major changes to pennsylvania entity law: outlining the impacts of act 170

February 7, 2017

Major changes to Pennsylvania Entity LawPresented by: William H. Clark Jr., partner, Drinker Biddle & Reath LLPLisa R. Jacobs, partner, DLA Piper LLP

Presented in partnership with LexisNexis®

Introduction | Meet the Presenters

William H. Clark, Jr.Partner

Drinker Biddle & Reath LLP-

Legal Advisor to CSC® Publishing

Lisa R. JacobsPartner

DLA Piper LLP

On November 21, 2016, House Bill 1398 was signed into law as Act 2016-170.

Act 170 is a comprehensive revision of PA law on partnerships and LLCs.

Today’s webinar is intended to provide a high-level overview of the important changes included in Act 170.

Overview

Revision of the laws on partnerships and LLCs.Uniform Partnership Act (1997, 2013)Uniform Limited Partnership Act (2001, 2013)Uniform Limited Liability Company Act (2006, 2013)

Expanded liability shield for LLPs and LLLPs.New provisions on derivative suits involving all types of entities.Nonprofit limited partnerships and LLCs.Benefit LLCs.

Topics Included in Act 170

The new law takes effect generally on February 21, 2017.

15 Pa.C.S. § 8811(b) provides that:“Before April 1, 2017, this chapter governs only:

“(1) a limited liability company formed on or after [February 21, 2017]; and

“(2) … a limited liability company formed before [February 21, 2017] which elects, in the manner provided in its operating agreement or by law for amending the operating agreement, to be subject to this chapter.”

Effective Date

6fv9e

Please note this code. It will be required to receive CLE credit, and will not be repeated.

CLE Code #1

Similar provisions are provided for:business corporationsnonprofit corporationslimited partnershipslimited liability companies

The new provisions expand and clarify (i) existing PA law and (ii) the rules from the ALI Principles of Corporate Governance adopted in Cuker.

Procedures are provided governing the use of special litigation committees.

The procedures come from the Uniform LP and LLC Acts.

Derivative Suits

§ 8620(b): “A limited partnership may have any lawful purpose, other than acting as a banking institution, credit union or insurer, regardless of whether the purpose is for profit. …”

Special provisions:Nonprofit purpose must be stated in public filing.Non-distribution constraint.May hold property in trust for its nonprofit purpose.Non-diversion restriction.

Nonprofit LPs and LLCs

Black Letter:

§ 8454 (General Partnerships) § 8673 (Limited Partnerships)§ 8853 (Limited Liability Companies)

(a) General rule. – On application by a judgment creditor of a member or transferee, a court may enter a charging order against the transferable interest of the judgment debtor for the unsatisfied amount of the judgment. Except as provided in subsection (f) [single member LLCs], a charging order constitutes a lien on a judgment debtor’s transferable interest and requires the limited liability company to pay over to the person to which the charging order was issued any distribution that otherwise would be paid to the judgment debtor. See also limit to transferable interest in § 8853(c).

Charging Forward – the new world of charging orders

The charging order concept dates back to the English Partnership Act of 1890 and in the United States has been a fundamental part of the law of unincorporated business organizations since 1914.

Serves both as a remedy and a remedy limitation.

It is the sole method by which a judgment creditor of a member or transferee can extract any value from the member’s or transferee’s ownership interest in a limited liability company.

Why?? Originally designed to preserve the primacy of the “pick your partner” rule – prohibits creditor from taking the ownership interest and stepping into shoes of the debtor (as a member of the LLC). Thus limitations were intended to protect the co-owners – NOT the debtor.

Charging Order – what it is; how it works

A judgment creditor of a member or transferee is entitled to a charging order against the relevant transferable interest. This order entitles the judgment creditor to whatever distributions would otherwise be due to the member or transferee whose interest is subject to the order.

However, the judgment creditor has no say in the timing or amount of those distributions. The charging order does not entitle the judgment creditor to accelerate any distributions or to otherwise interfere with the management and activities of the limited liability company.

The term “judgment debtor” includes both members and transferees. The lien pertains only to a distribution, which excludes by definition “amounts constituting reasonable compensation for present or past service or payments made in the ordinary course of business under a bona fide retirement plan or other bona fide benefits program.” (see 15 Pa. C.S. § 8812).

Charging Orders – how they work

§ 8853(b) - Available relief. – To the extent necessary to effectuate the collection of distributions pursuant to a charging order in effect under subsection (a), the court may:

(1) appoint a receiver of the distributions subject to the charging order, with the power to make all inquiries the judgment debtor might have made; and(2) make all other orders necessary to give effect to the charging order.

§ 8853(c) - Foreclosure. – Upon a showing that distributions under a charging order will not pay the judgment debt within a reasonable time, the court may foreclose the lien and order the sale of the transferable interest. Except as provided in subsection (f), the purchaser at the foreclosure sale only obtains the transferable interest, does not thereby become a member, and is subject to section 8852 [transfer of transferable interest does not render the transferee a “member”].

Charging Orders – other relief

Subsection (f) changes the result if foreclosure is against the sole member of an LLC. In that case:

(1) the court shall confirm the sale;

(2) the purchaser at the sale obtains the member’s entire interest, not just the member’s transferable interest;

(3) the purchaser becomes a member (with attendant governance rights); and

(4) the person whose interest was subject to the foreclosed charging order is dissociated as a member.

Charging Orders – other relief – sole members

Section 8204 is at the heart of what it means to be a limited liability partnership (“LLP”) or limited liability limited partnership (“LLLP”). By electing that status, the partnership may protect its general partners from liability for partnership liabilities including liability for the misconduct of other partners or representatives of the partnership. (See official committee comments for examples)

However, until the 2016 amendments, this protection was partial, as opposed to the full shield that owners enjoy in other entities such as corporations and LLCs.

Setting the table: full vs partial shield

Section 8204(b)(2)(i) was amended in 2016 to remove an implication in the former language of the provision that a partner could be liable for any act of a person under the supervision and control of the partner even if the partner had no responsibility to supervise or control the act giving rise to liability.

Protection for Supervising Professionals

§ 8204. Limitation on liability of partners.(a) General rule.--General rule. – Except as provided in

subsection (b), a partner in a [registered] limited liability partnership or limited liability limited partnership shall not be [individually] liable directly or indirectly, whether by way of indemnification, contribution or otherwise, under an order of court or in any other manner for any debts [and], obligations or other liabilities of, or chargeable to, the partnership, whether sounding in contract or tort or otherwise, that arise [from any negligent or wrongful acts or misconduct committed by another partner or other representative of the partnership] while the registration of the partnership under this subchapter is in effect.

New full shield provision

Section 8204(b) Exceptions.--

*(2) Subsection (a) shall not affect the liability of a partner:(i) Individually for any negligent or wrongful acts or misconduct committed by [him

or by any person under his direct supervision and control] the partner.(ii) For any debts [or], obligations or other liabilities of the partnership:

[(A) arising from any cause other than those specified in subsection (a); or](B) as to which the partner has agreed in [writing] record form to be liable[.];

or(C) that:

(I) arose before [the effective date of this clause]; and(II) did not arise from any negligent or wrongful acts or misconduct

committed by a partner or other representative of the partnership.(iii) To the extent expressly undertaken in the partnership agreement or the

certificate of limited partnership.________________________*Former subsection (b)(1) conditioned the limitation on personal liability provided by subsection (a) on the availability of a certain minimum amount of insurance. Subsection (b) was repealed at the same time the insurance requirement was repealed.

New full shield provision - exceptions

(3) Subsection (a) shall not affect in any way: (i) the liability of the partnership itself for all its debts [and],

obligations and other liabilities;(ii) the availability of the entire assets of the partnership to

satisfy its debts [and], obligations and other liabilities; or (iii) any obligation undertaken by a partner in [writing] record

form to individually indemnify another partner of the partnership or to individually contribute toward a liability of another partner.

* * * (d) Proper parties. – A partner in a limited liability partnership

or limited liability limited partnership is not a proper party to an action or proceeding by or against the partnership, the object of which is to recover damages or enforce debts, obligations or other liabilities for which the partner is not liable.

New full shield provision - exception

The reference in subsection (a) to liabilities arising “directly or indirectly, whether by way of indemnification, contribution, assessment or otherwise” is intended to make clear that the policy of this section should not be evaded by seeking to hold partners liable indirectly by a demand for indemnification, contribution, etc. Nonetheless, subsection (b)(3)(iii) makes clear that this section does not affect an indemnification obligation that a partner undertakes contractually. However, such an indemnification obligation must be one undertaken “individually” and an indemnification obligation of the partnership generally should not be construed as making the partners personally liable. The reference in subsection (a) to debts and obligations “chargeable to” the partnership is intended to make clear that the limited liability provided by this section may also not be circumvented by a plaintiff in a direct action against uninvolved partners seeking to hold them vicariously liable for the actions of a wrongdoing partner or other representative.

Further clarification

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The operating agreement and certificate of organization are the exclusive consensual process for modifying the various default rules in Chapter 88 pertaining to relationships inter se the members and between the members and the limited liability company.

The operating agreement and certificate of organization also have power over “the rights and duties under this title of a person in the capacity of a member or manager” pursuant to subsection (a)(2), and “the obligations of a limited liability company and its members to a person in the person’s capacity as a transferee or person dissociated as a member” pursuant to 15 Pa.C.S. § 8817(b). For the relationship between the operating agreement and certificate of organization, see 15 Pa.C.S. § 8817(d).

Agreements: Contents and Freedom of Contract

We next consider the extent to which an agreement among the organization’s owners can affect the fiduciary and other duties of those who manage the organization (e.g., members in a member-managed LLC; managers in a manager-managed LLC.

Chapter 88 rejects the notion that a contract can completely transform an inherently fiduciary relationship into a merely arm’s length association. Within that limitation, however, this section provides substantial power to the operating agreement to reshape, limit, and eliminate fiduciary and other managerial duties. (See comments to § 8815(d)(3)).


Overarching principles:§ 8814. Governing law.

(a) Pennsylvania law governs:(1) the internal affairs of a limited liability company; and(2) the liability of a member as member and of a manager as

manager for the debts, obligations or other liabilities of a limited liability company.

* * *§ 8815. Contents of operating agreement .

(a) The operating agreement is the primary vehicle establishing the “contract” governing the LLC.

(b) To the extent the operating agreement does not provide for a matter described in subsection (a), this title governs the matter.


§ 8815 . Contents of operating agreement.(a) Scope of operating agreement.--Except as provided under subsections

(c) and (d), the operating agreement governs:(1) relations among the members as members and between the

members and the limited liability company;(2) the rights and duties under this title of a person in the capacity of a

member or manager;(3) the activities and affairs of the company and the conduct of those

activities and affairs;(4) the means and conditions for amending the operating agreement;

and(5) the means and conditions for approving a transaction under Chapter

3 (relating to entity transactions). [META]

Operating Agreements - Contents

EXCEPTIONS:

(c) Limitations.--An operating agreement may not do any of the following:

(1) Vary a provision of Chapter 1 (general provisions) or Subchapter A of Chapter 2 (names).

(2) Vary the right of a member to approve a fundamental transaction.

(3) Vary the required contents of a plan relating to a fundamental transaction.

(4) Vary a provision of Chapter 81 (general partnership provisions)

Operating Agreements – Contents - Limitations

EXCEPTIONS cont’d:

(5) Vary the provisions of section 8811(b), (c) and (d) (short title and application of chapter).

(6) Vary the law applicable under section 8814 (governing law).

(7) Vary a provision of section 8818(d) (characteristics of limited liability company).

(8) Vary a provision of section 8819 (powers).

(9) Vary any requirement, procedure or other provision of this title pertaining to (i) registered offices; or (ii) the department of state, including provisions pertaining to documents authorized or required to be delivered to the department for filing under this title.


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EXCEPTIONS cont’d:

(10) Provide indemnification or exoneration in violation of the limitations in sections 8848(g) (reimbursement, indemnification , advancement and insurance), 8849.1(j) (standards of conduct for members) and 8849.2(h) (standards of conduct for managers).

(11) Eliminate the duty of loyalty provided for in section 8849.1(b)(1)(i) or (ii) or (2) or the duty of care of a member in a member-managed company, except as provided in subsection (d).

(12) Eliminate the duty of loyalty provided for in section 8849.2(b)(1)(i) or (ii) or (2) or the duty of care of a manager, except as provided in subsection (d).

(13) Vary the contractual obligation of good faith and fair dealing under section 8849.1(d) or 8849.2(d), except as provided in subsection (d).


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EXCEPTIONS cont’d:(14) Restrict the duties and rights under section 8850 (rights to information),

except as provided in subsection (d).(15 ) Vary the causes of dissolution specified in section 8871(a)(4) (events causing

dissolution)(16) Vary the statutory requirements to wind up the company’s activities and affairs

specified in section 8872(a), (b)(1), (e) and (f) (winding up and filing of certificates).(17) Unreasonably restrict the right of a member to maintain an action under

Subchapter H (actions by members).(18) Vary the provisions of section 8884 (special litigation committee), except that the

operating agreement may provide that the company may not have a special litigation committee.

(19) Vary a provision of Subchapter I (benefit companies). (20) Except as provided in section 8817(b) (amendment and effect of operating

agreement), restrict the rights under this title of a person other than a member or manager.

Operating Agreements - Contents

Section 8815 is patterned after Uniform Limited Liability Company Act (2006) (Last Amended 2013) § 105. A limited liability company is as much a creature of contract as of statute. Once a company comes into existence and has a member, the company necessarily has an operating agreement. See the Committee Comment to 15 Pa.C.S. § 8812 (“operating agreement”). Accordingly, Chapter 88 refers to “the operating agreement” rather than “an operating agreement.” This phrasing should not, however, be read to require a limited liability company or its members to take any formal action to adopt an operating agreement.

Operating Agreements - Discussion

Subsection (c) – This subsection lists the provisions of this title that cannot be varied or may be varied subject to a stated limitation.

If a person claims that a term of the operating agreement violates this subsection, the burden of proof is on the person making the claim.


Subsection (c)(10) (indemnity) – These restrictions are ubiquitous in the law of business entities and, in conjunction with other provisions of this section, control the otherwise very broad power of an operating agreement to affect fiduciary and other duties.

pertains to indirect as well as direct efforts to provide indemnification or exoneration and thus limits how far an operating agreement can go in providing for indemnification. See 15 Pa.C.S. § 8848(b) (default rule for indemnification).

But - an exculpatory provision cannot shield against a member’s claim of oppression. See 15 Pa.C.S. § 8871(a)(4)(iii).


Subsection (c)(11) and (12) (duty of loyalty/care)– These limitations are less far-reaching than might first appear because subsection (d) specifically authorizes substantial alterations to the duties of loyalty and care, including restricting and substantially eliminating those duties under certain circumstances.

Subsection (c)(13) (good faith/fair dealing)– 15 Pa.C.S. §§ 8849.1(d) and 8849.2(d) refer to the “contractual obligation of good faith and fair dealing,” which contract law implies in every contract. An operating agreement that seeks to “prescribe the standards … by which the performance of [that] obligation … is to be measured” should expressly refer to the obligation. See Gerber v. Enter. Prods. Hldgs., LLC, 67 A.3d 400, 418 (Del. 2013) (distinguishing between the implied contractual covenant and an express contractual obligation of “good faith” as stated in a limited partnership agreement).


Subsection (c)(14) (information rights)– Although phrased as a restriction, this provision grants substantial power to the operating agreement because of the application of the rules in subsection (d).

EXAMPLE: A law firm operates as a limited liability company, and the operating agreement provides that a “Compensation Committee” periodically decides each partner’s compensation. The agreement also states that only members who are on the Compensation Committee may have access to the Committee’s compensation decisions pertaining to other members. This restriction is reasonable.


15 Pa.C.S. § 8850(h) also empowers a limited liability company “as a matter within the ordinary course of its activities and affairs [to] impose reasonable restrictions and conditions on access to and use of information” obtained under section 8850.

In determining whether a restriction is reasonable, a court might consider: (i) the danger or other problem the restriction seeks to avoid; (ii) the purpose for which the information is sought; and (iii) whether, in light of both the problem and the purpose, the restriction is reasonably tailored. In addition, a restriction that is reasonable when applied to a non-managing member in a manager-managed limited liability company might be unreasonable when applied to a managing member or in the context of a member-managed company.


(d) Permitted terms. – Subject to subsection (c)(10), the following rules apply:

(1) The operating agreement may:

(i) specify the method by which a specific act or transaction that would otherwise violate the duty of loyalty may be authorized or ratified by one or more disinterested and independent persons after full disclosure of all material facts;

(ii) alter the prohibition stated in section 8845(a)(2) (relating to limitations on distributions) so that the prohibition requires only that the company’s total assets not be less than the sum of its total liabilities; and

(iii) impose reasonable restrictions on the availability and use of information obtained under section 8850 and may define appropriate remedies, including liquidated damages, for a breach of any reasonable restriction on use.

(2) To the extent the operating agreement of a member-managed limited liability company expressly relieves a member of a responsibility that the member would otherwise have under this title and imposes the responsibility on one or more other members, the operating agreement also may eliminate or limit any fiduciary duty of the member relieved of the responsibility that would have pertained to the responsibility.

Operating Agreements – Contents - Permitted

(3) If not manifestly unreasonable, the operating agreement may:

(i) alter the aspects of the duty of loyalty;

(ii) prescribe the standards, if not manifestly unreasonable, by which the performance of the contractual obligation of good faith and fair dealing is to be measured;

(iii) identify specific types or categories of activities that do not violate the duty of loyalty;

(iv) alter the duty of care; and

(v) alter or eliminate any other fiduciary duty.

Operating Agreements – Contents – variability subject to “manifestly unreasonable” standard

Subsection (d) – The operating agreement has complete power over the matters described in subsection (a), except as specifically limited by subsections (c) and (d)(3). However, subsection (d)(1) and (2) list various arrangements often found in operating agreements. Subsection (d)(3) lists arrangements subject to the “not manifestly unreasonable” standard. Subsection (e) delineates the manifestly unreasonable standard.

Subsection (d)(2) – in member-managed limited liability companies: (i) managers are collectively responsible; and (ii) managers may properly delegate a duty but the delegation does not discharge the duty. However, subject to subsection (d)(3) the operating agreement may alter or even eliminate fiduciary duties.

Subsection (d)(3) – Chapter 88 seeks to balance the virtues of “freedom of contract” against the dangers that inescapably exist when some have power over the interests of others, rejecting the notion that fiduciary duty within a business organization is merely a set of default rules .

Operating Agreements – “not manifestly unreasonable” variability of contents

A properly drafted operating agreement may substantially alter and even eliminate fiduciary duties, subject to two important limitations:

First, arrangements subject to this subsection may not be “manifestly unreasonable” as that concept is delineated in subsection (e).

Second, the operating agreement may not transform the relationship among the members, managers, and the limited liability company into an entirely arm’s length arrangement. For example, displacement of fiduciary duties is effective only to the extent that the displacement is stated clearly and with particularity. See, e.g., Paige Capital Management, LLC v. Lerner Master Fund, LLC, Civ. A. No. 5502–CS, 2011 WL 3505355 at *31 (Del.Ch. Aug. 8, 2011) (even under a statute that permits complete waiver of fiduciary duty, such waivers must be set forth clearly”).

Operating Agreements – “not manifestly unreasonable” variability of contents

(e) Determination of manifest unreasonableness. – The court shall decide as a matter of law whether a term of an operating agreement is manifestly unreasonable under subsection (d)(3). The court:

(1) makes its determination as of the time the challenged term became part of the operating agreement and by considering only circumstances existing at that time; and

(2) may invalidate the term only if, in light of the purposes, activities and affairs of the limited liability company, it is readily apparent that:

(i) the objective of the term is unreasonable; or(ii) the term is an unreasonable means to achieve the

term’s objective.

Operating Agreements –what is “not manifestly unreasonable”

Subsection (e) sets forth a demanding standard for persons claiming that a term of an operating agreement is “manifestly unreasonable” - - the court may invalidate the term only if, in light of the purposes, activities, and affairs of the limited liability company, it is readily apparent that the objective of the term is unreasonable or that the term is an unreasonable means to achieve the term’s objective.

Rules for applying the concept of “not manifestly unreasonable” and specifies:- who decides the issue of “manifestly unreasonable”:

the court … as a matter of law

- what is the framework for determining the issue: determination to be made “in light of the purposes, activities and affairs of the limited liability company,”

- the temporal setting for determining the issue: determination [to be made] as of the time the challenged term became part of the operating agreement”

- what information is admissible for determining the issue:“only circumstances existing” when “the challenged term became part of the operating agreement,”


WHY?Determining manifest unreasonableness in the context of owners of an organization is a different task than doing so in a commercial context, where concepts like “usages of trade” are available to inform the analysis. Each business organization must be understood in its own terms and context and in light of the practices of its owners.If loosely applied, the concept of “manifestly unreasonable” would permit a court to rewrite the members’ agreement, which would destroy the balance Chapter 88 seeks to establish between freedom of contract and fiduciary duty.Case law has not adequately delineated the concept. See e.g. In re Brobeck, Phleger & Harrison LLP, 408 B.R. 318, 335 (Bankr. N.D. Cal. 2009) (“RUPA does not define what is ‘manifestly unreasonable’ and the parties have not cited, nor can the court locate, a decision that defines the term. Absent case law or even a dictionary definition, the court must rely on its common sense to recognize something as manifestly unreasonable.”). - - so – are we back to “you know it when you see it?


Definitions:

“Transferable interest.” The right, as initially owned by a person in the person’s capacity as a member, to receive distributions from a limited liability company, whether or not the person remains a member or continues to own any part of the right. The term applies to any fraction of the interest, by whomever owned.

“Transferee.” A person to which all or part of a transferable interest has been transferred, whether or not the transferor is a member. The term includes a person that owns a transferable interest under section 8863(a)(3) (relating to effect of dissociation).

Transfers/Transferee

“Transferable interest.” - Absent a contrary provision in the operating agreement or the consent of the members, a “transferable interest” is the only interest in a limited liability company that can be transferred to a non-member. See 15 Pa.C.S. § 8852.

“Transferable interest” is defined “as initially owned by a person in the person’s capacity as a member,” because this chapter does not contemplate a limited liability company directly creating interests that comprise only economic rights. See 15 Pa.C.S. §§ 8841 (addressing how a person becomes a member) and 8852 (addressing how a person becomes a transferee).

“Transferee.” – Under 15 Pa.C.S. § 8863(a)(3), subject to limited exceptions, “any transferable interest owned by the person in the person’s capacity as a member immediately before dissociation as a member is owned by the person solely as a transferee” following dissociation.

In many sections of Chapter 88 – transferees and members have substantially identical rights – see, e.g., entitlements to and limitations on distributions.

BUT -

Transfers/Transferee - discussion

§ 8851. Nature of transferable interest.

(a) Personal property. – A transferable interest is personal property.

(b) Only right that may be transferred. – A person may not transfer to a person not a member any rights in a limited liability company other than a transferable interest. [meaning no governance rights]

Transfers/Transferee –relevance

§ 8852. Transfer of transferable interest.

(a) General rule. – Subject to section 8853(f) (relating to charging order), a transfer, in whole or in part, of a transferable interest:

(1) is permissible;

(2) does not by itself cause the dissociation of the transferor as a member or a dissolution and winding up of the limited liability company’s activities and affairs; and

(3) subject to section 8854 (relating to power of personal representative of deceased member), does not entitle the transferee to: (i) participate in the management or conduct of the company’s activities and affairs; or (ii) except as provided in subsection (c), have access to records or other information concerning the company’s activities and affairs.

(b) Right to distributions. – A transferee has the right to receive, in accordance with the transfer, distributions to which the transferor would otherwise be entitled.

(c) Right to account on dissolution. – In a dissolution and winding up of a limited liability company, a transferee is entitled to an account of the company’s transactions only from the date of dissolution.


(d) Certificate of interest. – A transferable interest may be evidenced by a certificate of the interest issued by the limited liability company in record form and, subject to this section, the interest represented by the certificate may be transferred by a transfer of the certificate.

(e) Recognition of transferee’s rights. – A limited liability company need not give effect to a transferee’s rights under this section until the company knows or has notice of the transfer.

(f) Transfer restrictions. – A transfer of a transferable interest in violation of a restriction on transfer contained in the operating agreement is ineffective if the intended transferee has knowledge or notice of the restriction at the time of transfer.

(g) Rights retained by transferor. – Except as provided in section 8861(5)(ii) (relating to events causing dissociation), if a member transfers a transferable interest, the transferor retains the rights of a member other than the transferable interest transferred and retains all the duties and obligations of a member.


This section is patterned after Uniform Limited Liability Company Act (2006) (Last Amended 2013) § 502.

One of the most fundamental characteristics of limited liability company law is its fidelity to the “pick your partner” principle.

A member’s rights in a limited liability company are bifurcated into economic rights (the transferable interest) and governance rights (including management rights, consent rights, rights to information, and rights to seek judicial intervention).

Unless the operating agreement otherwise provides, a member acting without the consent of all other members lacks both the power and the right to: (i) bestow membership on a non-member; or (ii) transfer to a non-member anything other than some or all of the member’s transferable interest.

The rights of a mere transferee are quite limited – i.e., to receive distributions as provided in subsection (b), and, if the company dissolves and winds up, to receive specified information pertaining to the company from the date of dissolution as provided in subsection (c).


§ 8817. Amendment and effect of operating agreement.

(b) Obligations to non-members. – The obligations of a limited liability company and its members to a person in the person’s capacity as a transferee or a person dissociated as a member are governed by the operating agreement. Except as provided in section 8844(d) (relating to sharing of and right to distributions before dissolution) or in a court order issued under section 8853(b)(2) (relating to charging order) to effectuate a charging order, an amendment to the operating agreement made after a person becomes a transferee or is dissociated as a member:

(1) is effective with regard to any debt, obligation or other liability of the limited liability company or its members to the person in the person’s capacity as a transferee or person dissociated as a member;

(2) is not effective to the extent the amendment imposes a new debt, obligation or other liability on the transferee or person dissociated as a member.

Transfers/Transferee –points of relevance

WHY? – another balancing act:

The law of unincorporated business organizations is only beginning to grapple in a modern way with the tension between the rights of an organization’s owners to carry on their activities as they see fit (or have agreed) and the rights of transferees of the organization’s economic interests. Such transferees can include the heirs of business founders as well as former owners who are “locked in” as transferees of their own interests. See 15 Pa.C.S. § 8863(a)(3).

If the law were to categorically favor the owners, there would be a serious risk of expropriation and other abuse. On the other hand, if the law were to grant former owners and other transferees the right to seek judicial protection, that specter could “freeze the deal” as of the moment an owner leaves the enterprise or a third party obtains an economic interest.

Transfers/Transferee –points of relevance

Separate sections provide rules on the duties of:members in a member-managed LLC (§ 8849.1)managers in a manager-managed LLC (§ 8849.2)

The duties in the two sections are largely the same, but the sections are tailored to the specific situations of members and managers.Section 8849.1(i) provides that “a member does not have any duty to a manager-managed limited liability company or to any other member of the company solely by reason of being or acting as a member.

Duties

In a major change from prior law, the duties of members in a member-managed LLC and managers in a

manager-managed LLC will be subject to variation by agreement of the

members.

Fiduciary duty of loyalty.Duty of care.

The duty is “to refrain from engaging in gross negligence, recklessness, willful misconduct or knowing violation of law.”

Contractual obligation of good faith and fair dealing.Is different from the corporate law concept of good faith which is an aspect of the duty of loyalty, as articulated in Stone v. Ritter, 911 A.2d 362 (Del. 2006).

Comment: “[T]he contractual obligation … is not a fiduciary duty, does not command altruism or self-abnegation, and does not prevent a partner from acting in the partner’s own self-interest … [T]he purpose … is to protect the arrangement the partners have chosen for themselves, not to restructure the arrangement under the guise of safeguarding it.”

Basic Duties

1. Do not conduct the company’s activities for personal gain.

2. Do not use company property for personal gain.3. Do not appropriate a company opportunity.4. Do not engage in self-dealing.5. Refrain from competing with the company.

These duties apply both during the life of the company and also during winding up.

Aspects of the Duty of Loyalty

Duties other than care and loyalty may be altered or eliminated by the OA, if not manifestly unreasonable.The OA may alter the duty of care, if not manifestly unreasonable.The OA may not vary the contractual obligation of good faith and fair dealing, but may prescribe the standards by which it is measured, if not manifestly unreasonable.

Varying Duties

The OA may identify types of activities that do not violate the duty of loyalty.The OA may alter, but not eliminate, the aspects of the duty of loyalty stated in 1, 2, and 4.The OA may freely alter, and may eliminate entirely, the aspects of the duty of loyalty stated in 3 and 5.

7993a

Please note this code. It will be required to receive CLE credit, and will not be repeated.

CLE Code #2

The agency authority of partners in a general or limited partnership remains as under the prior law.

Agency authority in an LLC will changesignificantly under the new law:

A member will not be an agent of an LLC regardless of whether the LLC is member-managed or not.A manager will not be an agent of an LLC, unless the certificate of organization states that the LLC is manager-managed.

New Filings Defining Authority

An LLC or GP may file a certificate of authority that pertains to:1. a position in the LLC or GP; or2. a specific person.

The certificate may state the authority of a person holding the position or the specific person to:1. transfer real property held in the name of the LLC or

GP; or2. enter into other transactions involving the LLC or GP.

New Filings Defining Authority (continued)

An effective certificate protects a third party without knowledge to the contrary.A copy of a certificate may be recorded in the land records.A person named in a filed certificate of authority may file a certificate of denial which acts as an amendment of the certificate and may be recorded in the land records.

New Filings Defining Authority (continued)

February 7, 2017

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Special thank you to LexisNexis® for providing CLE credits via LexisNexis University and to our presenters, William H. Clark, Jr. and Lisa R. Jacobs