The Illinois Limited Liability Company Act (as revised, the "Act") was amended effective July 1, 2017. Certain of the changes are significant and should be noted both with respect to existing LLCs and those to be formed in the future. Set forth below is a brief summary of certain changes that may be of particular interest.
1. Default Rule of Member Management. The Act now expressly provides, as a default rule, that an LLC is member-managed unless otherwise provided in the Operating Agreement. The Articles of Organization must contain the names and business addresses of all of the managers and any member having the authority of a manager.
2. Oral Agreements. The Act now specifically recognizes oral Operating Agreements. An oral agreement is given effect despite the general rule of the statute of frauds refusing to enforce an agreement not capable of performance within one year of its making. Nevertheless, it is always advisable to have a written Operating Agreement clearly setting forth the agreement of the parties.
3. No Member Agency Assumed. Prior to the revision, a member had the apparent authority to bind the LLC as its agent. The Act eliminates that apparent authority and states that a member is not an agent of the LLC solely by being a member. The Act does, however, provide that other applicable law, including the law of agency, will continue to apply in determining whether a member will be deemed an agent of the LLC.
4. Statement of Authority and Denial of Authority. An LLC may file with the Secretary of State a statement of authority, as well as a statement of denial authority, of a manager or member, or any other person, to bind the LLC. Generally, however, a statement limiting authority contained in a statement of authority is not by itself evidence of knowledge or notice of the limitation by any person (except for a limitation on authority to transfer real property contained in a statement of authority filed in the applicable office of the recorder of deeds). The Articles of Organization may also state the authority or limitations of the authority of a person, but those statements are not binding on a third party unless they receive actual notice from the LLC.
5. Limiting Fiduciary Duties. The Act provides new flexibility in defining the fiduciary duties of managers and members. The Act now provides that the Operating Agreement may restrict or eliminate a fiduciary duty, other than the duty of care (defined as grossly negligent or reckless conduct, intentional misconduct or a knowing violation of law) if the modification is clear and unambiguous. The Operating Agreement may also identify specific types or categories of activities that do not violate any fiduciary duties. The duty of care may also be modified in the Operating Agreement, except to authorize intentional misconduct or knowing violation of law.
6. Access to Information. The Act provides greater specificity on the information which a member may demand from the LLC and provides time periods within which the information must be supplied. The information requested, however, must be relevant to the proper exercise of the member's rights and duties or otherwise material to the membership interest of the member. A provision was also added giving a dissociated member the right to such information pertaining to the period during which the person was a member. The Act does not extend the right to receive information to a transferee. Reasonable restrictions, such as confidentiality, may be placed on access to and use of the information requested. The new information disclosure requirements and restrictions do not, however, limit or restrict the rights of a member to inspect and copy certain LLC records as provided in the Act. In addition, the right to inspect LLC records has been extended to transferees of distributional interests, but only for a proper purpose.
7. Consequences for Failure to Make Contribution. In addition to rights otherwise available under law, including specific performance, the Act states that the Operating Agreement may provide that the membership interest of a member that fails to make a required contribution will be subject to specified remedies or consequences, and provides a non-exclusive list that includes (i) loss of voting and management rights, (ii) dilution, (iii) subordination of distribution rights, (iv) liquidated damages, (v) a forced sale or redemption of the interest, including use of an appraisal or formula to set the value of the interest, (vi) permitting non-defaulting members to lend the amount of the failed contribution, and (vii) adjusting rates of return, preferences or priorities with respect to the contributions by or capital accounts of non-defaulting members.
8. Conversion and Domestication. The Act now provides for the conversion of a non-LLC into an Illinois LLC, and vice-versa, if the converting organization's governing statute authorizes the conversion. The Act also now provides for domestication of LLCs, under which a non-Illinois LLC may become an Illinois LLC and an Illinois LLC can become a non-Illinois LLC.
9. Elimination of Purchase of Interest Upon Dissociation. The Act no longer provides for a mandatory purchase of a dissociated member's interest by the LLC. In addition, the Act provides that dissociation alone does not discharge the person from any debt, obligation or other obligation to the LLC or other members incurred while a member.
10. Creditors' Rights. The Act clarifies the remedies accorded a judgment creditor with respect to the distributional interest of a member or transferee. The Act provides for a charging order constituting a lien on the distributional interest and allows for a foreclosure sale of the interest. The purchaser would not become a member as a result of the foreclosure sale. The Act allows the LLC or other members to satisfy the judgment and succeed to the rights of the judgment creditor, including the charging order. The charging order and foreclosure provisions are the exclusive means for a judgment creditor to satisfy the judgment from the distributional interest.
The summary above is only intended to highlight certain key changes in the Act. The impact of these and other changes will vary depending on the circumstance in each case. Please feel free to contact a GSRNH attorney to discuss the relevance to your particular situation, both as to existing LLCs in which you are a member or manager and LLCs you may become involved in going forward.
Written by: Francis J. Wirtz