OLR Bill Analysis
AN ACT CONCERNING ADOPTION OF THE CONNECTICUT UNIFORM LIMITED LIABILITY COMPANY ACT.
This bill makes many changes to the laws governing limited liability companies (LLCs). The bill includes provisions that apply to domestic LLCs, which are formed under Connecticut law, and foreign LLCs, which are formed under another jurisdiction's law and registered to do business in Connecticut. Its rules generally apply when an LLC's operating agreement does not cover a particular matter, except for certain items that the bill does not allow in an agreement or that an agreement cannot change.
Among its major provisions, the bill:
1. adds more detailed provisions on fiduciary duties and charging orders against members (court orders to collect a debt);
2. changes when a member can bind the LLC as an agent;
3. adds provisions on derivative actions by a member;
4. makes changes to the provisions governing mergers between LLCs, including mergers with foreign LLCs, and adds provisions governing interest exchanges; and
5. allows an LLC's operating agreement to include certain aspects of its governance, such as designating whether it is managed by its members or a manager.
The bill also modifies terminology, changing the name of an LLC's founding document from “articles of organization” to “certificate of organization.” For LLC's formed before the bill takes effect, their articles of organization are deemed certificates of organization and any language in them determining the LLC's management structure is considered to be in the operating agreement for purposes of the bill's requirements (§ 10).
The bill's provisions govern all LLCs beginning July 1, 2017 (§ 10).
The below analysis describes the bill's significant changes and new provisions. The bill makes many other minor changes.
EFFECTIVE DATE: July 1, 2017
§§ 2 & 5-7 — OPERATING AGREEMENTS
Currently, an LLC's operating agreement can cover the regulation and management of the LLC's affairs, including appointment or designation of officers by the members or managers, as consistent with its articles of organization and the law. For a manager-managed LLC, the operating agreement may establish the number; qualifications; and selection, removal, and replacement method of managers.
The bill eliminates these specific provisions and instead adds general provisions allowing the operating agreement to govern:
1. relations among the members and between the members and the LLC,
2. a manager's rights and duties,
3. the LLC's activities and affairs and their conduct, and
4. how to amend the operating agreement.
All provisions of the bill may be varied by the operating agreement except for the 14 specific items listed below (see Prohibited Contents). The bill's provisions govern the matters described above if they are not covered by the operating agreement.
Currently, an operating agreement can be in writing or oral. The bill allows it to be in a record, oral, implied, or any combination of these (§ 2).
Prohibited Contents of Operating Agreement
The bill prohibits the operating agreement from:
1. applying another state's law to govern a domestic LLC;
2. changing an LLC's capacity to sue and be sued in its own name;
3. changing the bill's provisions on registered agents or the secretary of the state, including provisions on delivering records to the secretary for filing;
4. varying the provisions that allow a person to ask a court to order someone to sign or deliver a document or the secretary to file it (see § 28);
5. altering or eliminating the duties of loyalty or care, except as provided below;
6. eliminating the implied contractual obligation of good faith and fair dealing under the bill (but the operating agreement may prescribe the standards, if not manifestly unreasonable, used to measure performance of the obligation);
7. relieving or exonerating a person from liability for conduct involving bad faith, willful or intentional misconduct, or knowing violation of law;
8. unreasonably restricting the duties and rights regarding access to LLC information (see § 48)(but the operating agreement may impose reasonable restrictions on its availability and use and may define appropriate remedies, including liquidated damages, for a breach of any reasonable use restriction);
9. varying certain causes of dissolution (when the LLC's activities are unlawful, it is not reasonably practicable to continue the LLC's activities, or managers or members are acting illegally or oppressively);
10. varying certain requirements regarding winding up the LLC;
11. unreasonably restricting the right of a member to maintain a direct or derivative action against the LLC (see §§ 64 to 69);
12. varying the provisions on special litigation committees regarding derivative suits, but the operating agreement may prohibit having such a committee;
13. varying the required contents of a plan of merger or interest exchange; or
14. restricting the rights under the bill of someone who is not a member or manager, with some exceptions.
Varying Members' Duties (§ 5)
Under the bill, an operating agreement may:
1. specify how a specific act or transaction that would otherwise violate the duty of loyalty may be authorized or ratified by disinterested persons after full disclosure of all material facts and
2. alter the bill's rule on making distributions, but only if it still requires the LLC's total assets to at least equal the sum of its total liabilities (see § 43).
To the extent the operating agreement of a member-managed LLC expressly relieves a member of a responsibility that the member otherwise would have under the bill's provisions and imposes the responsibility on one or more other members, the operating agreement may correspondingly eliminate or limit that member's fiduciary duty related to the responsibility.
Also, if not manifestly unreasonable, the bill allows an operating agreement to:
1. alter or eliminate a member's or manager's duty of loyalty (see § 47);
2. identify specific types or categories of activities that do not violate the duty of loyalty;
3. alter the duty of care, but not authorize conduct involving bad faith, willful or intentional misconduct, or a knowing violation of law; and
4. alter or eliminate any other fiduciary duty.
Under the bill, a court must determine whether a term is manifestly unreasonable as of the time the term became part of the operating agreement and consider only the circumstances existing at that time. It may invalidate the term only if, in light of the LLC's purposes and affairs, it is readily apparent that the (1) term's objective is unreasonable or (2) term is an unreasonable means to achieve its objective.
Binding Authority of Operating Agreement (§ 6)
Under the bill, an LLC is bound by and can enforce the operating agreement whether or not the company assented to it. Someone who becomes a member is deemed to assent to the agreement. Two or more people who are becoming the LLC's initial members can make an agreement that becomes the operating agreement when the LLC is formed. One person may do so as well.
Agreement Amendments (§ 7)
The bill allows an operating agreement to specify that amending it requires the (1) approval of a person that is not a party to the agreement or (2) satisfaction of a condition. If the agreement includes such a provision, an amendment is ineffective if its adoption does not include the required approval or satisfy the condition.
The bill provides that the operating agreement governs the LLC's and its members' obligations to a person who is a transferee or who dissociated as a member. Subject only to a court order to collect a distribution under a charging order, the bill makes an operating agreement amendment made after a person becomes a transferee or dissociates:
1. effective as to an LLC or member debt, obligation, or liability to the transferee or dissociated member and
2. ineffective to the extent it imposes a new debt, obligation, or liability on the transferee or dissociated member.
The bill makes an operating agreement provision in a record delivered by the LLC to the secretary ineffective if the bill prohibits its inclusion in the operating agreement.
If a record delivered to the secretary becomes effective and conflicts with an operating agreement provision, the bill provides that the agreement prevails as to members, dissociated members, transferees, and managers, but the record prevails as to others to the extent they reasonably rely on the record.
§ 9 — PROFESSIONAL SERVICES LLC
Under the bill, an LLC formed on or after July 1, 2017 to render professional services must include in its name "professional limited liability company," "P.L.L.C.," or "PLLC." It allows "Limited" to be abbreviated as "Ltd." and "company" as "Co.".
Existing law lists numerous professions that can be part of a professional services LLC. The bill adds physician assistants to this list (§ 2).
§§ 12-14 — LLC NAMES
The law requires the name of an LLC to be distinguishable on the secretary's records. The bill specifies that:
1. a person can consent in a record to allow another to use its name if the person granting consent submits a form to change its name in a distinguishable way on the secretary's records;
2. the secretary cannot consider words, phrases, or abbreviations indicating a type of person, such as "corporation", "corp.", "incorporated", "Inc.", "professional corporation", "P.C.", "PC", "Limited", "Ltd.", "limited partnership", "professional limited liability company", "P.L.L.C.", "PLLC", "limited liability partnership", "L.L.P.", or "LLP" when determining if a name is distinguishable;
3. a person may consent in a record to the use of a name that is not distinguishable from its name except for the addition of a word, phrase, or abbreviation as described above and the person need not change its name; and
4. an LLC's name cannot contain language stating or implying that it is organized for a purpose not allowed under the bill.
Reserving Names (§§ 13 & 14)
By law, a person can reserve a name for an LLC for 120 days. The bill eliminates the ability to renew the reservation for successive 120 day periods. It also eliminates a provision allowing someone who has reserved a name to cancel the reservation.
Similarly, under current law, a foreign LLC intending to register in Connecticut can reserve a name with the secretary for 120 days, with the option to renew it for successive 120-day periods. The bill instead allows a foreign LLC to register a name for one year, with the option to renew it for successive one-year periods by filing within 90 days of the registration's expiration. The bill allows the foreign LLC to consent in a signed record to allow another entity to use the name.
§§ 15-19 — REGISTERED AGENTS
The law requires LLCs to designate someone to receive legal process in Connecticut on their behalf. The bill changes the term for this person from “statutory agent for service” to “registered agent.” It makes a number of minor changes regarding these agents. Among them, the bill specifies that by designating the agent the LLC affirms that the agent consents to serving in this role.
The bill specifies that the agent's only duties under the bill are to:
1. forward to the domestic or foreign LLC, at the address the LLC most recently supplied to the agent, any process, notice, or demand served on or received by the agent;
2. notify the domestic or foreign LLC if he or she resigns, at the address the LLC most recently supplied to the agent; and
3. provide notice if he or she changes his or her name or address.
As under current law, an LLC must file with the secretary when the agent changes its address and an LLC can appoint a new agent at any time. The bill specifies that the LLC's members or managers need not approve these filings (§ 16).
The bill eliminates specific provisions requiring a domestic or foreign LLC to appoint a new agent when its appointed agent dies, dissolves, or leaves the state. But it generally requires LLCs to designate and maintain agents, which appears to cover these circumstances.
Resignation (§ 17)
By law, an agent can resign its position. The bill specifies that:
1. when a certificate of resignation takes effect, the agent ceases its responsibilities for any matter later given to it as agent;
2. the resignation does not affect any contractual rights between the LLC and the agent; and
3. the agent may resign whether or not the LLC is in good standing.
Change of Agent's Address or Name (§ 18)
Current law requires an LLC to inform the secretary “forthwith” when the agent changes its address. The bill instead requires the agent to inform the secretary within 30 days of the address change and also requires the agent to inform the secretary within 30 days of any name change. The bill also requires the agent, within 30 days of filing with the secretary, to notify the LLC of the change.
Service When the LLC Does Not Have an Agent (§ 19)
Currently, when an LLC does not have an agent or the serving officer attaches an affidavit stating that the agent cannot be served after using reasonable diligence, the officer can serve legal papers by (1) serving or mailing them to the secretary and (2) mailing them to the LLC's office (the principal office of a domestic LLC or the office designated in the articles of formation for a foreign LLC).
1. no longer requires service on the secretary;
2. no longer requires an affidavit from the serving officer when an agent cannot be found;
3. requires mailing the papers to the LLC's principal office address found in the LLC's most recent annual report;
4. allows use of a commercial delivery service, in addition to the U.S. Mail; and
5. makes service effective the earliest of (a) the date the LLC receives the mail; (b) the date shown on a return receipt signed by the LLC; or (c) five days after correctly addressing, paying postage for, and depositing the papers with the U.S. Mail or delivery service.
Service on Others (§ 19(d))
The bill eliminates a provision that allows serving legal papers on any LLC manager or a member acting as a manager (1) in person, (2) by leaving it at the member's usual place of abode in this state, or (3) at the manager's usual place of abode in this state if the manager is an individual.
The bill instead allows service on an individual in charge of any regular place of business of the LLC, if the individual is not a plaintiff, when service cannot be made on the agent or secretary as appointed agent for a foreign LLC.
§ 22 — FEES
The bill adds fees for filing the following documents with the secretary:
1. certificate of interest exchange, $60;
2. certificate of abandonment, $50;
3. statement of withdrawal of foreign LLC, $120;
4. registration of name or a removal of registration of name, $60;
5. statement of correction, $100; and
6. transfer of registration, $60 plus the qualification fee.
§ 24 — EFFECT OF REPEALING EXISTING LAW
The bill's repeal of current law governing LLCs does not affect (1) the operation of statutes or actions taken under them before their repeal; (2) any ratification, right, remedy, privilege, obligation, or liability acquired, accrued, or incurred under the statute before its repeal; (3) any violation of a statute, penalty, forfeiture, or punishment incurred before its repeal; or (4) any proceeding, reorganization, or dissolution begun under a statute before its repeal that may be completed in accordance with the statute as if it had not been repealed.
§ 25 — FORMING AN LLC
The bill renames the LLC's founding document filed with the secretary the certificate of organization, instead of the articles of organization.
The bill eliminates requirements that the:
1. LLC's organizers prepare a written document to be held with the LLC's records with the names and addresses of initial members and, if manager-managed, managers and
2. LLC maintain a record of members and managers.
Current law requires the articles of organization to state whether the LLC is member- or manager-managed. The bill instead requires that the operating agreement state if the LLC will be manager-managed. It specifies that the certificate of organization can contain other matters, but not provisions prohibited from being in an operating agreement.
The bill no longer requires that the certificate of organization state the nature of the LLC's business or purposes or that it will engage in any lawful activity. It requires the certificate to state a member's or manager's name and business and residential address, but the secretary can allow only a business address if there is good cause, such as exposing the person's personal security to significant risk (current law requires this information in a separate record).
The bill makes a number of other minor changes to these documents.
§ 26 — INACCURACIES IN A CERTIFICATE OF ORGANIZATION
The bill requires a member of a member-managed LLC or manager of a manager-managed LLC who knows that information in a filed certificate of organization is inaccurate to (1) have the certificate amended or (2) if appropriate, deliver to the secretary a statement of change of agent or statement of correction (see § 33). It also makes minor changes to amendment procedures.
§§ 27 & 28 — SIGNING DOCUMENTS
Currently, a document filed with the secretary must be signed by:
1. an organizer if the LLC has not been formed;
2. a member if the LLC is member-managed or a manager if the LLC is manager-managed;
3. a fiduciary if the LLC is in the hands of a receiver, trustee, or court-appointed fiduciary; or
4. a person on behalf of another person, if authorized by a power of attorney.
The bill instead requires:
1. an organizer to sign the initial certificate of organization,
2. a person authorized by the LLC to sign other documents,
3. a person winding up the LLC's affairs to sign on behalf of a dissolved corporation,
4. a person to sign any records delivered on behalf of that person,
5. an agent to sign any records, and
6. the legal representative of a deceased or incompetent person to sign if the bill requires that person's signature.
The bill specifies that (1) an agent's or legal representative's signature affirms the person's authority to sign, (2) the secretary is not required to verify a signature's authenticity or the signer's authority to commit the LLC, and (2) accepting a document does not validate the signature or person signing.
Action to Force Signing or Filing (§ 28)
If a person required to sign or deliver a record to the secretary under the bill does not do so, the bill allows an aggrieved person to ask the Superior Court to order the (1) person to sign or deliver the record or (2) secretary to file the record unsigned. If the person seeking the court order is not the LLC that is the subject of the record, the LLC must become a party in the action.
§ 29 — HARM CAUSED BY INACCURATE RECORDS
Under the bill, a person who suffers a loss by relying on inaccurate information in a record filed by the secretary may recover damages from a:
1. person who (a) signed the record or caused another to sign it on the person's behalf and (b) knew the information was inaccurate at the time of signing and
2. member of a member-managed LLC or manager of a manager-managed LLC if the (a) record was delivered for filing on the LLC's behalf and (b) member or manager had notice of the inaccuracy for a reasonably sufficient time before the information was relied on so that the member or manager reasonably could have taken appropriate action to correct the information.
To the extent that the operating agreement of a member-managed LLC expressly relieves a member of responsibility for maintaining the accuracy of information in LLC records filed with the secretary and imposes responsibility on another member or members, the bill provides that the member relieved of responsibility is not liable under this provision and the other member or members are responsible.
§§ 30-32 — FILING DOCUMENTS WITH THE SECRETARY
The bill makes (1) a certificate of organization or foreign registration statement effective when filed with the secretary and (2) other records effective when filed by the secretary or at a later time specified in the record, up to 90 days after filing.
The bill allows filing a statement of withdrawal to withdraw a record delivered to the secretary, if the record has not taken effect. The statement must (1) identify the record being withdrawn and (2) be signed by all those who signed the original record or state that all parties agreed to withdrawal or it is done as the operating agreement allows. When filed by the secretary, the original record does not take effect.
The bill also makes minor changes to the filing requirements for documents.
§ 33 — CORRECTION STATEMENT
The bill allows a person on whose behalf a record was delivered to the secretary to correct the record if it was (1) inaccurate when filed or (2) defectively signed or electronically transmitted. The person must file a signed statement of correction identifying the record and identifying and correcting the record's inaccuracy or defect. The correction statement cannot (1) have a delayed effective date, (2) be effective before the original record's filing date, or (3) take effect more than 90 days after the original record's filing date.
A correction statement is effective as of the effective date of the filed record. But it is effective on the date it is filed as to (1) anyone who relied on the original record and was adversely affected by the correction and (2) certain others, related to a dissolution or entity transaction.
§ 34 — FILING BY SECRETARY
The bill specifies that the secretary must file a record delivered for filing and this duty is ministerial. The secretary must record it as filed at the time it was delivered and deliver acknowledgement of the time of filing to the person that submitted the record.
If the secretary refuses to file a record, she must, within 15 business days of the record's delivery, (1) return it or notify the person that submitted it of the refusal and (2) briefly explain the reason for refusal. The person that submitted the record may petition the Superior Court to compel the record's filing, attaching to the petition the record and the secretary's explanation. The court may decide the matter in a summary proceeding.
The filing of or refusal to file a record does not create a presumption about the accuracy of information in the record.
Except as required by other law or when serving legal papers as provided in the bill, the secretary may deliver a record to a person by delivering it: (1) in person to the person that submitted it; (2) to the person's principal office; or (3) to another address, including an email address, that the person provided the secretary for delivery.
§ 35 — CERTIFICATE OF GOOD STANDING OR REGISTRATION
The bill allows the secretary, on anyone's request, to issue a certificate of good standing for an LLC or a certificate of registration for a registered foreign LLC. The certificate issued must state:
1. the LLC's name or registered foreign LLC's name used in Connecticut;
2. for a domestic LLC, that: (a) no statement of dissolution, administrative dissolution, or termination has been filed; (b) the secretary's records do not reflect that the company has been dissolved or terminated; (c) the LLC has filed all annual reports due; and (d) no dissolution by forfeiture proceedings are pending (the secretary can begin these proceedings for failure to file an annual report or maintain an agent); and
3. for a registered foreign LLC, that it is registered to do business in Connecticut and has filed all annual reports due.
The bill allows someone to rely on the certificate as conclusive evidence of the facts stated in it.
§ 36 — ANNUAL REPORT
By law, domestic and foreign LLCs must file annual reports with the secretary. The bill alters their due dates. It requires filing annual reports between January 1 and April 1 each year (beginning with the calendar year after filing as an LLC or registering as a foreign LLC), instead of current law requiring filing on the anniversary of filing the LLC's original documents.
The bill makes a number of other changes including eliminating provisions:
1. requiring the secretary to deliver or email each LLC a notice that its annual report is due and
2. prohibiting the secretary from accepting an LLC's annual report until it submits overdue reports.
As under existing law, the secretary may return an incomplete report to the LLC.
§ 37 — MEMBERS AS AGENTS OF LLC
Under the bill, a member is not an agent of an LLC solely because he or she is a member. Status as a member does not prohibit other law from imposing liability on an LLC because of the person's conduct.
This replaces current law which (1) makes every member an agent of the LLC for the purpose of its affairs and each member's acts carrying on the LLC's usual affairs binding on the LLC (unless the member actually has no authority to act and the person with whom the member is dealing knows it) but (2) in a manager-managed LLC, provides that members are not agents solely because they are members.
The bill eliminates specific provisions that (1) a member's admission or representation about the LLC's affairs within the scope of his or her authority may be used as evidence against the LLC and (2) in a manager-managed LLC, a manager's admission or representation about the LLC's affairs within the scope of authority may be used as evidence against the LLC and a member's admission or representation acting solely in their capacity as a member may not be used as evidence.
§ 38 — LIABILITY OF MEMBERS
By law, LLC members and managers are not liable for LLC debts or other obligations solely because they are members or managers. The bill specifies that the LLC's failure to observe formalities in exercising its powers or managing its activities and affairs is not a ground for imposing liability on a member or manager.
Current law specifies that the LLC laws do not affect other laws in effect on October 1, 1993 applicable to professional relationships, liability of those providing professional service, and the standards of professional conduct. The bill extends this to laws in effect on the bill's effective date (July 1, 2017).
The bill eliminates a specific provision that a member or manager is not a proper party to a proceeding by or against an LLC solely because he or she is a member or manager, except when the proceeding is to enforce a member's or manager's right against or liability to the LLC or as otherwise provided in an operating agreement.
§ 39 — ADMITTING MEMBERS
The bill changes the rules for admitting members.
Under current law, someone becomes an LLC member by:
1. acquiring an LLC interest from the LLC under the operating agreement or by consent of a majority in interest of members or
2. becoming an assignee of an LLC interest if (a) the assignor validly gives the assignee that right under the operating agreement or (b) a majority in interest of members, excluding the assignor, consent, unless the operating agreement provides otherwise.
Under the bill, a person becomes a member after formation (1) as provided in the operating agreement, (2) as the result of a transaction under the Entity Transaction Act (which involves transactions such as mergers of different types of entities), (3) with the unanimous consent of the members, or (4) with the consent of transferees with the right to receive the majority of distributions when the LLC has no members.
Under the bill, a majority in interest of the members for this and other provisions of the bill are members owning more than 50% of the LLC's transferable interests, excluding transferable interests not owned by the members. If it is not possible to make this determination based on the operating agreement, the majority in interest of the members means:
1. the members who would receive more than 50% of the distributions with respect to the dissolution of the LLC at the time of the vote if there would be distributions or
2. if there would not be distributions, the members who at the time of the vote contributed more than 50% the unreturned capital contributions to the LLC since its formation (§ 2).
The bill specifies that a person may become a member without acquiring a transferable interest or making or being obligated to make a contribution to the LLC.
§ 41 — MEMBER CONTRIBUTIONS
The bill eliminates a provision in current law that requires a member's promise to contribute to the LLC to be written to be enforceable.
The bill adds that if an LLC's creditor extends credit or acts in reliance on a member's obligation to contribute and does not have notice that the LLC compromised the obligation, the creditor may enforce the obligation.
§§ 42-44 — DISTRIBUTIONS
The bill defines a "distribution" as a transfer of money or other property from an LLC to a person on account of a transferable interest or in the person's capacity as a member. It includes (1) an LLC's purchase of a transferable interest and (2) a transfer to a member in return for the member relinquishing the right to participate as a member in the LLC's management, activities, and affairs or to have access to the LLC's records or information. It does not include reasonable compensation for present or past service or payments made in the ordinary course of business under a bona fide retirement or benefits program (§ 2).
As under current law, a member or other person entitled to a distribution becomes a creditor. The bill specifies that the LLC's obligation to make the distribution can be offset by the amount the distribution's recipient owes the LLC. The bill eliminates specific provisions on distributions when a members dissociates.
Restrictions on Making Distributions (§ 43)
The bill prohibits an LLC from making a distribution if, after the distribution the:
1. LLC would not be able to pay its debts as they become due in the ordinary course of its activities and affairs or
2. LLC's total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the LLC dissolved and was wound up at the time of the distribution, to satisfy the preferential rights of members and transferees whose preferential rights are superior to those of persons receiving the distribution.
The bill allows an LLC to base a decision that a distribution is proper on: (1) financial statements prepared on the basis of reasonable accounting practices and principles or (2) a fair valuation or other reasonable method.
The bill measures a distribution's effect on the date the:
1. distribution is authorized, if the payment occurs within 120 days of authorization;
2. payment is made, if it is more than 120 days since authorization; or
3. money or other property is transferred or debt is incurred, if the distribution is connected to an LLC's purchase of a transferable interest or a transfer to a member in return for the member relinquishing the right to participate as a member.
The bill provides that an LLC's debt to a member or transferee for a distribution is at parity with its debts to general, unsecured creditors. An LLC's debts, including those issued as a distribution, are not a liability when determining whether a distribution is appropriate if the debt's terms provide that payment of principal and interest is made only if and to the extent that payment of a distribution could then be made under this provision. If the debt is issued as a distribution, each payment of principal or interest is treated as a distribution, the effect of which is measured on the date the payment is made.
In measuring the effect of a distribution when an LLC is winding up its affairs, the dissolved LLC's liabilities do not include claims disposed of under the provisions governing its winding up (see §§ 59- 61).
Liability for Distributions that Violate the Bill's Provisions (§ 44)
The bill makes a member of a member-managed LLC or manager of a manager-managed LLC personally liable to the LLC if he or she consents to a distribution that violates the above provisions and violates the duty of loyalty or care. The liability is for the amount the distribution exceeds the amount that could have been distributed without violating the bill's rules.
If the operating agreement of a member-managed LLC expressly relieves a member of the authority and responsibility to consent to distributions and imposes that authority and responsibility on one or more other members, only those members with authority can be liable under the bill.
The bill makes a person who receives a distribution knowing that it violates the bill's provisions personally liable to the LLC to the extent the distribution exceeded the amount that could be properly paid under the bill.
A person subject to an action under these provisions may implead (make part of the lawsuit) anyone that:
1. is also liable for consenting to the distribution, and seek to enforce a right of contribution from the person, or
2. received a distribution knowing it violated the bill's provisions, and seek to enforce a right of contribution from the person in the amount the person received in violation of the bill.
An action under these provisions must be brought within two years of the distribution.
§ 45 — VOTING REQUIREMENTS
Under current law, except as provided in organizational documents, operating agreement, or statutes, decisions regarding the LLC require approval by a majority in interest of members of a member-managed LLC or more than one-half of the managers in a manager-managed LLC. But:
1. a majority in interest of members must approve an amendment to the articles of organization, unless the documents provide otherwise and
2. 2/3 in interest of members, unless the articles or operating agreement require otherwise, must approve (1) amendments to the written operating agreement or (2) authorizing someone to act for the LLC in a way that contradicts the written operating agreement.
Unless the operating agreement provides otherwise, the bill requires unanimous member approval for amendments to the certificate of organization or operating agreement and expands the 2/3 voting requirement to include approving any act outside the LLC's ordinary course of activities and affairs and approving a transaction under the Entity Transaction Act.
In a manager-managed LLC, the bill also specifies that each manager has equal rights in managing and conducting the LLC's activities.
The bill allows members to vote without a meeting and a member may appoint a proxy or agent to vote or act by signing an appointing record, personally or by the agent.
Under the bill, the LLC's dissolution does not affect these provisions but a person who wrongfully causes the dissolution loses the right to participate as a member and a manager.
§ 45 — MANAGERS
As under existing law, the operating agreement may set many of the requirements related to choosing managers. The bill specifies a number of rules regarding managers, including:
1. dissociation of a member who is a manager removes the person as manager, but a member who ceases to be a manager is not dissociated because of it and
2. ceasing to be a manager does not discharge debts, obligations, or liabilities to the LLC that the person incurred as a manager.
The bill eliminates a specific provision allowing an LLC to designate a particular class or group to choose a manager by a majority in interest of members in the class or group, but such a provision would be permitted in an operating agreement.
§ 45 — MEMBER ADVANCES AND SERVICES
The bill requires an LLC to reimburse a member for an advance to the LLC beyond the capital the member agreed to contribute. It considers such a payment and other payments by a member to the LLC a loan.
Under the bill, unless it is stated in the operating agreement, a member is not entitled to remuneration for service performed for a member-managed LLC except for reasonable compensation for services in winding up the LLC's activities.
§ 46 — MEMBER, MANAGER, AND OFFICER LIABILITY PROTECTION
The bill requires an LLC to reimburse a member of a member-managed company or the manager of a manager-managed company for any payment made by the member or in the course of the member's or manager's activities on behalf of the LLC, if the member or manager complied with the bill's provisions on voting and duty of loyalty.
Current law allows an operating agreement to eliminate or limit a member's or manager's personal liability for monetary damages for a breach of duty to the LLC and indemnify a member or manager for judgments, settlements, penalties, fines, or expenses incurred in a proceeding to which an individual is a party because he or she is or was a member or manager.
The bill similarly allows an LLC to indemnify and hold harmless someone for acting as a member or manager as long as liability is not based on breaching duties regarding distributions, voting, or the duty of care or loyalty to the LLC. It extends these provisions to officers.
The bill requires an LLC to indemnify and hold harmless a person who was wholly successful in defending a proceeding with respect to a claim or demand based on the person's capacity as a member, manager, or officer. This applies to reasonable expenses, including attorney's fees and other costs. It applies to any threatened, pending, or completed action, arbitration, investigation, suit or proceeding, whether civil, criminal, or administrative and whether formal or informal.
The bill also allows an LLC to advance reasonable expenses for these purposes if the person promises to repay them if he or she is not ultimately entitled to indemnification.
The bill authorizes an LLC to purchase and maintain insurance on behalf of a member, manager, or officer against liability asserted against or incurred by the member, manager, or officer in that capacity or arising from that status even if the operating agreement could not eliminate or limit the person's liability to the company for the conduct.
§ 47 — DUTY OF CARE AND LOYALTY TO LLC
As under current law, a member or manager must discharge his or her duties in good faith with the care an ordinarily prudent person would use in similar circumstances, and in the LLC's best interests. The bill requires that members in a member-managed LLC and managers in a manager-managed LLC have a duty of loyalty including:
1. accounting to the company and holding as trustee property, profit, or benefit from (a) conducting or winding up the LLC's affairs; (b) a member's use of the LLC's property; or (c) appropriating an LLC opportunity;
2. refraining from dealing with the company in conducting or winding up its affairs as, or on behalf of, a person with an interest adverse to the company (but it provides a defense for a violation of this duty if the transaction was fair to the LLC and also provides that if the transaction is ratified the member's rights and obligations as to the transaction are the same as those of a non-member); and
3. refraining from competing with the company in conducting its affairs.
The bill requires members and managers to discharge their duties and obligations under the bill's provisions or the operating agreement and exercise rights consistent with the implied contractual obligation of good faith and fair dealing. A member who is not acting as a manager does not violate these obligations solely because of conduct that furthers his or her own interest.
Current law allows a vote of half of disinterested managers or a majority in interest of disinterested members to approve a violation related to the duty to account to the company and hold property as trustee, as described above. The bill allows a majority in interest of disinterested members, but not a majority of managers, to approve such a violation, but expands their authority to allow the members to approve any violation of the duty of loyalty after full disclosure of all material facts.
§ 48 — ACCESS TO LLC INFORMATION
The bill replaces current law on access to LLC information with more detailed provisions. It eliminates current law which (1) requires an LLC to keep specific information at its principal place of business or a location stated in the operating agreement; (2) allows members access to records during ordinary business hours; and (3) requires members or managers, to the extent circumstances make it just and reasonable, to provide other members with true and full information of all things affecting them.
The bill imposes the below rules on a member-managed LLC.
1. On reasonable notice, a member may inspect and copy during regular business hours, at a reasonable location specified by the company, any record the LLC maintains about its activities, affairs, financial condition, and other circumstances to the extent the information is material to the member's rights and duties under the operating agreement or law.
2. An LLC must give each member (a) without demand, any information about the company that it knows and that is material to the proper exercise of the member's rights and duties under the operating agreement or law, except if the company can establish that it reasonably believes the member already knows the information and (b) on demand, any other information concerning the company, except to the extent it is unreasonable or improper under the circumstances.
3. The duty to provide the above information also applies to each member if he or she knows any of the above information.
The bill imposes the below rules on a manager-managed LLC.
1. The right to information and duty to furnish information described above applies to the managers and not members.
2. During regular business hours and at a reasonable location specified by the company, a member may inspect and copy information on the LLC's activities, affairs, financial condition, and other circumstances as is just and reasonable if (a) the member seeks the information for a purpose reasonably related to his or her interest as a member, (b) the member makes a demand in a record received by the company that describes with reasonable particularity the information sought and the purpose for seeking it, and (c) the information is directly connected to the member's purpose.
3. Within 10 days of receiving a member's demand, the company must inform the member in a record of the (a) information the company will provide and when and where it will be available and (b) company's reasons for declining to provide any of the demanded information.
4. When the bill or operating agreement provides for a member to give or withhold consent to a matter, the company must, without demand, provide the member with all information that it knows and that is material to the member's decision, before the member makes a decision.
If an LLC receives a demand from a dissociated member in the form of a record, the bill requires the LLC to allow the dissociated member to access information he or she was entitled to as a member if the:
1. information pertains to the period during which the person was a member,
2. the information is sought in good faith, and
3. person satisfies the requirements imposed on a member described above.
The LLC must respond within 10 days that it will provide the information or with the reason for its denial.
The bill allows a member or dissociated member to exercise their rights to access information through an agent or, in the case of an individual under legal disability, a legal representative. These rights do not extend to a transferee and a legal representative has certain rights on behalf of a member who dies.
In addition to any restriction or condition in the operating agreement, the bill allows an LLC to impose reasonable restrictions and conditions on access to and use of information. This can include designating confidential information and imposing nondisclosure and safeguarding obligations on the recipient. In a dispute concerning the reasonableness of a restriction, the company must prove reasonableness.
The bill allows an LLC to charge reasonable copying costs, limited to labor and material.
§ 50 — TRANSFERRABLE INTERESTS
The bill adds provisions on transfers of interests, but treats them similarly to current provisions governing assignments of interests which the bill repeals. Among its provisions, the bill provides that:
1. a transferee is not entitled to access LLC records except for an account of a dissolving LLC's transactions since the date of dissolution and
2. an LLC need not give effect to a transferee's rights until the company knows or has notice of the transfer.
§ 51 — CHARGING ORDERS
As under current law, a judgment creditor of a member can ask a court to enter a charging order against the member's transferable interest for the unsatisfied amount of the judgment. The bill applies this to any transferee as well.
The bill adds a number of provisions related to charging orders.
1. A charging order is a lien on the transferable interest and requires the LLC to pay the creditor any distribution that otherwise would be paid to the member or transferee.
2. If necessary to collect distributions, the court may appoint a receiver and make other necessary orders.
3. The member or transferee may extinguish the charging order by satisfying the judgment and filing a certified copy of the satisfaction with the court.
4. The LLC or one or more members whose transferable interests are not subject to the charging order may pay the amount due under the judgment and succeed to the rights of the judgment creditor, including the charging order.
5. A charging order is the exclusive remedy to satisfy a judgment against a transferable interest and attachment, garnishment, foreclosure, and other legal or equitable remedies are not available.
§ 53 — WRONGFUL DISSOCIATION
Currently, when a member's withdrawal breaches the operating agreement or occurs because of the member's wrongful conduct, the LLC can recover damages from the member. Unless otherwise provided in the operating agreement, in the case of an LLC formed for a definite term or particular undertaking, a withdrawal before that term expires or the undertaking is completed breaches the operating agreement.
The bill also makes the withdrawing member liable to a member who brings a direct action against the person. It also provides that a member's dissociation is wrongful if it occurs before completing the LLC's winding up and the member:
1. withdraws by express will;
2. is expelled by judicial order (see below);
3. is a trust that becomes dissociated because it distributes its entire transferrable interest; or
4. in the case of a person that is not a trust other than a business trust, an estate, or an individual, is expelled or otherwise dissociated as a member because of a willful dissolution or termination.
§ 54 — MEMBER WITHDRAWAL OR EXPULSION
Currently, a member can voluntarily withdraw, unless the operating agreement provides otherwise, by giving 30 days' written notice to the other members or other notice as the operating agreement allows. Unless the operating agreement states that a member cannot withdraw, the bill allows a member to withdraw on the date of notice to the LLC or a later date the member specifies.
The bill contains provisions similar to those in current law on other types of dissociation by a member. Generally, situations such as a member's death, bankruptcy, or an entity's dissolution or termination dissociate a member. The bill adds that a member that is an entity ceases to be a member when it participates in certain transactions (such as a merger).
The bill makes many minor changes and in some circumstances changes the default rules that apply if the certificate or operating agreement does not address a particular type of dissociation (such as the voting requirement for dissociating a member in a particular circumstance).
Judicial Expulsion of a Member
The bill adds provisions that allow the LLC or a member to seek a judicial order to expel a member who:
1. engages in wrongful conduct that has or will adversely and materially affect the LLC,
2. materially breaches the operating agreement or his or her duty in a willful or persistent manner, or
3. engages in conduct in the LLC's affairs that makes it not reasonably practicable to carry on the LLC's affairs with the person as a member.
§ 55 — EFFECT OF MEMBER'S DISSOCIATION
When a person dissociates as a member, the bill specifies that:
1. the person's right to participate as a member in the LLC's management and conduct of its affairs terminates;
2. if the LLC is member-managed, the person's duties and obligations as a member end with regard to matters arising and events occurring after the person's dissociation;
3. subject to other provisions, any transferable interest owned by the person in their capacity as a member immediately before dissociation is owned by the person solely as a transferee; and
4. the dissociation does not discharge the person from any debt, obligation, or liability to the company or its other members that the person incurred while a member.
§ 56 — LLC DISSOLUTION
Currently, one way an LLC dissolves is when the articles of organization or operating agreement designates an event to trigger dissolution and that event occurs. The bill provides that the event is designated in the operating agreement alone.
Current law allows a member, legal representative, or assignee to apply to court to wind up an LLC when a member or manager engaged in wrongful conduct or for other cause shown. The bill instead allows a member to apply for a court-ordered dissolution because the:
1. conduct of substantially all of the LLC's affairs is unlawful or
2. managers or members in control (a) have acted, are acting, or will act in an illegal or fraudulent manner or (b) have acted or are acting in a manner that is oppressive and was, is, or will be directly harmful to the applicant (the court can order remedies other than dissolution).
The bill adds a new circumstance for dissolution. Specifically, that it occurs when the LLC has no members for 90 consecutive days unless, during that period, transferees with the right to receive a majority of the LLC's distributions consent to admit at least one specific person as a member and at least one person becomes a member accordingly.
§ 57 — WINDING UP DISSOLVED LLC
The bill provides that if a dissolved LLC has no members, the legal representative of the last member may wind up the LLC's affairs. If the legal representative does not do so, transferees with a majority in interest may appoint a person to wind up the LLC.
The bill also allows a member or transferee to apply to court for judicial supervision of the LLC's winding up, including appointing a person to perform this function. A member must show good cause for court supervision and a transferee may only apply if the LLC has no members, the legal representative described above does not wind up the LLC, and the transferees do not appoint someone as described above. Courts can also act in other circumstances (see § 56).
§ 58 — REINSTATEMENT
The law allows a dissolved LLC to be reinstated. Under current law, filing a certificate of reinstatement with the secretary begins the LLC's legal existence. The bill instead allows a reinstated LLC to resume its activities as if dissolution had not occurred, but the rights of a third party that relied on the dissolution before knowing or having notice of the reinstatement cannot be adversely affected.
§§ 59-62 — DISSOLVED LLC
Claims Against a Dissolved LLC (§ 59)
The bill makes minor changes to the way a dissolved LLC gives notice to known and unknown claimants. Among other things, for notices to known claimants, the bill requires the:
1. notice the LLC sends them to allow filing a claim within 120 days from the date a claimant receives the notice, instead of 120 days from the notice's effective date or the filing of articles of dissolution and
2. LLC's notice of claim rejection to state that the claimant has 90 days to bring an action to enforce the claim after receiving notice (the 90-day limit applies under existing law, but the LLC is not required to provide notice of it).
Court Proceeding on Unknown Claims of Dissolved LLC (§§ 60 & 61)
The law permits a dissolved LLC to publish a notice of dissolution to notify potential claimants. The bill adds a provision that allows the dissolved LLC to file an application with the Superior Court in the judicial district where its principal office is located or, if the office is not located in this state, where the office of its registered agent is located, for a determination of the amount and form of security to be provided for payment of claims that (1) are contingent, (2) have not been made known, or (3) are based on an event occurring after the dissolution's effective date but which, based on the facts known to the dissolved company, are reasonably expected to arise after that date. Security is not required for any claim that is or is reasonably anticipated to be barred.
The bill requires the dissolved LLC to give notice of the judicial proceeding to each claimant holding a contingent claim known to the company within 10 days of filing in court. The court can appoint a guardian ad litem to represent claimants whose identities are unknown. The dissolved LLC pays the guardian's reasonable fees and expenses, including reasonable expert witness fees.
Under the bill, a dissolved LLC that provides the security ordered by the court satisfies its obligations with respect to these claims and they cannot be enforced against a member or transferee that received assets in liquidation.
Distributions From Dissolved LLC (§ 62)
By law, a dissolved LLC must first distribute its assets to its creditors. Currently, any surplus then pays members and former members (1) in the same way they are entitled to distributions and (2) then for the return of their contributions to the LLC and in proportion to their share of distributions. The bill instead pays:
1. members and former members, subject to any charging order, for their contributions received by the LLC and not returned, and then in shares proportionate to their transferable interests or
2. if assets cannot pay for all unreturned contributions, those with transferable interests in proportion to the value of their unreturned contributions.
The bill requires these distributions to members and former members to be made only in money, unless the operating agreement provides otherwise.
§ 64 — DIRECT ACTION BY MEMBER
The bill authorizes a member's direct action against another member, a manager, or the LLC to enforce the member's rights and protect the member's interests, including rights and interests under the operating agreement or the bill or arising independently of the membership relationship. The member must plead and prove an actual or threatened injury that is not solely from an injury suffered or threatened to be suffered by the LLC.
§§ 65-69 — DERIVATIVE ACTION BY MEMBER
Current law does not specifically address derivative actions. The bill allows a member to bring a derivative action to enforce a right of the LLC if:
1. the member makes a demand on the other members in a member-managed LLC or the managers of a manager-managed LLC, requesting that they cause the company to bring an action to enforce the right, and they do not do so within 90 days or
2. such a demand would be futile.
The complaint must state the date and content of the demand and the response the member received or why a demand should be excused as futile.
To bring the derivative action, the member must be a member at the time of bringing the action and either (1) was a member when the conduct giving rise to the action occurred or (2) became a member by law or under the operating agreement from a person that was a member at the time of the conduct.
Special Litigation Committee
The bill allows an LLC involved in a derivative proceeding to appoint a special litigation committee to investigate and determine whether the action is in the LLC's best interests. If the committee makes a motion in the LLC's name, the court must stay discovery for the time reasonably necessary for the committee's investigation, except for good cause. This does not prevent the court from (1) enforcing a person's right to information under the bill (see § 48) or (2) granting a temporary restraining order or preliminary injunction.
A special litigation committee must consist of one or more disinterested individuals, who may be members or managers.
In a member-managed LLC, a committee can be appointed by a majority in interest of members not named as parties in the proceeding. If all members are parties, a majority in interest of the members named as defendants can appoint the committee. In a manager-managed LLC, a majority of the managers not named as parties can appoint the committee but if all managers are parties, then a majority of the managers named as defendants can do so.
After appropriate investigation, a committee may determine that it is in the LLC's best interests that the proceeding: (1) continue under the plaintiff's control, (2) continue under the committee's control, (3) be settled on terms approved by the committee, or (4) be dismissed.
After making its determination, the committee must file with the court a statement and report supporting its determination and serve each party with a copy. The court must determine whether the (1) committee members were disinterested individuals and (2) committee conducted its investigation and made its recommendation in good faith, independently, and with reasonable care. The committee has the burden of proof. If the court makes these findings, it must enforce the committee's decision. Otherwise, the court dissolves the stay of discovery and the action continues under the plaintiff's control.
Result of Derivative Action
Under the bill, any benefits from the derivative action, including settlements, belong to the LLC, not the plaintiff, and a plaintiff must give any proceeds to the LLC.
When the proceeding ends, the court may order:
1. the LLC to pay the plaintiff's expenses incurred in the proceeding if the proceeding's results substantially benefit the LLC;
2. the plaintiff to pay the defendant's expenses in defending the proceeding if the proceeding's was commenced or maintained without reasonable cause or for an improper purpose; or
3. a party to pay an opposing party's expenses incurred because of filing a document in the case that was (a) not well grounded in fact after a reasonable inquiry or warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law and (b) was used for an improper purpose, such as to harass or cause unnecessary delay or needlessly increase litigation costs.
The bill defines "expenses" as reasonable expenses incurred in connection with a matter, including reasonable attorney's fees.
The bill prohibits voluntarily dismissing or settling a derivative action on behalf of an LLC without court approval.
§§ 70-79 — REGISTERED FOREIGN LLC
The bill contains many of the same provisions as current law requiring foreign LLCs to register with the secretary to do business in Connecticut.
The bill makes many minor changes and specifies that registration to transact business in Connecticut does not allow a foreign LLC to engage in activities or exercise powers in Connecticut that a domestic LLC may not do (§ 70).
Isolated Transactions (§ 74)
Currently, a foreign LLC is not considered to be doing business in Connecticut and required to register if it is conducting an isolated transaction completed within 30 days that is not in the course of similar repeated transactions. The bill instead applies this provision to any isolated transactions not in the course of similar transactions, without any time limitation for completion.
Names (§ 75)
Currently, a foreign LLC registering in Connecticut must have a name that is distinguishable on the secretary's records or (1) add a distinguishing element to its name, (2) obtain permission from those who use or have reserved a similar name in Connecticut and agree to use a distinguishing element, or (3) use a name in Connecticut that is different from the one under which it is organized.
The bill provides different rules if the foreign LLC's name is not distinguishable. It requires the foreign LLC to (1) adopt an alternate name, (2) use the company's name with the addition of its governing jurisdiction, or (3) use an assumed or fictitious name that complies with the law governing trade names.
Registration After Merger (§ 76)
When a registered foreign LLC merges into a foreign entity that is not registered to transact business in Connecticut or converts to a foreign entity required to register with the secretary, the bill requires the foreign entity to apply to the secretary for a registration transfer. The application must state:
1. the registered foreign LLC's name before the merger or conversion and that it was previously registered;
2. for the foreign entity the LLC is merging with or being converted into: its name and, if not distinguishable on the secretary's records, an alternate name that complies with the bill's provisions; its entity type and governing jurisdiction; its principal office address and office address in its governing jurisdiction if that jurisdiction requires one; and its registered agent's name and address in Connecticut;
3. the name and business and residence addresses of a manager or a member of the foreign LLC (for good cause, the secretary may accept only a business address); and
4. the email address, if any, of the foreign LLC.
When an application for registration transfer takes effect, the registration of the foreign LLC to transact business in this state is transferred without interruption to the foreign entity into which the foreign LLC has merged or to which it is converted.
Service After Withdrawing Registration (§ 78)
By law, a registered foreign LLC may withdraw its registration by filing with the secretary. Current law requires the foreign LLC to consent to the secretary accepting any service of process on the foreign LLC's behalf for causes of action arising in Connecticut during the time the foreign LLC was authorized to transact business in the state. The bill instead requires the foreign LLC to designate an address to receive service by mail or commercial delivery service.
§§ 80-97 — LLC MERGERS AND INTEREST EXCHANGES
The bill makes changes to the provisions governing mergers between LLCs, including mergers with foreign LLCs. It adds provisions about interest exchanges, which are transactions involving exchanging interests to merge businesses without merging the entities.
These changes generally make the merger and interest exchange provisions similar to those in the Entity Transaction Act, which governs mergers, interest exchanges, and other transactions between different types of business entities (for example, a merger between an LLC and a corporation) (CGS § 34-600 et seq.).
The bill eliminates provisions on LLC consolidations, which current law treats similarly to mergers.
General Provisions (§§ 81-86)
The bill declares that its merger and interest exchange provisions are supplemented by the principles of law and equity and do not authorize an action prohibited by law or affect the application or requirements of other laws (§ 81).
1. requires a domestic or foreign LLC that must give notice to, or obtain the approval of, a Connecticut agency or officer for a merger to also give notice or obtain approval for an interest exchange;
2. prohibits property held by a domestic or foreign LLC for a charitable purpose under Connecticut law immediately before a merger's or interest exchange's effective date from being diverted from the objects for which it was donated, granted, or transferred (unless other law allows the LLC to notify the attorney general and obtain a court order specifying the disposition);
3. provides that a surviving LLC receives any bequest, devise, gift, grant, or promise in a will or other instrument of donation, subscription, or conveyance that (a) is made to the other LLC involved in the merger and (b) takes effect or remains payable after the merger (§ 82);
4. makes a merger or interest exchange filing signed by an LLC part of the LLC's organizational documents (§ 83);
5. provides that a merger or interest exchange transaction under the bill's provisions that produces certain results does not prohibit accomplishing the same result in any other legally permitted manner (§ 84);
6. does not prohibit an LLC's merger, conversion, or domestication under other laws (§ 84);
7. allows a merger or interest exchange plan to refer to facts ascertainable outside the plan if the plan specifies how the facts will impact it (§ 85); and
8. does not provide appraisal rights to members of LLCs involved in a merger or interest exchange except to the extent provided in the LLC's organizational documents or plan (§ 86).
Professional Service LLCs (§ 87)
Existing law allows a domestic LLC that provides professional services to merge with another domestic LLC that provides the same services. The bill additionally (1) allows such a domestic LLC to merge with an LLC that renders two or more professional services, (2) allows mergers with foreign LLCs that render professional services under the same circumstances, and (3) applies these rules to interest exchanges.
Mergers (§§ 88-91)
Existing law allows LLCs to merge, whether they are domestic or foreign LLCs. For a merger to be effective, the bill requires (1) each of the merging LLC's organic law (the law of the jurisdiction governing the LLC's internal affairs) to authorize the merger, (2) that the law governing each of the merging LLCs and federal law do not prohibit the merger, and (3) each of the merging LLCs to comply with its organic law in effecting the merger (§ 88).
The bill's requirements for the plan of merger are similar to those in current law. The law requires approval of a plan by a vote of at least 2/3 in interest of the members unless the certificate of organization or operating agreement requires otherwise. Currently, a plan may be abandoned after its approval by unanimous consent unless it provides another procedure. The bill allows a plan's amendment or abandonment (1) as provided in the plan or (2) except as prohibited in the plan, by a vote of at least 2/3 in interest of the members or as provided in the certificate of organization or operating agreement for plan approval (§ 89).
The bill renames the document that the LLCs must file with the secretary after approving a merger the certificate of merger, instead of articles of merger. It requires this document to contain many of the same items as in current law but (1) adds that it can include any information required under one of the merging LLC's organic law and that a surviving LLC that is a foreign LLC must list its office address and (2) eliminates a required statement that the merger plan be available at the surviving LLC's place of business and be available without cost to any person holding an interest in one of the merging LLCs (§ 90).
The bill makes numerous other minor changes to merger provisions.
Authorized Interest Exchanges (§ 92)
The bill allows an LLC to acquire all of one or more classes or series of transferable interests of a domestic or foreign LLC in exchange for interests, securities, obligations, money, other property, rights to acquire interests or securities, or any combination of them. Similarly, it allows an LLC's interests to be acquired by a domestic or foreign LLC. A foreign LLC can be involved in an interest exchange if the law of its governing jurisdiction allows it.
If a protected agreement has a provision that applies to a merger of a domestic LLC, but does not refer to an interest exchange, the bill deems the provision to also apply to an interest exchange if the domestic LLC is the acquired entity, until the protected agreement provision is amended. Under the bill, a “protected agreement" is:
1. a record evidencing a debt and any related agreement in effect on or after July 1, 2017;
2. an agreement that is binding on a domestic or foreign LLC on or after July 1, 2017;
3. the organizational documents of an LLC in effect on or after July 1, 2017; or
4. an agreement that is binding on any of the domestic or foreign LLC's members or managers on or after July 1, 2017 (§ 80).
Interest Exchange Plan (§ 93)
The bill allows an LLC to be acquired in an interest exchange if it approves an interest exchange plan in a record that contains:
1. the name of the acquired LLC;
2. the name and governing jurisdiction of the acquiring domestic or foreign LLC;
3. the manner of converting the transferable interests in the acquired LLC into interests, securities, obligations, money, other property, rights to acquire interests or securities, or any combination of them;
4. any proposed amendments to the certificate of organization or operating agreement that are, or are proposed to be, in a record of the acquired LLC;
5. the interest exchange's other terms and conditions; and
6. any other provision required by Connecticut law or the acquired LLC's organizational documents.
The plan may contain any other provisions not prohibited by law.
Interest Exchange Approval (§ 94)
Unless the LLC's certificate of organization or operating agreement provides otherwise, the bill requires approval of an interest exchange plan by two-thirds in interest of the members of an acquired LLC entitled to vote on any matter. An interest exchange involving a foreign LLC requires approval according to the law governing the foreign LLC. The members of the domestic or foreign acquiring LLC are not required to approve an interest exchange unless the LLC's governing law or organizational documents require it.
Interest Exchange Plan Amendment or Abandonment (§ 95)
The bill requires each party to an interest exchange plan to consent to its amendment unless the plan provides otherwise.
An acquired LLC can approve an amendment:
1. in the same way it approved the plan if the plan does not specify how it can be amended or
2. by the LLC's managers or members as provided in the plan, but a member that was entitled to vote on or consent to approval of the interest exchange is entitled to vote on or consent to any amendment of the plan that will change (a) the amount or type of property to be received by any members of the acquired LLC; (b) the certificate of organization or operating agreement of the acquired LLC that will be in effect immediately after the interest exchange becomes effective, except for changes that do not require approval of the members of the acquired LLC under the bill's provisions or the operating agreement; or (c) any other plan term or condition if the change would adversely affect the member in a material way.
The bill allows parties to abandon the plan, in a manner specified in the plan, any time after approval and before a certificate of interest exchange becomes effective. Unless prohibited by the plan, an acquired LLC can abandon a plan in the same manner as it was approved.
An acquired LLC must deliver a signed certificate of abandonment to the secretary if a plan is abandoned after a certificate of interest exchange is delivered, but before it is effective. A certificate of abandonment is effective on filing. The certificate must state (1) the acquired LLC's name, (2) the date the certificate of interest exchange was delivered to the secretary, and (3) that the interest exchange is abandoned.
Certificate of Interest Exchange (§ 96)
The bill requires an acquired LLC to sign and deliver a certificate of interest exchange to the secretary for filing. The certificate must state:
1. the LLC's name;
2. the name and governing jurisdiction of the acquiring domestic or foreign LLC;
3. that the interest exchange plan was approved by the acquired LLC;
4. if the certificate of interest exchange is not effective upon filing, the date and time it takes effect; and
5. any amendments to the acquired LLC's certificate of organization approved as part of the plan.
The certificate may contain any other provision not prohibited by law.
An interest exchange plan signed by an acquired LLC with the same information can be delivered to the secretary instead of a certificate.
An interest exchange is effective when the certificate is effective (either upon filing or on a specified date within 90 days of filing (see § 31)).
Effect of Interest Exchange (§ 97)
Under the bill, when an interest exchange in which the acquired entity is an LLC becomes effective:
1. transferable interests in the LLC that are the subject of the interest exchange cease to exist, or are converted or exchanged, and the members holding those interests are entitled only to the rights provided to them under the interest exchange plan and the bill's appraisal rights;
2. the acquiring domestic or foreign LLC becomes the holder of the transferable interests in the acquired LLC as set forth in the plan;
3. the certificate of organization of the acquired LLC is amended as provided in the certificate of interest exchange; and
4. provisions of the operating agreement of the acquired LLC that must be in a record, if any, are amended as provided for in the interest exchange plan.
Except as otherwise provided in the operating agreement of an acquired LLC, the interest exchange does not give rise to any rights that a member, manager, or third party would otherwise have in a dissolution, liquidation, or winding up of the acquired LLC.
The bill provides that the transferable interests in an LLC that are to be exchanged under the plan's terms are exchanged and the former holders of them have the rights provided in the plan and any appraisal rights they have under the bill and the acquired LLC's governing law.
The bill's provisions do not impair existing contracts or affect any proceedings begun or rights accrued before the bill takes effect. This also applies to any future amendments to the LLC laws (§ 102).
The bill requires considering the need to promote uniformity with other states regarding LLC law when applying and construing its provisions (§ 98).
The bill modifies, limits, and supersedes the federal Electronic Signatures in Global and National Commerce Act (E-SIGN). But it does not (1) modify, limit, or supersede E-SIGN's provisions on consumer disclosures (such as when consumers are considered to have consented to electronic disclosures) or (2) authorize electronic delivery of specified notices that are not subject to E-SIGN (§ 99).
If any specific provision of the bill or its application to a person or circumstance is held invalid, the bill provides that it does not affect the bill's other provisions or applications (§ 101).
The law prohibits an LLC from serving certain functions, such as operating as an electric distribution company. The bill specifies that an LLC may not operate as any other type of electric company (§ 9).
Knowledge and Notice of Facts Under LLC Laws (§ 3)
By law, a person has notice of a fact when he or she actually knows the fact. The bill eliminates a provision about when a fact is known involving bad faith.
Currently, a person has notice of a fact when someone who claims the benefit of the notice (1) states the fact to the person or (2) mails or otherwise delivers a written statement of the fact to the person or a proper person at the person's place of business or residence. The bill instead provides that a person has notice of a fact when he or she has reason to know the fact from all the facts he or she knows at the time.
Under the bill, a person is deemed to know the fact of an LLC's dissolution 90 days after a certificate of dissolution takes effect. A person is also deemed to know facts as otherwise provided by law. A person is deemed to have notice of an LLC's participation in an entity transaction 90 days after articles of the transaction become effective.
The bill provides that a person notifies another of a fact by taking steps reasonably required to inform the other person in ordinary course, whether or not those steps cause the other person to know the fact.
Under the bill, a person who is not an LLC member is deemed to have notice of the LLC's:
1. dissolution 90 days after a certificate of dissolution takes effect and
2. participation in a merger, interest exchange, conversion, or domestication 90 days after articles of merger, interest exchange, conversion, or domestication take effect under the bill's provisions or existing law (the Entity Transactions Act).
The bill eliminates provisions that:
1. notice to any member of a matter relating to the LLC's affairs, and the knowledge of the member acting in the particular matter, acquired while a member or known at the time of becoming a member, and the knowledge of any other member who reasonably could and should have communicated it to the acting member, operate as notice to or knowledge of the LLC, except in the case of a fraud on the LLC committed by or with that member's consent and
2. in a manager-managed LLC, (a) notice to a manager of a matter relating to the LLC's affairs, and the knowledge of the manager acting in the particular matter, acquired while a manager or known at the time of becoming a manager, and the knowledge of any other manager who reasonably could and should have communicated it to the acting manager, operate as notice to or knowledge of the LLC, except in the case of a fraud on the LLC committed by or with that manager's consent and (b) notice to or knowledge of any member acting solely in the capacity of member is not notice to or knowledge of the LLC.
The bill eliminates a number of specific provisions, including those:
1. authorizing the secretary to submit interrogatories to and require answers from an LLC to ascertain compliance with the LLC law and for a fine of up to $500 for an LLC, member, or manager who fails to answer fully and truthfully;
2. giving the secretary authority to prescribe forms of reports, certificates, and documents for filing, and requiring, upon a written request, the secretary to mail any matter required or permitted to be mailed under the LLC statutes to the LLC;
3. on voting to allow a lawsuit on behalf of the LLC to be brought by (1) a manager of a manager-managed LLC or (2) member or members, regardless of how the LLC is managed; and
4. authorizing an LLC to acquire property, take on debt, enter profit sharing arrangements, and conduct any type of business during a time of war or national emergency at a government authority's direction.
Professional Services-Registered Limited Liability Partnership (LLP) (§§ 2 & 104)
By law, a registered LLP can consist of partners who render professional services and the LLP must maintain at least $250,000 of professional liability insurance.
The bill adds physician assistants to the list of services such an LLP can provide.
Names of LLPs and Statutory Trusts (§§ 105-106)
The bill's changes on reserving entity names also apply to domestic and foreign registered LLPs and statutory trusts.
sHB 5639, favorably reported by the Judiciary Committee, contains substantially similar changes to the LLC laws. It also includes provisions on corporate directors, benefit corporations, and remittance transfers. It creates a Center for Commercial Claims for the courts to handle certain civil commercial claims and a rapid arbitration procedure for certain business disputes.
Joint Favorable Substitute