corporation not authorized to transact business in this State; and

    b. no domestic corporation shall dissolve and no domestic or foreign corporation shall distribute any of its assets in dissolution or liquidation to any shareholder unless

    (1) one or more domestic corporations or foreign corporations authorized to transact business in this State are owners in the aggregate of 50% or more of all classes of such corporation's capital stock and, prior to such dissolution or distribution, all such holders of the corporation's capital stock jointly and severally undertake in writing to pay all such taxes on or before the date such taxes are payable; or

    (2) such corporate action is pursuant to a plan of reorganization under which a domestic corporation or a foreign corporation authorized to transact business in this State has purchased, or is about to purchase, all, or substantially all, of the assets of such corporation in exchange for shares of its capital stock and has undertaken in writing to pay all such taxes on or before the date such taxes are payable; and

    c. no business entity shall merge or consolidate into any other business entity other than a domestic [corporation] business entity or a foreign [corporation] business entity authorized to transact business in this State.

(cf: P.L.1995, c.279, s.23)

 

    15. Section 3 of P.L.1973, c.367 (C.54:50-14) is amended to read as follows:

    3. The Secretary of State shall not:

    a. accept for filing a certificate of dissolution of a domestic corporation;

    b. issue a certificate of withdrawal of a foreign corporation, unless such withdrawal is effected by its merger or consolidation into a domestic corporation or a foreign corporation authorized to transact business in this State;

    c. accept for filing a certificate of merger or consolidation of a domestic corporation into a foreign corporation not authorized to transact business in this State; or

    d. accept for filing a certificate of merger or consolidation of any business entity into any other business entity other than a domestic [corporation] business entity or a foreign [corporation] business entity authorized to transact business in this State;

    unless the business entity files with the Secretary of State a certificate issued by the Director of the Division of Taxation dated not earlier than 45 days prior to the effective date of the business entity action evidencing that the business entity's taxes have been paid or provided for.

(cf: P.L.1995, c.279, s.24)

 

    16. This act shall take effect immediately.

 

 

STATEMENT

 

    This bill makes revisions to the “New Jersey Limited Liability Company Act” as suggested by the 1995 Annual Report of the New Jersey Corporate and Business Law Study Commission, and in recognition of recent Internal Revenue Service “check-the-box” regulations, to put domestic and foreign business entities authorized to transact business in New Jersey on a more “level playing field” with similar entities in other states.

    Significant among these revisions, the bill: allows for perpetual existence of a limited liability company, as permitted by the recent IRS rules; permits a limited liability company to continue temporarily with only one member, so long as one or more additional members are added within 90 days; revises the termination of membership provisions; authorizes each member of a limited liability company, when managed by its members, to bind the limited liability company, including the authority to file for insolvency or reorganization on behalf of the limited liability company; clarifies the rights of a resigning member to receive the fair value of the member’s interest as of the date of resignation; and finally, adds a new section to the act requiring limited liability companies to file an annual report with the Secretary of State.

    The New Jersey Corporate and Business Law Study Commission is charged with studying and reviewing statutes, legislation and decisions of the courts of New Jersey and other states relating to business entities, including business and nonprofit corporations, partnerships and the issuance of ownership interests and securities, and then reporting annually to the Governor and the Legislature concerning its findings.


                             

Revises law concerning limited liability companies.