A Brief Overview of Nebraska's Recent Adoption of the Revised Uniform Limited Liability Company Act
On April 1, 2010, Legislative Bill 888, adopting the Nebraska Uniform Limited Liability Company Act (the "New Act"), was signed into law. The New Act is largely based on the Revised Uniform Limited Liability Company Act, as drafted by the National Conference of Commissioners on Uniform State Laws in 2006. The New Act became operative January 1, 2011, but provides a two year grace period so that limited liability companies existing prior to that date will not be subject to the New Act until January 1, 2013 (unless they opt in earlier). Limited liability companies ("LLCs") formed on or after January 1, 2011, will be governed by the New Act.Key Differences Between the New Act and the Current LLC Act
One of the major improvements of the New Act is that it expressly is a default statute, meaning that most matters will be governed by the Operating Agreement entered into by the members of the LLC (with certain enumerated exceptions), and the New Act will govern when the Operating Agreement is silent. Nebraska’s current Limited Liability Company Act (the "Current LLC Act") is not expressly a default statute and is silent on a number of issues, leaving LLC members and their legal counsel uncertain as to what matters they can or cannot include in an Operating Agreement. Additionally, while the Current LLC Act makes no mention of fiduciary duties, the New Act clarifies certain obligations that are included within the duties of loyalty and care owed by a member of a member-managed LLC (or a manager of a manager-managed LLC). The New Act specifically addresses how members of an LLC may treat fiduciary duties within the Operating Agreement.
Practical Considerations for Drafting Operating Agreements Under the New Act
Management. An LLC may continue to be manager-managed or member-managed under the New Act. If the Operating Agreement is silent as to whether the LLC is manager-managed or member-managed, the LLC will be member-managed by default. In a member-managed LLC, ordinary course matters are decided by a majority of the members (with each member having one vote), while acts outside the ordinary course of business require the consent of all members by default. In a manager-managed LLC, ordinary course decisions are decided by a majority of the managers, while actions outside the ordinary course of business (e.g., sale of substantially all of the assets, merger, etc.) must be approved by all of the members by default. The management of the LLC and the procedures and approvals required to implement such management are matters that should be expressly addressed in the Operating Agreement to the extent the default provisions of the New Act are not desired.
Voting. The New Act’s default rule provides that every member has an equal vote on matters if the parties do not otherwise provide for alternative voting methods in the Operating Agreement (i.e., each member has one vote regardless of the amount of capital contributed to the LLC). A similar concept applies to manager voting. In practice, the Operating Agreements of most LLCs usually provide for voting rights equal to the member’s ownership interest in the LLC. However, under the New Act, not providing for voting provisions in the Operating Agreement could cause a member owning only 10% of the LLC’s interests to have an equal vote with another member owning 90% of the LLC’s interests. Accordingly, this is an area that should be expressly covered in the Operating Agreement.
Distributions. The default provisions of the New Act provide that any non-liquidating distributions must be made in equal shares among members and dissociated members. The New Act’s default provisions also provide that liquidating distributions are to be made (after paying off all LLC debts) to the members (i) in accordance with unreturned contributions and then (ii) in equal shares among members and dissociated members. LLC members will want to expressly provide for the manner in which distributions will be made in the Operating Agreement to ensure that the economics desired by the members is appropriately reflected.
Transfer of LLC Interests. The New Act defines a "transferable interest" as the right to receive distributions from the LLC pursuant to the Operating Agreement. Under the New Act, a transferable interest is personal property that may be transferred (although a transferee is generally only entitled to the economic rights of the interest and not any voting or management rights). The New Act also provides, however, that a transfer of a transferable interest in violation of a restriction on transfer contained in the Operating Agreement is ineffective as to a person having notice of the restriction at the time of transfer. Thus, any desired restrictions on transferability should be addressed in the Operating Agreement.
The Bottom LineAs this article has highlighted, under the New Act it is extremely important that an LLC’s Operating Agreement be carefully drafted to ensure that the members’ desired arrangement is appropriately reflected so as to avoid the application of undesirable default rules. If you have an existing Nebraska LLC and have not reviewed your Operating Agreement since the passage of the New Act, or if you are planning on forming a new Nebraska LLC, please contact the authors or another member of our Business / General Counsel Practice Group to discuss the potential impact of the New Act on your LLC in more detail.
By Taylor C. Dieckman and Stephanie N. Mahlin