Uniform Partnership Act (1997) Uniform Limited Partnership Act (2001) Uniform Limited Liability Company Act (2006) Uniform Limited Cooperative Association Act (2007)

D R A F T

FOR DISCUSSION ONLY

Amendments to: UNIFORM PARTNERSHIP ACT (1997) UNIFORM LIMITED PARTNERSHIP ACT (2001) UNIFORM LIMITED LIABILITY COMPANY ACT (2006) UNIFORM LIMITED COOPERATIVE ASSOCIATION ACT (2007)

NATIONAL CONFERENCE OF COMMISSIONERS

ON UNIFORM STATE LAWS

FOR RECORD OWNERS OF BUSINESS ACT NOVEMBER 18, 2007 DRAFTING COMMITTEE MEETING

Without Prefatory Notes and With Comments

______The ideas and conclusions set forth in this draft, including the proposed statutory language and any comments or reporter=s notes, have not been passed upon by the National Conference of Commissioners on Uniform State Laws or the Drafting Committee. They do not necessarily reflect the views of the Conference and its Commissioners and the Drafting Committee and its Members and Reporter. Proposed statutory language may not be used to ascertain the intent or meaning of any promulgated final statutory proposal.

November 5, 2007 DRAFTING COMMITTEE ON RECORD OWNERS OF BUSINESS ACT The Committee appointed by and representing the National Conference of Commissioners on Uniform State Laws in preparing this Act consists of the following individuals: HARRY J. HAYNSWORTH, IV, 2200 IDS Center, 80 S. 8th St., Minneapolis, MN 55402, Chair BRUCE A. COGGESHALL, One Monument Sq., POrtland, ME 04101 DAVID G. NIXON, 2340 Green Acres Rd., Suite 12, Fayetteville, AR 72703 STEVE WILBORN, 306 Tower Dr., Shelbyville, KY 40065 NORA WINKELMAN, Office of General Counsel, 333 Market St., 17th Flr., Harrisburg, PA 17101 WILLIAM H. CLARK, JR., One Logan Square, 18th and Cherry Streets, Philadelphia, PA 19103-6996, Reporter

EX OFFICIO MARTHA LEE WALTERS, Oregon Supreme Court, 1163 State St., Salem, OR 97301-2563, President WILLIAM H. HENNING, University of Alabama, Box 870382, Tuscaloosa, AL 35487-0382, Division Chair

AMERICAN BAR ASSOCIATION ADVISOR ALLAN G. DONN, Willcox & Savage, Suite 1800, Norfolk, VA 23510, ABA Advisor

EXECUTIVE DIRECTOR JOHN A. SEBERT, 211 E. Ontario St., Suite 1300, Chicago, IL 60611, Executive Director

Copies of this Act may be obtained from:

NATIONAL CONFERENCE OF COMMISSIONERS ON UNIFORM STATE LAWS 211 E. Ontario Street, Suite 1300 Chicago, Illinois 60611 312/915-0195 www.nccusl.org RECORD OWNERS OF BUSINESS ACT

TABLE OF CONTENTS

AMENDMENTS TO UNIFORM PARTNERSHIP ACT (1997) SECTION 103. EFFECT OF PARTNERSHIP AGREEMENT; NONWAIVABLE PROVISIONS...... 1 SECTION 403. PARTNER’S RIGHTS AND DUTIES WITH RESPECT TO INFORMATION...... 5 SECTION 1003. ANNUAL REPORT ...... 8

AMENDMENTS TO UNIFORM LIMITED PARTNERSHIP ACT (2001) SECTION 110. EFFECT OF PARTNERSHIP AGREEMENT; NONWAIVABLE PROVISIONS...... 11 SECTION 111. REQUIRED INFORMATION ...... 14 SECTION 210. ANNUAL REPORT FOR [SECRETARY OF STATE]...... 17

AMENDMENTS TO UNIFORM LIMITED LIABILITY COMPANY ACT (2006) SECTION 110. OPERATING AGREEMENT; SCOPE, FUNCTION, AND LIMITATIONS. .19 SECTION 209. ANNUAL REPORT FOR [SECRETARY OF STATE]...... 28 SECTION 410. RIGHT OF MEMBERS, MANAGERS, AND DISSOCIATED MEMBERS TO INFORMATION...... 30 SECTION 502. TRANSFER OF TRANSFERABLE INTEREST...... 34

AMENDMENTS TO UNIFORM LIMITED COOPERATIVE ASSOCIATION ACT (2007)

1 AMENDMENTS TO

2 UNIFORM PARTNERSHIP ACT (1997)

4 SECTION 103. EFFECT OF PARTNERSHIP AGREEMENT; NONWAIVABLE

5 PROVISIONS.

6 (a) Except as otherwise provided in subsection (b), relations among the partners and

7 between the partners and the partnership are governed by the partnership agreement. To the

8 extent the partnership agreement does not otherwise provide, this [Act] governs relations among

9 the partners and between the partners and the partnership.

10 (b) The partnership agreement may not:

11 (1) vary the rights and duties under Section 105 except to eliminate the duty to

12 provide copies of statements to all of the partners;

13 (2) unreasonably restrict the right of access to books and records under Section

14 403(b);

15 (3) eliminate the duty of loyalty under Section 404(b) or 603(b)(3), but:

16 (i) the partnership agreement may identify specific types or categories of

17 activities that do not violate the duty of loyalty, if not manifestly unreasonable; or

18 (ii) all of the partners or a number or percentage specified in the

19 partnership agreement may authorize or ratify, after full disclosure of all material facts, a specific

20 act or transaction that otherwise would violate the duty of loyalty;

21 (4) unreasonably reduce the duty of care under Section 404(c) or 603(b)(3);

22 (5) eliminate the obligation of good faith and fair dealing under Section 404(d),

23 but the partnership agreement may prescribe the standards by which the performance of the

1 1 obligation is to be measured, if the standards are not manifestly unreasonable;

2 (6) vary the power to dissociate as a partner under Section 602(a), except to

3 require the notice under Section 601(1) to be in writing;

4 (7) vary the right of a court to expel a partner in the events specified in Section

5 601(5);

6 (8) vary the requirement to wind up the partnership business in cases specified in

7 Section 801(4), (5), or (6);

8 (9) vary the law applicable to a limited liability partnership under Section 106(b);

9 or

10 (10) restrict rights of third parties under this [Act]; or

11 (11) vary the requirements of section 403(d).

12 Comment 13 14 1. The general rule under Section 103(a) is that relations among the partners and between 15 the partners and the partnership are governed by the partnership agreement. See Section 101(5). 16 To the extent that the partners fail to agree upon a contrary rule, RUPA provides the default rule. 17 Only the rights and duties listed in Section 103(b), and implicitly the corresponding liabilities 18 and remedies under Section 405, are mandatory and cannot be waived or varied by agreement 19 beyond what is authorized. Those are the only exceptions to the general principle that the 20 provisions of RUPA with respect to the rights of the partners inter se are merely default rules, 21 subject to modification by the partners. All modifications must also, of course, satisfy the general 22 standards of contract validity. See Section 104. 23 24 2. Under subsection (b)(1), the partnership agreement may not vary the requirements for 25 executing, filing, and recording statements under Section 105, except the duty to provide copies 26 to all the partners. A statement that is not executed, filed, and recorded in accordance with the 27 statutory requirements will not be accorded the effect prescribed in the Act, except as provided in 28 Section 303(d). 29 30 3. Subsection (b)(2) provides that the partnership agreement may not unreasonably 31 restrict a partner or former partner’s access rights to books and records under Section 403(b). It 32 is left to the courts to determine what restrictions are reasonable. See Comment 2 to Section 403. 33 Other information rights in Section 403 can be varied or even eliminated by agreement. 34 35 4. Subsection (b)(3) through (5) are intended to ensure a fundamental core of fiduciary

2 1 responsibility. Neither the fiduciary duties of loyalty or care, nor the obligation of good faith and 2 fair dealing, may be eliminated entirely. However, the statutory requirements of each can be 3 modified by agreement, subject to the limitation stated in subsection (b)(3) through (5). 4 5 There has always been a tension regarding the extent to which a partner’s fiduciary duty 6 of loyalty can be varied by agreement, as contrasted with the other partners’ consent to a 7 particular and known breach of duty. On the one hand, courts have been loathe to enforce 8 agreements broadly “waiving” in advance a partner’s fiduciary duty of loyalty, especially where 9 there is unequal bargaining power, information, or sophistication. For this reason, a very broad 10 provision in a partnership agreement in effect negating any duty of loyalty, such as a provision 11 giving a managing partner complete discretion to manage the business with no liability except 12 for acts and omissions that constitute willful misconduct, will not likely be enforced. See, e.g., 13 Labovitz v. Dolan, 189 Ill. App. 3d 403, 136 Ill. Dec. 780, 545 N.E.2d 304 (1989). On the other 14 hand, it is clear that the remaining partners can “consent” to a particular conflicting interest 15 transaction or other breach of duty, after the fact, provided there is full disclosure. 16 17 RUPA attempts to provide a standard that partners can rely upon in drafting exculpatory 18 agreements. It is not necessary that the agreement be restricted to a particular transaction. That 19 would require bargaining over every transaction or opportunity, which would be excessively 20 burdensome. The agreement may be drafted in terms of types or categories of activities or 21 transactions, but it should be reasonably specific. 22 23 A provision in a real estate partnership agreement authorizing a partner who is a real 24 estate agent to retain commissions on partnership property bought and sold by that partner would 25 be an example of a “type or category” of activity that is not manifestly unreasonable and thus 26 should be enforceable under the Act. Likewise, a provision authorizing that partner to buy or sell 27 real property for his own account without prior disclosure to the other partners or without first 28 offering it to the partnership would be enforceable as a valid category of partnership activity. 29 30 Ultimately, the courts must decide the outer limits of validity of such agreements, and 31 context may be significant. It is intended that the risk of judicial refusal to enforce manifestly 32 unreasonable exculpatory clauses will discourage sharp practices while accommodating the 33 legitimate needs of the parties in structuring their relationship. 34 35 5. Subsection (b)(3)(i) permits the partners, in their partnership agreement, to identify 36 specific types or categories of partnership activities that do not violate the duty of loyalty. A 37 modification of the statutory standard must not, however, be manifestly unreasonable. This is 38 intended to discourage overreaching by a partner with superior bargaining power since the courts 39 may refuse to enforce an overly broad exculpatory clause. See, e.g., Vlases v. Montgomery Ward 40 & Co., 377 F.2d 846, 850 (3d Cir. 1967) (limitation prohibits unconscionable agreements); PPG 41 Industries, Inc. v. Shell Oil Co., 919 F.2d 17, 19 (5th Cir. 1990) (apply limitation deferentially to 42 agreements of sophisticated parties). 43 44 Subsection (b)(3)(ii) is intended to clarify the right of partners, recognized under general 45 law, to consent to a known past or anticipated violation of duty and to waive their legal remedies 46 for redress of that violation. This is intended to cover situations where the conduct in question is

3 1 not specifically authorized by the partnership agreement. It can also be used to validate conduct 2 that might otherwise not satisfy the “manifestly unreasonable” standard. Clause (ii) provides that, 3 after full disclosure of all material facts regarding a specific act or transaction that otherwise 4 would violate the duty of loyalty, it may be authorized or ratified by the partners. That 5 authorization or ratification must be unanimous unless a lesser number or percentage is specified 6 for this purpose in the partnership agreement. 7 8 6. Under subsection (b)(4), the partners’ duty of care may not be unreasonably reduced 9 below the statutory standard set forth in Section 404(d), that is, to refrain from engaging in 10 grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law. 11 12 For example, partnership agreements frequently contain provisions releasing a partner 13 from liability for actions taken in good faith and in the honest belief that the actions are in the 14 best interests of the partnership and indemnifying the partner against any liability incurred in 15 connection with the business of the partnership if the partner acts in a good faith belief that he 16 has authority to act. Many partnership agreements reach this same result by listing various 17 activities and stating that the performance of these activities is deemed not to constitute gross 18 negligence or willful misconduct. These types of provisions are intended to come within the 19 modifications authorized by subsection (b)(4). On the other hand, absolving partners of 20 intentional misconduct is probably unreasonable. As with contractual standards of loyalty, 21 determining the outer limit in reducing the standard of care is left to the courts. 22 23 The standard may, of course, be increased by agreement to one of ordinary care or an 24 even higher standard of care. 25 26 7. Subsection (b)(5) authorizes the partners to determine the standards by which the 27 performance of the obligation of good faith and fair dealing is to be measured. The language of 28 subsection (b)(5) is based on UCC Section 1-102(3). The partners can negotiate and draft 29 specific contract provisions tailored to their particular needs (e.g., five days notice of a partners’ 30 meeting is adequate notice), but blanket waivers of the obligation are unenforceable. See, e.g., 31 PPG Indus., Inc. v. Shell Oil Co., 919 F.2d 17 (5th Cir. 1990); First Security Bank v. Mountain 32 View Equip. Co., 112 Idaho 158, 730 P.2d 1078 (Ct. App. 1986), aff’d, 112 Idaho 1078, 739 P.2d 33 377 (1987); American Bank of Commerce v. Covolo, 88 N.M. 405, 540 P.2d 1294 (1975). 34 35 8. Section 602(a) continues the traditional UPA Section 31(2) rule that every partner has 36 the power to withdraw from the partnership at any time, which power can not be bargained away. 37 Section 103(b)(6) provides that the partnership agreement may not vary the power to dissociate 38 as a partner under Section 602(a), except to require that the notice of withdrawal under Section 39 601(1) be in writing. The UPA was silent with respect to requiring a written notice of 40 withdrawal. 41 42 9. Under subsection (b)(7), the right of a partner to seek court expulsion of another 43 partner under Section 601(5) can not be waived or varied (e.g., requiring a 90-day notice) by 44 agreement. Section 601(5) refers to judicial expulsion on such grounds as misconduct, breach of 45 duty, or impracticability. 46

4 1 10. Under subsection (b)(8), the partnership agreement may not vary the right of partners 2 to have the partnership dissolved and its business wound up under Section 801(4), (5), or (6). 3 Section 801(4) provides that the partnership must be wound up if its business is unlawful. 4 Section 801(5) provides for judicial winding up in such circumstances as frustration of the firm’s 5 economic purpose, partner misconduct, or impracticability. Section 801(6) accords standing to 6 transferees of an interest in the partnership to seek judicial dissolution of the partnership in 7 specified circumstances. 8 9 11. Subsection (b)(9) makes clear that a limited liability partnership may not designate 10 the law of a State other than the State where it filed its statement of qualification to govern its 11 internal affairs and the liability of its partners. See Sections 101(5), 106(b), and 202(a). 12 Therefore, the selection of a State within which to file a statement of qualification has important 13 choice of law ramifications, particularly where the partnership was formed in another State. See 14 Comments to Section 106(b). 15 16 12. Although stating the obvious, subsection(b)(10) provides expressly that the rights of a 17 third party under the Act may not be restricted by an agreement among the partners to which the 18 third party has not agreed. A non-partner who is a party to an agreement among the partners is, 19 of course, bound. Cf. Section 703(c) (creditor joins release). 20 21 13. The Article 9 rules regarding conversions and mergers are not listed in Section 103(b) 22 as mandatory. Indeed, Section 907 states expressly that partnerships may be converted and 23 merged in any other manner provided by law. The effect of compliance with Article 9 is to 24 provide a “safe harbor” assuring the legal validity of such conversions and mergers. Although 25 not immune from variation in the partnership agreement, noncompliance with the requirements 26 of Article 9 in effecting a conversion or merger is to deny that “safe harbor” validity to the 27 transaction. In this regard, Sections 903(b) and 905(c)(2) require that the conversion or merger of 28 a limited partnership be approved by all of the partners, notwithstanding a contrary provision in 29 the limited partnership agreement. Thus, in effect, the agreement can not vary the voting 30 requirement without sacrificing the benefits of the “safe harbor.” 31 32 SECTION 403. PARTNER’S RIGHTS AND DUTIES WITH RESPECT TO

33 INFORMATION.

34 (a) A partnership shall keep its books and records, if any, at its chief executive office.

35 (b) A partnership shall provide partners and their agents and attorneys access to its books

36 and records. It shall provide former partners and their agents and attorneys access to books and

37 records pertaining to the period during which they were partners. The right of access provides the

38 opportunity to inspect and copy books and records during ordinary business hours. A partnership

39 may impose a reasonable charge, covering the costs of labor and material, for copies of

5 1 documents furnished.

2 (c) Each partner and the partnership shall furnish to a partner, and to the legal

3 representative of a deceased partner or partner under legal disability:

4 (1) without demand, any information concerning the partnership’s business and

5 affairs reasonably required for the proper exercise of the partner’s rights and duties under the

6 partnership agreement or this [Act]; and

7 (2) on demand, any other information concerning the partnership’s business and

8 affairs, except to the extent the demand or the information demanded is unreasonable or

9 otherwise improper under the circumstances.

10 (d) A partnership must maintain a current list showing the full name and last known street

11 and mailing address of each partner in alphabetical order. The partnership must designate an

12 individual whose principal residence is in the United States who shall have access to the list.

13 Comment 14 15 1. Subsection (a) provides that the partnership’s books and records, if any, shall be kept at 16 its chief executive office. It continues the UPA Section 19 rule, modified to include partnership 17 records other than its “books,” i.e., financial records. The concept of “chief executive office” 18 comes from UCC Section 9-103(3)(d). See the Comment to Section 106. 19 20 Since general partnerships are often informal or even inadvertent, no books and records 21 are enumerated as mandatory, such as that found in RULPA Section 105 other than the list of 22 partners required by subsection (d). Any requirement in UPA Section 19 that the partnership 23 keep books is oblique at best, since it states merely where the books shall be kept, not that they 24 shall be kept. Under RUPA, there is no liability to either partners or third parties for the failure to 25 keep partnership books. A partner who undertakes to keep books, however, must do so 26 accurately and adequately. 27 28 In general, a partnership should, at a minimum,, keep those books and records necessary 29 to enable the partners to determine their share of the profits and losses, as well as their rights on 30 withdrawal. An action for an accounting provides an adequate remedy in the event adequate 31 records are not kept. The partnership must also maintain any books and records required by state 32 or federal taxing or other governmental authorities. 33 34 2. Under subsection (b), partners are entitled to access to the partnership books and

6 1 records. Former partners are expressly given a similar right, although limited to the books and 2 records pertaining to the period during which they were partners. The line between partners and 3 former partners is not a bright one for this purpose, however, and should be drawn in light of the 4 legitimate interests of a dissociated partner in the partnership. For example, a withdrawing 5 partner’s liability is ongoing for pre-withdrawal liabilities and will normally be extended to new 6 liabilities for at least 90 days. It is intended that a former partner be accorded access to 7 partnership books and records as reasonably necessary to protect that partner’s legitimate 8 interests during the period his rights and liabilities are being wound down. 9 10 The right of access is limited to ordinary business hours, and the right to inspect and copy 11 by agent or attorney is made explicit. The partnership may impose a reasonable charge for 12 furnishing copies of documents. Accord, RULPA § 105(b). 13 14 A partner’s right to inspect and copy the partnership’s books and records is not 15 conditioned on the partner’s purpose or motive. Compare RMBCA Section 16.02(c)(l) 16 (shareholder must have proper purpose to inspect certain corporate records). A partner’s 17 unlimited personal liability justifies an unqualified right of access to the partnership books and 18 records. An abuse of the right to inspect and copy might constitute a violation of the obligation 19 of good faith and fair dealing for which the other partners would have a remedy. See Sections 20 404(d) and 405. 21 22 Under Section 103(b)(2), a partner’s right of access to partnership books and records may 23 not be unreasonably restricted by the partnership agreement. Thus, to preserve a partner’s core 24 information rights despite unequal bargaining power, an agreement limiting a partner’s right to 25 inspect and copy partnership books and records is subject to judicial review. Nevertheless, 26 reasonable restrictions on access to partnership books and records by agreement are authorized. 27 For example, a provision in a partnership agreement denying partners access to the compensation 28 of other partners should be upheld, absent any abuse such as fraud or duress. 29 30 3. Subsection (c) is a significant revision of UPA Section 20 and provides a more 31 comprehensive, although not exclusive, statement of partners’ rights and duties with respect to 32 partnership information other than books and records. Both the partnership and the other partners 33 are obligated to furnish partnership information. 34 35 Paragraph (1) is new and imposes an affirmative disclosure obligation on the partnership 36 and partners. There is no express UPA provision imposing an affirmative obligation to disclose 37 any information other than the partnership books. Under some circumstances, however, an 38 affirmative disclosure duty has been inferred from other sections of the Act, as well as from the 39 common law, such as the fiduciary duty of good faith. Under UPA Section 18(e), for example, 40 all partners enjoy an equal right in the management and conduct of the partnership business, 41 absent contrary agreement. That right has been construed to require that every partner be 42 provided with ongoing information concerning the partnership business. See Comment 7 to 43 Section 401. Paragraph (1) provides expressly that partners must be furnished, without demand, 44 partnership information reasonably needed for them to exercise their rights and duties as 45 partners. In addition, a disclosure duty may, under some circumstances, also spring from the 46 Section 404(d) obligation of good faith and fair dealing. See Comment 4 to Section 404.

7 1 2 Paragraph (2) continues the UPA rule that partners are entitled, on demand, to any other 3 information concerning the partnership’s business and affairs. The demand may be refused if 4 either the demand or the information demanded is unreasonable or otherwise improper. That 5 qualification is new to the statutory formulation. The burden is on the partnership or partner from 6 whom the information is requested to show that the demand is unreasonable or improper. The 7 UPA admonition that the information furnished be “true and full” has been deleted as 8 unnecessary, and no substantive change is intended. 9 10 The Section 403(c) information rights can be waived or varied by agreement of the 11 partners, since there is no Section 103(b) limitation on the variation of those rights as there is 12 with respect to the Section 403(b) access rights to books and records. See Section 103(b)(2). 13 14 SECTION 1003. ANNUAL REPORT.

15 (a) A limited liability partnership, and a foreign limited liability partnership authorized to

16 transact business in this State, shall file an annual report in the office of the [Secretary of State]

17 which contains:

18 (1) the name of the limited liability partnership and the State or other jurisdiction

19 under whose laws the foreign limited liability partnership is formed;

20 (2) the street address of the partnership’s chief executive office and, if different,

21 the street address of an office of the partnership in this State, if any; and

22 (3) if the partnership does not have an office in this State, the name and street

23 address of the partnership’s current agent for service of process; and

24 (4) in the case of an annual report filed by a limited liability partnership, the name

25 and a residence or business address of the individual with access to the list of partners required

26 by section 403(d).

27 (b) An annual report must be filed between [January 1 and April 1] of each year

28 following the calendar year in which a partnership files a statement of qualification or a foreign

29 partnership becomes authorized to transact business in this State.

30 (c) The [Secretary of State] may revoke the statement of qualification of a partnership

8 1 that fails to file an annual report when due or pay the required filing fee. To do so, the [Secretary

2 of State] shall provide the partnership at least 60 days’ written notice of intent to revoke the

3 statement. The notice must be mailed to the partnership at its chief executive office set forth in

4 the last filed statement of qualification or annual report. The notice must specify the annual

5 report that has not been filed, the fee that has not been paid, and the effective date of the

6 revocation. The revocation is not effective if the annual report is filed and the fee is paid before

7 the effective date of the revocation.

8 (d) A revocation under subsection (c) only affects a partnership’s status as a limited

9 liability partnership and is not an event of dissolution of the partnership.

10 (e) A partnership whose statement of qualification has been revoked may apply to the

11 [Secretary of State] for reinstatement within two years after the effective date of the revocation.

12 The application must state:

13 (1) the name of the partnership and the effective date of the revocation; and

14 (2) that the ground for revocation either did not exist or has been corrected.

15 (f) A reinstatement under subsection (e) relates back to and takes effect as of the effective

16 date of the revocation, and the partnership’s status as a limited liability partnership continues as

17 if the revocation had never occurred.

18 Comment 19 20 Section 1003 sets forth the requirements of an annual report that must be filed by all 21 limited liability partnerships and any foreign limited liability partnership authorized to transact 22 business in this State. See Sections 101(5)(definition of a limited liability partnership) and 23 101(4)(definition of a foreign limited liability partnership). The failure of a limited liability 24 partnership to file an annual report is a basis for the Secretary of State to administratively revoke 25 its statement of qualification. See Section 1003(c). A foreign limited liability partnership that 26 fails to file an annual report may not maintain an action or proceeding in this State. See Section 27 1103(a). 28 29 Subsection (a) generally requires that an annual report contain the same information

9 1 required in a statement of qualification. Compare Sections 1001(a) and 1003(a). The differences 2 are that, in addition to the information the annual report must contain regarding the individual 3 with access to the list of partners of a limited liability partnership, the annual report requires 4 disclosure of the State of formation of a foreign limited liability partnership but deletes the 5 delayed effective date and limited liability partnership election statement provisions of a 6 statement of qualification. As such, the annual report serves to update the information required in 7 a statement of qualification. Under subsection (b), the annual report must be filed between 8 January 1 and April 1 of each calendar year following the year in which a statement of 9 qualification was filed or a foreign limited liability partnership becomes authorized to transact 10 business. This timing requirement means that a limited liability partnership must make an annual 11 filing and may not prefile multiple annual reports in a single year. 12 13 Subsection (c) sets forth the procedure for the Secretary of State to administratively 14 revoke a partnership’s statement of qualification for the failure to file an annual report when due 15 or pay the required filing fee. The Secretary of State must provide a partnership at least 60 days’ 16 written notice of the intent to revoke the statement. The notice must be mailed to the partnership 17 at the address of its chief executive office set forth in the last filed statement or annual report and 18 must state the grounds for revocation as well as the effective date of revocation. The revocation 19 is not effective if the stated problem is cured before the stated effective date. 20 21 Under subsection (d), a revocation only terminates the partnership’s status as a limited 22 liability partnership but is not an event of dissolution of the partnership itself. Where revocation 23 occurs, a partnership may apply for reinstatement under subsection (e) within two years after the 24 effective date of the revocation. The application must state that the grounds for revocation either 25 did not exist or have been corrected. The Secretary of State may grant the application on the 26 basis of the statements alone or require proof of correction. Under subsection (f), when the 27 application is granted, the reinstatement relates back to and takes effect as of the effective date of 28 the revocation. The relation back doctrine prevents gaps in a reinstated partnership’s liability 29 shield. See Comments to Section 306(c).

10 1 AMENDMENTS TO

2 UNIFORM LIMITED PARTNERSHIP ACT (2001)

3 4 SECTION 110. EFFECT OF PARTNERSHIP AGREEMENT; NONWAIVABLE

5 PROVISIONS.

6 (a) Except as otherwise provided in subsection (b), the partnership agreement governs

7 relations among the partners and between the partners and the partnership. To the extent the

8 partnership agreement does not otherwise provide, this [Act] governs relations among the

9 partners and between the partners and the partnership.

10 (b) A partnership agreement may not:

11 (1) vary a limited partnership’s power under Section 105 to sue, be sued, and

12 defend in its own name;

13 (2) vary the law applicable to a limited partnership under Section 106;

14 (3) vary the requirements of Section 204;

15 (4) vary the information required under Section 111 or unreasonably restrict the

16 right to information under Sections 304 or 407, but the partnership agreement may impose

17 reasonable restrictions on the availability and use of information obtained under those sections

18 and may define appropriate remedies, including liquidated damages, for a breach of any

19 reasonable restriction on use;

20 (5) eliminate the duty of loyalty under Section 408, but the partnership agreement

21 may:

22 (A) identify specific types or categories of activities that do not violate the

23 duty of loyalty, if not manifestly unreasonable; and

24 (B) specify the number or percentage of partners which may authorize or

11 1 ratify, after full disclosure to all partners of all material facts, a specific act or transaction that

2 otherwise would violate the duty of loyalty;

3 (6) unreasonably reduce the duty of care under Section 408(c);

4 (7) eliminate the obligation of good faith and fair dealing under Sections 305(b)

5 and 408(d), but the partnership agreement may prescribe the standards by which the performance

6 of the obligation is to be measured, if the standards are not manifestly unreasonable;

7 (8) vary the power of a person to dissociate as a general partner under Section

8 604(a) except to require that the notice under Section 603(1) be in a record;

9 (9) vary the power of a court to decree dissolution in the circumstances specified

10 in Section 802;

11 (10) vary the requirement to wind up the partnership’s business as specified in

12 Section 803;

13 (11) unreasonably restrict the right to maintain an action under [Article] 10;

14 (12) restrict the right of a partner under Section 1110(a) to approve a conversion

15 or merger or the right of a general partner under Section 1110(b) to consent to an amendment to

16 the certificate of limited partnership which deletes a statement that the limited partnership is a

17 limited liability limited partnership; or

18 (13) restrict rights under this [Act] of a person other than a partner or a transferee;

19 or

20 (14) vary the requirements of section 111(b).

21 Comment 22 23 Source – RUPA Section 103. 24 25 Subject only to subsection (b), the partnership agreement has plenary power to structure 26 and regulate the relations of the partners inter se. Although the certificate of limited partnership

12 1 is a limited partnership’s foundational document, among the partners the partnership agreement 2 controls. See Section 201(d). 3 4 The partnership agreement has the power to control the manner of its own amendment. In 5 particular, a provision of the agreement prohibiting oral modifications is enforceable, despite any 6 common law antagonism to “no oral modification” provisions. Likewise, a partnership 7 agreement can impose “made in a record” requirements on other aspects of the partners’ 8 relationship, such as requiring consents to be made in a record and signed, or rendering 9 unenforceable oral promises to make contributions or oral understandings as to “events upon the 10 happening of which the limited partnership is to be dissolved,” Section 111(9)(D). See also 11 Section 801(1). 12 13 Subsection (b)(3) – The referenced section states who must sign various documents. 14 15 Subsection (b)(4) – In determining whether a restriction is reasonable, a court might 16 consider: (i) the danger or other problem the restriction seeks to avoid; (ii) the purpose for which 17 the information is sought; and (iii) whether, in light of both the problem and the purpose, the 18 restriction is reasonably tailored. Restricting access to or use of the names and addresses of 19 limited partners is not per se unreasonable. 20 21 Under this Act, general and limited partners have sharply different roles. A restriction 22 that is reasonable as to a limited partner is not necessarily reasonable as to a general partner. 23 24 Sections 304(g) and 407(f) authorize the limited partnership (as distinguished from the 25 partnership agreement) to impose restrictions on the use of information. For a comparison of 26 restrictions contained in the partnership agreement and restrictions imposed unilaterally by the 27 limited partnership, see the Comment to Section 304(g). 28 29 Subsection (b)(5)(A) – It is not per se manifestly unreasonable for the partnership 30 agreement to permit a general partner to compete with the limited partnership. 31 32 Subsection (b)(5)(B) – The Act does not require that the authorization or ratification be 33 by disinterested partners, although the partnership agreement may so provide. The Act does 34 require that the disclosure be made to all partners, even if the partnership agreement excludes 35 some partners from the authorization or ratification process. An interested partner that 36 participates in the authorization or ratification process is subject to the obligation of good faith 37 and fair dealing. Sections 305(b) and 408(d). 38 39 Subsection (b)(8) – This restriction applies only to the power of a person to dissociate as 40 a general partner. The partnership agreement may eliminate the power of a person to dissociate 41 as a limited partner. 42 43 Subsection (b)(9) – This provision should not be read to limit a partnership agreement’s 44 power to provide for arbitration. For example, an agreement to arbitrate all disputes – including 45 dissolution disputes – is enforceable. Any other interpretation would put this Act at odds with 46 federal law. See Southland Corp. v. Keating, 465 U.S. 1 (1984) (holding that the Federal

13 1 Arbitration Act preempts state statutes that seek to invalidate agreements to arbitrate) and Allied- 2 Bruce Terminix Cos., Inc. v. Dobson, 513 U.S. 265 (1995) (same). This provision does prohibit 3 any narrowing of the substantive grounds for judicial dissolution as stated in Section 802. 4 5 Example: A provision of a partnership agreement states that no partner may obtain 6 judicial dissolution without showing that a general partner is in material breach of the 7 partnership agreement. The provision is ineffective to prevent a court from ordering 8 dissolution under Section 802. 9 10 Subsection (b)(11) – Section 1001 codifies a partner’s right to bring a direct action, and 11 the rest of Article 10 provides for derivative actions. The partnership agreement may not restrict 12 a partner’s right to bring either type of action if the effect is to undercut or frustrate the duties 13 and rights protected by Section 110(b). 14 15 The reasonableness of a restriction on derivative actions should be judged in light of the 16 history and purpose of derivative actions. They originated as an equitable remedy, intended to 17 protect passive owners against management abuses. A partnership agreement may not provide 18 that all derivative claims will be subject to final determination by a special litigation committee 19 appointed by the limited partnership, because that provision would eliminate, not merely restrict, 20 a partner’s right to bring a derivative action. 21 22 Subsection (b)(12) – Section 1110 imposes special consent requirements with regard to 23 transactions that might make a partner personally liable for entity debts. 24 25 Subsection (b)(13) – The partnership agreement is a contract, and this provision reflects 26 a basic notion of contract law – namely, that a contract can directly restrict rights only of parties 27 to the contract and of persons who derive their rights from the contract. A provision of a 28 partnership agreement can be determined to be unenforceable against third parties under 29 paragraph (b)(13) without therefore and automatically being unenforceable inter se the partners 30 and any transferees. How the former determination affects the latter question is a matter of other 31 law. 32 33 SECTION 111. REQUIRED INFORMATION.

34 (a) A limited partnership shall maintain at its designated office the following information:

35 (1) a current list showing the full name and last known street and mailing address

36 of each partner, separately identifying the general partners, in alphabetical order, and the limited

37 partners, in alphabetical order;

38 (2) a copy of the initial certificate of limited partnership and all amendments to

39 and restatements of the certificate, together with signed copies of any powers of attorney under

14 1 which any certificate, amendment, or restatement has been signed;

2 (3) a copy of any filed articles of conversion or merger;

3 (4) a copy of the limited partnership’s federal, state, and local income tax returns

4 and reports, if any, for the three most recent years;

5 (5) a copy of any partnership agreement made in a record and any amendment

6 made in a record to any partnership agreement;

7 (6) a copy of any financial statement of the limited partnership for the three most

8 recent years;

9 (7) a copy of the three most recent annual reports delivered by the limited

10 partnership to the [Secretary of State] pursuant to Section 210;

11 (8) a copy of any record made by the limited partnership during the past three

12 years of any consent given by or vote taken of any partner pursuant to this [Act] or the

13 partnership agreement; and

14 (9) unless contained in a partnership agreement made in a record, a record stating:

15 (A) the amount of cash, and a description and statement of the agreed

16 value of the other benefits, contributed and agreed to be contributed by each partner;

17 (B) the times at which, or events on the happening of which, any

18 additional contributions agreed to be made by each partner are to be made;

19 (C) for any person that is both a general partner and a limited partner, a

20 specification of what transferable interest the person owns in each capacity; and

21 (D) any events upon the happening of which the limited partnership is to

22 be dissolved and its activities wound up.

23 (b) A limited partnership must designate an individual whose principal residence is in the

15 1 United States who shall have access to the list of partners.

2 Comment 3 4 Source – RULPA Section 105. 5 6 Sections 304 and 407 govern access to the information required by this section, as well as 7 to other information pertaining to a limited partnership. 8 9 Paragraph (5) Subsection (a)(5) – This requirement applies to superseded as well as 10 current agreements and amendments. An agreement or amendment is “made in a record ” to the 11 extent the agreement is “integrated” into a record and consented to in that memorialized form. It 12 is possible for a partnership agreement to be made in part in a record and in part otherwise. See 13 Comment to Section 110. An oral agreement that is subsequently inscribed in a record (but not 14 consented to as such) was not “made in a record” and is not covered by paragraph (5). However, 15 if the limited partnership happens to have such a record, Section 304(b) might and Section 16 407(a)(2) will provide a right of access. 17 18 Paragraph (8) Subsection (a)(8) – This paragraph does not require a limited partnership 19 to make a record of consents given and votes taken. However, if the limited partnership has made 20 such a record, this paragraph requires that the limited partnership maintain the record for three 21 years. The requirement applies to any record made by the limited partnership, not just to records 22 made contemporaneously with the giving of consent or voting. The three year period runs from 23 when the record was made and not from when the consent was given or vote taken. 24 25 Paragraph (9) Subsection (a)(9) – Information is “contained in a partnership agreement 26 made in a record” only to the extent that the information is “integrated” into a record and, in that 27 memorialized form, has been consented to as part of the partnership agreement. 28 29 This paragraph is not a statute of frauds provision. For example, failure to comply with 30 paragraph (a)(9)(A) or (B) does not render unenforceable an oral promise to make a contribution. 31 Likewise, failure to comply with paragraph (a)(9)(D) does not invalidate an oral term of the 32 partnership specifying “events upon the happening of which the limited partnership is to be 33 dissolved and its activities wound up.” See also Section 801(1). 34 35 Obversely, the mere fact that a limited partnership maintains a record in purported 36 compliance with paragraph (a)(9)(A) or (B) does not prove that a person has actually promised to 37 make a contribution. Likewise, the mere fact that a limited partnership maintains a record in 38 purported compliance with paragraph (a)(9)(D) does not prove that the partnership agreement 39 actually includes the specified events as causes of dissolution. 40 41 Consistent with the partnership agreement’s plenary power to structure and regulate the 42 relations of the partners inter se, a partnership agreement can impose “made in a record” 43 requirements which render unenforceable oral promises to make contributions or oral 44 understandings as to “events upon the happening of which the limited partnership is to be 45 dissolved.” See Comment to Section 110.

16 1 2 Paragraph (9)(A) Subsection (a)(9)(A) and (B) – Often the partnership agreement will 3 state in record form the value of contributions made and promised to be made. If not, these 4 provisions require that the value be stated in a record maintained as part of the limited 5 partnership’s required information. The Act does not authorize the limited partnership or the 6 general partners to set the value of a contribution without the concurrence of the person who has 7 made or promised the contribution, although the partnership agreement itself can grant that 8 authority. 9 10 Paragraph (9)(C) Subsection (a)(9)(C) – The information required by this provision is 11 essential for determining what happens to the transferable interests of a person that is both a 12 general partner and a limited partner and that dissociates in one of those capacities but not the 13 other. See Sections 602(3) and 605(5). 14 15 SECTION 210. ANNUAL REPORT FOR [SECRETARY OF STATE].

16 (a) A limited partnership or a foreign limited partnership authorized to transact business

17 in this State shall deliver to the [Secretary of State] for filing an annual report that states:

18 (1) the name of the limited partnership or foreign limited partnership;

19 (2) the street and mailing address of its designated office and the name and street

20 and mailing address of its agent for service of process in this State;

21 (3) in the case of a limited partnership,:

22 (A) the street and mailing address of its principal office; and

23 (B) the name and a residence or business address of the individual with

24 access to the list of partners required by section 111(b); and

25 (4) in the case of a foreign limited partnership, the State or other jurisdiction

26 under whose law the foreign limited partnership is formed and any alternate name adopted under

27 Section 905(a).

28 (b) Information in an annual report must be current as of the date the annual report is

29 delivered to the [Secretary of State] for filing.

30 (c) The first annual report must be delivered to the [Secretary of State] between [January

17 1 1 and April 1] of the year following the calendar year in which a limited partnership was formed

2 or a foreign limited partnership was authorized to transact business. An annual report must be

3 delivered to the [Secretary of State] between [January 1 and April 1] of each subsequent calendar

4 year.

5 (d) If an annual report does not contain the information required in subsection (a), the

6 [Secretary of State] shall promptly notify the reporting limited partnership or foreign limited

7 partnership and return the report to it for correction. If the report is corrected to contain the

8 information required in subsection (a) and delivered to the [Secretary of State] within 30 days

9 after the effective date of the notice, it is timely delivered.

10 (e) If a filed annual report contains an address of a designated office or the name or

11 address of an agent for service of process which differs from the information shown in the

12 records of the [Secretary of State] immediately before the filing, the differing information in the

13 annual report is considered a statement of change under Section 115.

14 Comment 15 16 Source – ULLCA Section 211. 17 18 Subsection (d) – This subsection’s rule affects only Section 809(a)(2) (late filing of 19 annual report grounds for administrative dissolution) and any late fees that the filing officer 20 might have the right to impose. For the purposes of subsection (e), the annual report functions as 21 a statement of change only when “filed” by the filing officer. Likewise, a person cannot rely on 22 subsection (d) to escape liability arising under Section 208.

18 1 AMENDMENTS TO

2 UNIFORM LIMITED LIABILITY COMPANY ACT (2006)

4 SECTION 110. OPERATING AGREEMENT; SCOPE, FUNCTION, AND

5 LIMITATIONS.

6 (a) Except as otherwise provided in subsections (b) and (c), the operating agreement

7 governs:

8 (1) relations among the members as members and between the members and the

9 limited liability company;

10 (2) the rights and duties under this [act] of a person in the capacity of manager;

11 (3) the activities of the company and the conduct of those activities; and

12 (4) the means and conditions for amending the operating agreement.

13 (b) To the extent the operating agreement does not otherwise provide for a matter

14 described in subsection (a), this [act] governs the matter.

15 (c) An operating agreement may not:

16 (1) vary a limited liability company’s capacity under Section 105 to sue and be

17 sued in its own name;

18 (2) vary the law applicable under Section 106;

19 (3) vary the power of the court under Section 204;

20 (4) subject to subsections (d) through (g), eliminate the duty of loyalty, the duty of

21 care, or any other fiduciary duty;

22 (5) subject to subsections (d) through (g), eliminate the contractual obligation of

23 good faith and fair dealing under Section 409(d);

19 1 (6) unreasonably restrict the duties and rights stated in Section 410;

2 (7) vary the power of a court to decree dissolution in the circumstances specified

3 in Section 701(a)(4) and (5);

4 (8) vary the requirement to wind up a limited liability company’s business as

5 specified in Section 702(a) and (b)(1);

6 (9) unreasonably restrict the right of a member to maintain an action under

7 [Article] 9;

8 (10) restrict the right to approve a merger, conversion, or domestication under

9 Section 1014 to a member that will have personal liability with respect to a surviving, converted,

10 or domesticated organization; or

11 (11) except as otherwise provided in Section 112(b), restrict the rights under this

12 [act] of a person other than a member or manager;

13 (12) vary the requirements of Section 410(h); or

14 (13) authorize a limited liability company to issue certificates of membership

15 interest in bearer form.

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

17 (1) restrict or eliminate the duty:

18 (A) as required in Section 409(b)(1) and (g), to account to the limited

19 liability company and to hold as trustee for it any property, profit, or benefit derived by the

20 member in the conduct or winding up of the company’s business, from a use by the member of

21 the company’s property, or from the appropriation of a limited liability company opportunity;

22 (B) as required in Section 409(b)(2) and (g), to refrain from dealing with

23 the company in the conduct or winding up of the company’s business as or on behalf of a party

20 1 having an interest adverse to the company; and

2 (C) as required by Section 409(b)(3) and (g), to refrain from competing

3 with the company in the conduct of the company’s business before the dissolution of the

4 company;

5 (2) identify specific types or categories of activities that do not violate the duty of

6 loyalty;

7 (3) alter the duty of care, except to authorize intentional misconduct or knowing

8 violation of law;

9 (4) alter any other fiduciary duty, including eliminating particular aspects of that

10 duty; and

11 (5) prescribe the standards by which to measure the performance of the

12 contractual obligation of good faith and fair dealing under Section 409(d).

13 (e) The operating agreement may specify the method by which a specific act or

14 transaction that would otherwise violate the duty of loyalty may be authorized or ratified by one

15 or more disinterested and independent persons after full disclosure of all material facts.

16 (f) To the extent the operating agreement of a member-managed limited liability

17 company expressly relieves a member of a responsibility that the member would otherwise have

18 under this [act] and imposes the responsibility on one or more other members, the operating

19 agreement may, to the benefit of the member that the operating agreement relieves of the

20 responsibility, also eliminate or limit any fiduciary duty that would have pertained to the

21 responsibility.

22 (g) The operating agreement may alter or eliminate the indemnification for a member or

23 manager provided by Section 408(a) and may eliminate or limit a member or manager’s liability

21 1 to the limited liability company and members for money damages, except for:

2 (1) breach of the duty of loyalty;

3 (2) a financial benefit received by the member or manager to which the member

4 or manager is not entitled;

5 (3) a breach of a duty under Section 406;

6 (4) intentional infliction of harm on the company or a member; or

7 (5) an intentional violation of criminal law.

8 (h) The court shall decide any claim under subsection (d) that a term of an operating

9 agreement is manifestly unreasonable. The court:

10 (1) shall make its determination as of the time the challenged term became part of

11 the operating agreement and by considering only circumstances existing at that time; and

12 (2) may invalidate the term only if, in light of the purposes and activities of the

13 limited liability company, it is readily apparent that:

14 (A) the objective of the term is unreasonable; or

15 (B) the term is an unreasonable means to achieve the provision’s

16 objective.

17 Comment 18 19 The operating agreement is pivotal to a limited liability company, and Sections 110 20 through 112 are pivotal to this Act. They must be read together, along with Section 102(13) 21 (defining the operating agreement). 22 23 One of the most complex questions in the law of unincorporated business organizations is 24 the extent to which an agreement among the organization’s owners can affect the law of 25 fiduciary duty. This section gives special attention to that question and is organized as follows: 26 Subsection (a) grants broad, general authority to the operating agreement

Subsection (b) establishes this Act as comprising the

22 “default rules” (“gap fillers”) for matters within the purview of the operating agreement but not addressed by the operating agreement

Subsection (c) states restrictions on the power of the operating agreement, especially but not exclusively with regard to fiduciary duties and the contractual obligation of good faith

Subsection (d) contains specific grants of authority for the operating agreement with regard to fiduciary duty and the contractual obligation of good faith; expressed so as to state restrictions on those specific grants – including the “if not manifestly unreasonable” standard

Subsection (e) specifically grants the operating agreement the power to provide mechanisms for approving or ratifying conduct that would otherwise violate the duty of loyalty; expressed so as to state restrictions on those mechanism – full disclosure and disinterested and independent decision makers

Subsection (f) specifically authorizes the operating agreement to divest a member of fiduciary duty with regard to a matter if the operating agreement is also divesting the person of responsibility for the matter (and imposing that responsibility on one or more other members)

Subsection (g) contains specific grants of authority for the operating agreement with regard to indemnification and exculpatory provisions; expressed so as to state restrictions on those specific grants

Subsection (h) provides rules for applying the “not manifestly unreasonable” standard established by subsection (d) 1 2 A limited liability company is as much a creature of contract as of statute, and Section

23 1 102(13) delineates a very broad scope for “operating agreement.” As a result, once an LLC 2 comes into existence and has a member, the LLC necessarily has an operating agreement. See 3 Comment to Section 102(13). Accordingly, this Act refers to “the operating agreement” rather 4 than “an operating agreement.” 5 6 This phrasing should not, however, be read to require a limited liability company or its 7 members to take any formal action to adopt an operating agreement. Compare Cal. Corp. Code 8 § 17050(a) (West 2006) (“In order to form a limited liability company, one or more persons shall 9 execute and file articles of organization with, and on a form prescribed by, the Secretary of State 10 and, either before or after the filing of articles of organization, the members shall have entered 11 into an operating agreement.”) 12 13 The operating agreement is the exclusive consensual process for modifying this Act’s 14 various default rules pertaining to relationships inter se the members and between the members 15 and the limited liability company. Section 110(b). The operating agreement also has power over 16 “the rights and duties under this [act] of a person in the capacity of manager,” subsection (a)(2), 17 and “the obligations of a limited liability company and its members to a person in the person’s 18 capacity as a transferee or dissociated member.” Section 112(b). 19 20 Subsection (a) – This section describes the very broad scope of a limited liability 21 company’s operating agreement, which includes all matters constituting “internal affairs.” 22 Compare Section 106(1) (using the phrase “internal affairs” in stating a choice of law rule). This 23 broad grant of authority is subject to the restrictions stated in subsection (c), including the broad 24 restriction stated in paragraph (c)(11) (concerning the rights under this Act of third parties). 25 26 Subsection (a)(1) – Under this Act, a limited liability company is emphatically an entity, 27 and the members lack the power to alter that characteristic. 28 29 Subsection (a)(2) – Under this paragraph, the operating agreement has the power to 30 affect the rights and duties of managers (including non-member managers). Because the term 31 “[o]perating agreement . . . . includes the agreement as amended or restated,” Section 102(13), 32 this paragraph gives the members the ongoing power to define the role of an LLC’s managers. 33 Power is not the same as right, however, and exercising the power provided by this paragraph 34 might constitute a breach of a separate contract between the LLC and the manager. A non- 35 member manager might also have rights under Section 112(a). 36 37 Subsection (a)(4) – If the operating agreement does not address this matter, under 38 subsection (b) this Act provides the rule. The rule appears in Section 407(b)(5) and 407(c)(4)(D) 39 (unanimous consent). 40 41 This Act does not specially authorize the operating agreement to limit the sources in 42 which terms of the operating agreement might be found or limit amendments to specified modes 43 (e.g., prohibiting modifications except when consented to in writing). Compare UCC § 2-209(2) 44 (authorizing such prohibitions in a “signed agreement” for the sale of goods). However, this 45 Paragraph (a)(4) could be read to encompass such authorization. Also, under Section 107 the 46 parol evidence rule will apply to a written operating agreement containing an appropriate merger

24 1 provision. 2 3 Subsection (c) – If a person claims that a term of the operating agreement violates this 4 subsection, as a matter of ordinary procedural law the burden is on the person making the claim. 5 6 Subsection (c)(4) – This limitation is less powerful than might first appear, because 7 subsections (d) through (g) specifically authorize significantly alterations to fiduciary duty. The 8 reference to “or any other fiduciary duty” is necessary because the Act has “un-cabined” 9 fiduciary duty. See Comment to Section 409. 10 11 Subsection (c)(9) – Arbitration and forum selection provisions are commonplace in 12 business agreements, and this paragraph’s restrictions do not reflect any special hostility to or 13 skepticism of such provisions. 14 15 Subsection (c)(10) – Under Section 1014: 16 17 each member is protected from being merged, converted, or domesticated “into” the 18 status of an unshielded general partner (or comparable position) without the member 19 having directly consented to either: 20 o the merger, conversion, or domestication; or 21 o an operating agreement provision that permits such transactions to occur with 22 less than unanimous consent of the members; and 23 merely consenting to an operating agreement provision that permits amendment of 24 the operating agreement with less than unanimous consent of the members does not 25 qualify as the requisite direct consent. 26 27 The sole function of subsection (c)(10) is to protect Section 1014 by denying the operating 28 agreement the power to restrict or otherwise undercut the protections of Section 1014. 29 30 Subsection (c)(11) – This limitation pertains only to “the rights under this[act] of” third 31 parties. The extent to which an operating agreement can affect other rights of third parties is a 32 question for other law, particularly the law of contracts. 33 34 Subsection (d) – Delaware recently amended its LLC statute to permit an operating 35 agreement to fully “eliminate” fiduciary duty within an LLC. This Act rejects the ultra- 36 contractarian notion that fiduciary duty within a business organization is merely a set of default 37 rule and seeks instead to balance the virtues of “freedom of contract” against the dangers that 38 inescapably exist when some have power over the interests of others. As one source has 39 explained: 40 41 The open-ended nature of fiduciary duty reflects the law’s long-standing recognition that 42 devious people can smell a loophole a mile away. For centuries, the law has assumed that 43 (1) power creates opportunities for abuse and (2) the devious creativity of those in power 44 may outstrip the prescience of those trying, through ex ante contract drafting, to constrain 45 that combination of power and creativity. 46

25 1 Carter G. Bishop and Daniel S. Kleinberger, Limited Liability Companies: Tax and Business 2 Law, ¶ 14.05[4][a][ii] 3 4 Subsection (h) contains rules for applying the “not manifestly unreasonable” standard. 5 6 Subsection (d)(1) – Subject to the “not manifestly unreasonable” standard, this paragraph 7 empowers the operating agreement to eliminate all aspects of the duty of loyalty listed in Section 8 409. The contractual obligation of good faith would remain, see subsections(c)(5) and (d)(5), as 9 would any other, uncodified aspects of the duty of loyalty. See Comment to Section 409 10 (explaining the decision to “un-cabin” fiduciary duty). See also subsection (d)(4) (empowering 11 the operating agreement to “alter any other fiduciary duty, including eliminating particular 12 aspects of that duty”). 13 14 Subsection (d)(3) – The operating agreement’s power to affect this Act’s duty of care 15 both parallels and differs from the agreement’s power to affect this Act’s duty of loyalty as well 16 as any other fiduciary duties not codified in the statute. With regard to all fiduciary duties, the 17 operating agreement is subject to the “manifestly unreasonable” standard. The differences 18 concern: (i) the extent of the operating agreement’s power to restrict the duty; and (ii) the power 19 of the operating agreement to provide indemnity or exculpation for persons subject to the duty. 20 duty extent of operating power of the agreement’s power to operating agreement restrict the duty to provide indemnity (subject to the “manifestly or exculpation w/r/t unreasonable” standard) breach of the duty Section 110(d)(1), (3) and (4) Section 110(g)

loyalty restrict or completely none eliminate care alter, but not eliminate; complete specifically may not authorize intentional misconduct or knowing violation of law other fiduciary restrict or completely complete duties, not eliminate codified in the Section 110(4) statute 21 22 Subsection (e) – Section 409(f) states the Act’s default rule for authorization or 23 ratification – unanimous consent. This subsection specifically empowers the operating 24 agreement to provide alternate mechanisms but, in doing so, imposes significant restrictions – 25 namely, any alternate mechanism must involve full disclosure to, and the disinterestedness and 26 independence of, the decision makers. These restrictions are consonant with ordinary notions of 27 authorization and ratification. 28 29 This Act provides four separate methods through which those with management power in

26 1 a limited liability company can proceed with conduct that would otherwise violate the duty of 2 loyalty: 3 Method Statutory Authority

The operating agreement might eliminate the duty or Section 110(d)(1) and (2) otherwise permit the conduct, without need for further authorization or ratification.

The conduct might be authorized or ratified by all the Section 409(f) members after full disclosure.

The operating agreement might establish a mechanism Section 110(e) other than the informed consent for authorizing or ratifying the conduct.

In the case of self-dealing the conduct might be Section 409(e) successfully defended as being or having been fair to the limited liability company. 4 5 Subsection (f) – This subsection is intended to make clear that – regardless of the 6 strictures stated elsewhere in this section – in the specified circumstances the operating 7 agreement can entirely strip away the pertinent fiduciary duties. 8 9 Subsection (g) – This subsection specifically empowers the operating agreement to 10 address matters of indemnification and exculpation but subjects that power to stated limitations. 11 Those limitations are drawn from the raft of exculpatory provisions that sprung up in corporate 12 statutes in response to Smith v. Van Gorkum, 488 A.2d 858 (Del. 1985). Delaware led the 13 response with Del. Code Ann. tit. 8, § 102(b)(7) (2006), and a number of LLC statutes have 14 similar provisions. E.g. Ga. Code Ann. § 14-11-305(4)(A) (West 2006); Idaho Code Ann. § 53- 15 624(1) (2006). For an extreme example, see Va. Code Ann. § 13.1-1025 (West 2006) 16 (establishing limits of monetary liability as the default rule). 17 18 The restrictions stated in paragraphs (1) through (5) apply both to indemnification and 19 exculpation. The power to “alter or eliminate the indemnification provided by Section 408(a)” 20 includes the power to expand or reduce that indemnification. 21 22 Subsection (g)(4) – Due to this paragraph, an exculpatory provision cannot shield against 23 a member’s claim of oppression. See Section 701(a)(5)(B) and (b). 24 25 Subsection (h) – The “not manifestly unreasonable standard” became part of uniform 26 business entity statutes when RUPA imported the concept from the Uniform Commercial Code. 27 This subsection provides rules for applying that standard, which are necessary because: 28 29 • Determining unreasonableness inter se owners of an organization is a different task than 30 doing so in a commercial context, where concepts like “usages of trade” are available to

27 1 inform the analysis. Each business organization must be understood in its own terms and 2 context. 3 • If loosely applied, the standard would permit a court to rewrite the members’ agreement, 4 which would destroy the balance this Act seeks to establish between freedom of contract 5 and fiduciary duty. 6 • Case law research indicates that courts have tended to disregard the significance of the 7 word “manifestly.” 8 • Some decisions have considered reasonableness as of the time of the complaint, which 9 means that a prospectively reasonable allocation of risk could be overturned because it 10 functioned as agreed. 11 12 If a person claims that a term of the operating agreement in manifestly unreasonable 13 under subsections (d) and (h), as a matter of ordinary procedural law the burden is on the person 14 making the claim. 15 16 Subsection (h)(1) – The significance of the phrase “as of the time the term as challenged 17 became part of the operating agreement” is best shown by example. 18 19 EXAMPLE: An LLC’s operating agreement as initially adopted includes a provision 20 subjecting a matter to “the manager’s sole, reasonable discretion.” A year later, the 21 agreement is amended to delete the word “reasonable.” Later, a member claims that, 22 without the word “reasonable,” the provision is manifestly unreasonable. The relevant 23 time under subsection (h)(1) is when the agreement was amended, not when the 24 agreement was initially adopted. 25 26 EXAMPLE: When a particular manager-managed LLC comes into existence, its 27 business plan is quite unusual and its success depends on the willingness of a particular 28 individual to serve as the LLC’s sole manager. This individual has a rare combination of 29 skills, experiences, and contacts, which are particularly appropriate for the LLC’s start- 30 up. In order to induce the individual to accept the position of sole manager, the members 31 are willing to have the operating agreement significantly limit the manager’s fiduciary 32 duties. Several years later, when the LLC’s operations have turned prosaic and the 33 manager’s talents and background are not nearly so crucial, a member challenges the 34 fiduciary duty limitations as manifestly unreasonable. The relevant time under 35 subsection (h)(1) is when the LLC began. Subsequent developments are not relevant, 36 except as they might inferentially bear on the circumstances in existence at the relevant 37 time. 38

39 SECTION 209. ANNUAL REPORT FOR [SECRETARY OF STATE].

40 (a) Each year, a limited liability company or a foreign limited liability company

41 authorized to transact business in this state shall deliver to the [Secretary of State] for filing a

42 report that states:

28 1 (1) the name of the company;

2 (2) the street and mailing addresses of the company’s designated office and the

3 name and street and mailing addresses of its agent for service of process in this state;

4 (3) the street and mailing addresses of its principal office; and

5 (4) in the case of a limited liability company, the name and a residence or

6 business address of the individual with access to the list of members required by section 410(h);

7 and

8 (5) in the case of a foreign limited liability company, the state or other jurisdiction

9 under whose law the company is formed and any alternate name adopted under Section 805(a).

10 (b) Information in an annual report under this section must be current as of the date the

11 report is delivered to the [Secretary of State] for filing.

12 (c) The first annual report under this section must be delivered to the [Secretary of State]

13 between [January 1 and April 1] of the year following the calendar year in which a limited

14 liability company was formed or a foreign limited liability company was authorized to transact

15 business. A report must be delivered to the [Secretary of State] between [January 1 and April 1]

16 of each subsequent calendar year.

17 (d) If an annual report under this section does not contain the information required in

18 subsection (a), the [Secretary of State] shall promptly notify the reporting limited liability

19 company or foreign limited liability company and return the report to it for correction. If the

20 report is corrected to contain the information required in subsection (a) and delivered to the

21 [Secretary of State] within 30 days after the effective date of the notice, it is timely delivered.

22 (e) If an annual report under this section contains an address of a designated office or the

23 name or address of an agent for service of process which differs from the information shown in

29 1 the records of the [Secretary of State] immediately before the annual report becomes effective,

2 the differing information in the annual report is considered a statement of change under Section

3 114.

4 Comment 5 6 Source – ULPA (2001) § 210, which was based on ULLCA § 211. 7 8 A limited liability company that fails to comply with this section is subject to 9 administrative dissolution. Section 705(a)(2). A foreign limited liability company that fails to 10 comply with this section is subject to having its certificate of authority revoked. Section 11 806(a)(2). 12

13 SECTION 410. RIGHT OF MEMBERS, MANAGERS, AND DISSOCIATED

14 MEMBERS TO INFORMATION.

15 (a) In a member-managed limited liability company, the following rules apply:

16 (1) On reasonable notice, a member may inspect and copy during regular business

17 hours, at a reasonable location specified by the company, any record maintained by the company

18 regarding the company’s activities, financial condition, and other circumstances, to the extent the

19 information is material to the member’s rights and duties under the operating agreement or this

20 [act].

21 (2) The company shall furnish to each member:

22 (A) without demand, any information concerning the company’s activities,

23 financial condition, and other circumstances which the company knows and is material to the

24 proper exercise of the member’s rights and duties under the operating agreement or this [act],

25 except to the extent the company can establish that it reasonably believes the member already

26 knows the information; and

27 (B) on demand, any other information concerning the company’s

30 1 activities, financial condition, and other circumstances, except to the extent the demand or

2 information demanded is unreasonable or otherwise improper under the circumstances.

3 (3) The duty to furnish information under paragraph (2) also applies to each

4 member to the extent the member knows any of the information described in paragraph (2).

5 (b) In a manager-managed limited liability company, the following rules apply:

6 (1) The informational rights stated in subsection (a) and the duty stated in

7 subsection (a)(3) apply to the managers and not the members.

8 (2) During regular business hours and at a reasonable location specified by the

9 company, a member may obtain from the company and inspect and copy full information

10 regarding the activities, financial condition, and other circumstances of the company as is just

11 and reasonable if:

12 (A) the member seeks the information for a purpose material to the

13 member’s interest as a member;

14 (B) the member makes a demand in a record received by the company,

15 describing with reasonable particularity the information sought and the purpose for seeking the

16 information; and

17 (C) the information sought is directly connected to the member’s purpose.

18 (3) Within 10 days after receiving a demand pursuant to paragraph (2)(B), the

19 company shall in a record inform the member that made the demand:

20 (A) of the information that the company will provide in response to the

21 demand and when and where the company will provide the information; and

22 (B) if the company declines to provide any demanded information, the

23 company’s reasons for declining.

31 1 (4) Whenever this [act] or an operating agreement provides for a member to give

2 or withhold consent to a matter, before the consent is given or withheld, the company shall,

3 without demand, provide the member with all information that is known to the company and is

4 material to the member’s decision.

5 (c) On 10 days’ demand made in a record received by a limited liability company, a

6 dissociated member may have access to information to which the person was entitled while a

7 member if the information pertains to the period during which the person was a member, the

8 person seeks the information in good faith, and the person satisfies the requirements imposed on

9 a member by subsection (b)(2). The company shall respond to a demand made pursuant to this

10 subsection in the manner provided in subsection (b)(3).

11 (d) A limited liability company may charge a person that makes a demand under this

12 section the reasonable costs of copying, limited to the costs of labor and material.

13 (e) A member or dissociated member may exercise rights under this section through an

14 agent or, in the case of an individual under legal disability, a legal representative. Any

15 restriction or condition imposed by the operating agreement or under subsection (g) applies both

16 to the agent or legal representative and the member or dissociated member.

17 (f) The rights under this section do not extend to a person as transferee.

18 (g) In addition to any restriction or condition stated in its operating agreement, a limited

19 liability company, as a matter within the ordinary course of its activities, may impose reasonable

20 restrictions and conditions on access to and use of information to be furnished under this section,

21 including designating information confidential and imposing nondisclosure and safeguarding

22 obligations on the recipient. In a dispute concerning the reasonableness of a restriction under

23 this subsection, the company has the burden of proving reasonableness.

32 1 (h) A limited liability company must maintain a current list showing the full name and

2 last known street and mailing address of each member in alphabetical order. The company must

3 designate an individual whose principal residence is in the United States who shall have access

4 to the list.

5 Comment 6 7 This section is derived from ULPA (2001), §§ 304 (rights to information of limited 8 partners and former limited partners) and 407 (same re: general partners and former general 9 partners). The rules stated here are what might be termed “quasi-default rules” – subject to some 10 change by the operating agreement. Section 110(c)(6) (prohibiting unreasonable restrictions on 11 the information rights stated in this section). 12 13 Although the rights and duties stated in this section are extensive, they may not 14 necessarily be exhaustive. In some situations, some courts have seen owners’ information rights 15 as reflecting a fiduciary duty of those with management power. This Act’s statement of 16 fiduciary duties is not exhaustive. See Comment to Section 409 (explaining that this Act does 17 not seek to “cabin in” all fiduciary duties). In contrast, the operating agreement has considerable 18 “cabining in” power of its own. Section 110(d)(4). 19 20 Subsection (a) – Paragraph 1 states the rule pertaining to information memorialized in 21 “records maintained by the company”. Paragraph 2 applies to information not in such a record. 22 Appropriately, paragraph (2) sets a more demanding standard for those seeking information. 23 24 Subsection (a)(2) and (3) – In appropriate circumstances, violation of either or both of 25 these provisions might cause a court to enjoin or even rescind action taken by the LLC, 26 especially when the violation has interfered with an approval or veto mechanism involving 27 member consent. E.g. Blue Chip Emerald LLC v. Allied Partners Inc., 299 A.D.2d 278, 279-280 28 (N.Y. App. Div. 2002) (invoking partnership law precedent as reflecting a duty of full disclosure 29 and holding that “[a]bsent such full disclosure, the transaction is voidable). 30 31 Subsection (a)(2) – Violation of this paragraph could give rise to a claim for damages 32 against a member or manager [see subsection (b)(1)] who breaches the duties stated in Section 33 409 in causing or suffering the LLC to violate this paragraph. 34 35 Subsection (a)(3) – A member’s violation of this paragraph is actionable in damages 36 without need to show a violation of a duty stated in Section 409. 37 38 Subsection (b)(1) – This is a switching provision. A manager’s violation of the duty 39 stated in subsection (a)(3) is actionable in damages without need to show a violation of a duty 40 stated in Section 409. 41 42 Subsection (b)(2) – This paragraph refers to “information” rather than “records

33 1 maintained by the company” – compare subsection (a) – so in some circumstances the company 2 might have an obligation to memorialize information. Such circumstances will likely be rare or 3 at least unusual. Section 410 generally concerns providing existing information, not creating it. 4 In any event, a member does not trigger the company’s obligation under this paragraph merely 5 by satisfying subparagraphs (A) through (C). The member must also satisfy the “just and 6 reasonable” requirement. 7 8 Subsection (c) – This section does not control the rights of the estate of a member who 9 dissociates by dying. In that circumstance, Section 504 controls. 10 11 Subsection (g) – The phrase “as a matter within the ordinary course of its activities” 12 means that a mere majority consent is needed to impose a restriction or condition. See Section 13 407(b)(3) and (c)(3). This approach is necessary, lest a requesting member (or manager- 14 member) have the power to block imposition of a reasonable restriction or condition needed to 15 prevent the requestor from abusing the LLC. 16 17 The burden of proof under this subsection contrasts with the burden of proof when 18 someone claims that a term of an operating agreement violates Section 110(c)(6). Under that 19 subsection, as a matter of ordinary procedural law, the burden is on the person making the claim. 20

21 SECTION 502. TRANSFER OF TRANSFERABLE INTEREST.

22 (a) A transfer, in whole or in part, of a transferable interest:

23 (1) is permissible;

24 (2) does not by itself cause a member’s dissociation or a dissolution and winding

25 up of the limited liability company’s activities; and

26 (3) subject to Section 504, does not entitle the transferee to:

27 (A) participate in the management or conduct of the company’s activities;

28 or

29 (B) except as otherwise provided in subsection (c), have access to records

30 or other information concerning the company’s activities.

31 (b) A transferee has the right to receive, in accordance with the transfer, distributions to

32 which the transferor would otherwise be entitled.

33 (c) In a dissolution and winding up of a limited liability company, a transferee is entitled

34 1 to an account of the company’s transactions only from the date of dissolution.

2 (d) A transferable interest may be evidenced by a certificate of the interest issued by the

3 limited liability company in a record, and, subject to this section, the interest represented by the

4 certificate may be transferred by a transfer of the certificate. A company may not issue a

5 certificate in bearer form.

6 (e) A limited liability company need not give effect to a transferee’s rights under this

7 section until the company has notice of the transfer.

8 (f) A transfer of a transferable interest in violation of a restriction on transfer contained in

9 the operating agreement is ineffective as to a person having notice of the restriction at the time of

10 transfer.

11 (g) Except as otherwise provided in Section 602(4)(B), when a member transfers a

12 transferable interest, the transferor retains the rights of a member other than the interest in

13 distributions transferred and retains all duties and obligations of a member.

14 (h) When a member transfers a transferable interest to a person that becomes a member

15 with respect to the transferred interest, the transferee is liable for the member’s obligations under

16 Sections 403 and 406(c) known to the transferee when the transferee becomes a member.

17 Comment 18 One of the most fundamental characteristics of LLC law is its fidelity to the “pick your 19 partner” principle. This section is the core of the Act’s provisions reflecting and protecting that 20 principle. 21 22 A member’s rights in a limited liability company are bifurcated into economic rights (the 23 transferable interest) and governance rights (including management rights, consent rights, rights 24 to information, rights to seek judicial intervention). Unless the operating agreement otherwise 25 provides, a member acting without the consent of all other members lacks both the power and the 26 right to: (i) bestow membership on a non-member, Section 401(d); or (ii) transfer to a non- 27 member anything other than some or all of the member’s transferable interest. Section 502(a)(3). 28 However, consistent with current law, a member may transfer governance rights to another 29 member without obtaining consent from the other members. Thus, this Act does not itself 30 protect members from control shifts that result from transfers among members (as distinguished

35 1 from transfers to non-members who seek thereby to become members). 2 3 This section applies regardless of whether the transferor is a member, a transferee of a 4 member, a transferee of a transferee, etc. See Section 102(21) (defining “transferable interest” in 5 terms of a right “originally associated with a person’s capacity as a member” regardless of 6 “whether or not the person remains a member or continues to own any part of the right”). 7 8 Subsection (a) – The definition of “transfer,” Section 102(20), and this subsection’s 9 reference to “in whole or in part” combine to mean that this section encompasses not only 10 unconditional, permanent, and complete transfers but also temporary, contingent, and partial 11 ones as well. Thus, for example, a charging order under Section 504 effects a transfer of part of 12 the judgment debtor’s transferable interest, as does the pledge of a transferable interest as 13 collateral for a loan and the gift of a life-interest in a member’s rights to distribution. 14 15 Subsection (a)(2) – Section 602(4)(B) creates a risk of dissociation via expulsion when a 16 member transfers all of the member’s transferable interest. 17 18 Subsection (a)(3) – Mere transferees have no right to intrude as the members carry on 19 their activities as members. When a member dies, other law may effect a transfer of the 20 member’s interest to the member’s estate or personal representative. Section 504 contains 21 special rules applicable to that situation. 22 23 Subsection (b) – Amounts due under this subsection are of course subject to offset for 24 any amount owed to the limited liability company by the member or dissociated member on 25 whose account the distribution is made. As to whether an LLC may properly offset for claims 26 against a transferor that was never a member is matter for other law, specifically the law of 27 contracts dealing with assignments. 28 29 Subsection (d) – The use of certificates can raise issues relating to Articles 8 and 9 of the 30 Uniform Commercial Code.

36 1 AMENDMENTS TO

2 UNIFORM LIMITED COOPERATIVE ASSOCIATION ACT (2007)

3 4 [to be supplied]