Act 170 www.blumlinggusky.com Presented March 27, 2017 by: John F. Nobbs, Esquire (jnobbs@bglaw-llp.com) Amanda B. Kraft, Esquire (akraft@bglaw-llp.com)
This publication is distributed with the understanding that Blumling & Gusky, LLP is not rendering legal, accounting, financial or other professional advice or opinions on specific facts or matters, and accordingly it assumes no liability whatsoever in connection with its use. If you desire to discuss any issues highlighted in this publication please contact Blumling & Gusky, LLP for personalized professional assistance. 2
Signed into law November 2016 Includes the adoption of: - Uniform Partnership Act - Uniform Limited Partnership Act - Uniform Limited Liability Company Act Expands liability shield for LLPs New sections on derivative suits for ALL entities Nonprofit LP and LLCs Benefit LLCs 3
Took effect on February 21, 2017 for all new entities created after February 21 On April 1, 2017, Act 170 takes effect for ALL PREEXISTING ENTITIES 4
Corporations - §§ 1781-1784 Nonprofit corporations - §§ 5781-5784 Limited partnerships - §§ 8692-8695 Limited liability companies - §§ 8882-8885 (not General Partnerships) 5
Clarification post Cuker (1997 PA Supreme Court) Adoption of universal demand rule • Notice must include reasonable specificity of essential facts relied upon in demand • A new demand must be made if a later claim is raised that was not subsumed under original demand 6
[A] member or manager may maintain a derivative action to enforce a right of an LLC only if: (1) the plaintiff first makes a demand on the [managing party], requesting that they cause the LLC to bring an action to enforce the right and: (i) if a special litigation committee is not appointed under section 8884, the company does not bring the action within a reasonable time; or (ii) if a special litigation committee is appointed under section 8884, a determination is made: (A) that the company not object to the action; or (B) that the plaintiff continue the action; (2) demand is excused under subsection (b); (3) action is maintained for the limited purpose of seeking court review; or (4) the court has allowed the action to continue under the control of the plaintiff. 7
The making of a demand tolls any applicable statute of limitations with respect to a claim asserted in the demand until the earlier of the date: (1) the plaintiff making the demand is notified: (i) that the managers or members have decided not to bring an action and not to appoint a special litigation committee; or (ii) of a determination under section 8884(e) after the appointment of a special litigation committee under section 8884; or (2) the plaintiff commences an action asserting the claim. 8
Special Litigation Committees – §§ 1783; 5783; 8694; 8884 Managing party “may appoint a special litigation committee to investigate the claims asserted in the demand or action and to determine on behalf of the company or recommend to the managers or members whether pursuing any of the claims asserted is in the best interests of the company” with some limitations 9
◦ If an action is initiated by members during pendency of the SLC determination, pleadings may be tolled and discovery stayed ◦ Where action exists, SLC submits its determination and report to the court ◦ Where court determines that SLC members were disinterested and acted in good faith, independently and with reasonable care, court SHALL enforce determination of committee 10
◦ Biggest change: adoption of a full liability shield for General Partners of limited liability entities comparable to the liability shield of corporate shareholders and LLC members ◦ GP is now shielded for negligent acts of those they supervise (although they are still on the hook for their own negligence) ◦ 15 Pa.C.S. § 8204 11
LLCs are creations of Statute and Contract • Requires a certificate of organization but Operating Agreement controls actual governance and operation of the LLC • There is freedom of contract but the Act provides "default" provisions which must be considered and addressed via the Operating Agreement • Particularly an issue in multimember entities 12
Certificate of organization no longer requires a declaration of the manner of management ◦ It can be stated in the Operating Agreement ◦ OR via Certificate of Authority filed with the Dept of State ◦ OR not at all! Statutory Default - member NOT manager managed ◦ BUT under default provision, members no longer have "statutory apparent authority!" 15 Pa. C. S. § 8831 13
Certificate of Authority ◦ General Purpose – denotes party (by position or specific person) permitted to act on behalf of LLC or GP Transfer real property held by entity; or Enter into other transactions on behalf of entity ◦ Filed with Dept of State or local Dept of Real Estate ◦ Certificate of Denial Filed by named party to amend prior certificate of authority denying that authority (ex: dissociation) 14
Authority in LLCs When will we see this most commonly? ◦ Lenders; title insurance; contracting generally as an LLC or with other LLCs Who needs to know this at our clients’ companies? ◦ Contracting officers; members; managers; salesmen ◦ Make sure the person executing a contract has actual authority to avoid an “apparent authority” argument in future litigation 15
Contracts should have a statement that the party executing an agreement on behalf of the LLC has actual authority to do so OR request a copy of the operating agreement or a certificate of authority from the LLC OR request that ALL members (of a member managed or unknown LLC) execute the contract 16
Section references: ◦ General Partnerships - § 8485 ◦ Limited Partnership - § 8673 ◦ Limited Liability Companies - § 8853 17
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) [related to 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 which the charging order was issued any distribution that otherwise would be paid to the judgment debtor 18
Transferable interest ◦ Limited to right of distribution only ◦ Not management and/or voting rights Relies on the underlying theory of "pick your partner" 19
New sections mandate duties of the managing party ◦ Members in a member-managed LLC ( § 8849.1) ◦ Managers in a manager-managed LLC ( § 8849.2) Largely the same duties in each section, but each is tailored to specific circumstances of of member vs. manager management 20
Members, § 8849.1(a) • A member of a member managed limited liability company owes to the company and…the other members the duties of loyalty and care stated under subsections (b) and (c) Manager, § 8849.2(a) • A manager of a manager managed limited liability company owes to the company and…the other members the duties of loyalty and care stated under subsections (b) and (c) 21
"A member does not have any duty to a manager managed LLC or to any other member of the LLC solely by reason of being or acting as a member" 15 Pa.C.S. 8849.1(i) 22
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 23
Operating agreement may identify specifically described activities that do not violate the duty of loyalty Operating agreement may alter but NOT eliminate 1/2/4 Operating agreement may freely alter or eliminate entirely 3/5 24
“[T]o refrain from engaging in gross negligence, recklessness, willful misconduct or knowing violation of law“ May be altered but not eliminated by operating agreement if not "manifestly unreasonable" 25
Different from corporate law concept of "good faith" which is an aspect of duty of loyalty It is a contractual obligation, not a fiduciary duty Operating agreement cannot eliminate this obligation, but it may prescribe specific standards by which it is measured, as long as not “manifestly unreasonable” 26
The rights of an owner are terminated Compare to Dissolution - commencing the termination of the existence of the entity 27
Example: LLC Act provides 17 instances causing dissociation by a person, including: (1) The limited liability company knows or has notice of the person's express will to withdraw as a member, except that if the person specified a withdrawal date later than the date the company knew or had notice, on that later date. (2) An event stated in the operating agreement as causing the person's dissociation occurs. (4) The person is expelled as a member pursuant to the operating agreement. 28
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