Mercel Bernier ()
When Connecticut business owners go to formally set up their companies, the vast majority create limited liability companies, which offer owners the liability shield of corporations and the taxation benefit of partnerships. But even though by some estimates LLCs make up more than 90 percent of all new businesses formed in Connecticut, the law governing them had not kept pace with their popularity.
That changed when Gov. Dannel Malloy recently signed the first reform to Connecticut’s LLC law since legislators authorized that form of business incorporation in 1993. The Connecticut Uniform Limited Liability Company Act will go into effect July 1, 2017, and will import provisions from the Uniform Law Commission’s model law, the Uniform Limited ­Liability Company Act.
Business lawyers in Connecticut say the wholesale update to Connecticut’s LLC law will make the state more business-friendly.
David Levine, a principal with Cohen and Wolf and one of the drafters of the legislation, said the reform should make Connecticut business owners more comfortable turning to the Connecticut legal system to litigate disputes. The LLC law will “maintain Connecticut as a desirable place to do business, including [because of] its business laws,” Levine said.
If businesses are forming as LLCs in Connecticut, and not corporate haven Delaware, the state will also keep the revenue from the filing fees paid to the state to form LLCs, Levine added.
Monte Frank, the incoming president of the Connecticut Bar Association and a commercial litigator, was among those who testified in favor of the reform. He says reforming the LLC law is the first step in promoting business in Connecticut and “to move Connecticut into the future.”
David Swerdloff, a Day Pitney corporate attorney, said the new law is important to small businesses that can’t afford to hire lawyers to form LLCs. The new law will provide default rules allowing LLCs to form without adopting a written operating agreement. At the same time, it maintains the flexibility for business owners to contract for arrangements that meet their needs, Swerdloff said. “That’s great if you’re a sophisticated businessperson … and you can negotiate the best terms for your business,” Swerdloff said.
Another important change is a new default rule requiring that two-thirds of the members have to approve decisions to merge the LLC or sell it, Swerdloff said.
Marcel Bernier, a Murtha Cullina partner and another drafter of the reform law, said basing Connecticut’s LLC law on a national model will also help Connecticut businesses. If a certain point in the law hasn’t already been litigated in Connecticut, judges can look to see how other state courts have decided similar issues, Bernier said.
The model law has been adopted in 16 jurisdictions, including California, New Jersey and Vermont.
Levine and Bernier are co-chairmen of the CBA’s Business Law Section’s LLC Committee and were among the dozen lawyers who spent three years vetting the legislation word by word. The committee members voted on each of the changes. Bernier estimates 95 percent of the new act is based on the model act drafted by the Uniform Law Commission, a Chicago-based nonprofit group that promotes consistency among state laws. But 5 percent of the law’s language is unique to Connecticut, he said.
The law’s drafters kept existing Connecticut law if they thought it better, Bernier said. For example, the model act has a default rule that the members of an LLC get one vote per person. But that could mean that two minority owners in a business could outvote a majority owner. Connecticut’s default rule gives proportional voting rights based on the percentage that a member owns of the LLC, Bernier said.
Another change in the law is clarifying what fiduciary duties are owed by the members of LLCs—or managers of LLCs—and if those duties can be modified or even eliminated, Bernier said.
Business lawyers will have a higher comfort level knowing that the new law specifically authorizes LLC members to eliminate fiduciary duties by contract as “long as what you did is not manifestly unreasonable,” Bernier said. “[What is] manifestly unreasonable is determined by the judge and is based on the time you drafted the arrangement and not a latter time when something has gone wrong.”
The new law also clarifies when a claim about the breach of fiduciary duty owed by an LLC member can be brought, Bernier said. The current statute is silent on when a member of an LLC claiming there has been a breach of a fiduciary duty can file that claim directly or file the claim on a “derivative” basis—in other words, on behalf of the LLC.
The law states that a member bringing a direct action to vindicate his or her rights must show that he or she is facing an injury separate from the LLC itself. The law also explicitly says that an LLC member has to make a demand on the other LLC members, or show that such a demand would be futile, before he or she can bring a lawsuit to enforce the rights of the LLC itself.
Before the reform, Connecticut judges did not have any guidance on what procedure was required for LLC members wanting to prosecute a breach of fiduciary duty claim, Bernier said.
The new law also clarifies what should happen when an LLC member owes money to creditors. The law only allows creditors to place a “charging order” on an LLC member’s interest to the extent of the distributions that the member is entitled to, Levine said. Before, it was unclear if a creditor could place a charging order on a member’s interest and force the LLC to dissolve in order to pay off a member’s debts.
The change in the law will ensure that creditors aren’t essentially imported into the LLC as members of the LLC, Levine said. •