OPERATING AGREEMENT Mechanics LLC Comparison Chart Centralization of key provisions in operating agreement Centralization - 105-107 Contain three key provisions dealing with the operating agreement: 105 scope, function & limitations; 106 effect on LLC and its members; and 107 effect on third parties and relationship to records. No Centralization: 10.50.095 permits members to adopt an operating agreement. The definition, scope, and other provisions that may be modified by the operating agreement are scattered throughout the chapter. Specific statement of operating agreement s relationship to the statutory default rules? Express authorization of operating agreement in SMLLCs? Yes - 105(b) Default rules in the Act govern matters not addressed by the operating agreement. Yes - 102(13) Definition states it is an agreement among all the members, including a sole member. No - There is no specific statement regarding the scope of the operating agreement, but many statutory provisions indicate that they are subject to change/modification by the operating agreement or articles of organization, which implies default rules exist. 10.50.990(17) - Operating agreement means agreement among all the members. 10.50.095 provides that members may adopt an operating agreement. Nevertheless, there is specific authorization for single member LLC in 10.50.155(b). Oral v. written Either - 102(13) Broad definition that states regardless of its name, the operating agreement is an agreement among all the members, whether oral, implied, or in a record. Amendment Yes Unanimous consent of members required to amend operating agreement under 407(b)(4)(B) [member-managed] Power to grant rights to third parties Binding on dissociated members and transferees Binding on LLC irrespective of LLC being a party and 407(c)(3)(B) [manager-managed]. Yes - 107(a) Operating agreement may permit nonmembers to have veto rights over amendments to the operating agreement (e.g. lenders, non-member managers). Yes - 107(b) Provides that dissociated member and transferee rights are subject to changes in the operating agreement that occur after the transfer, provided the changes do not impose a new liability on the dissociated member or transferee. Yes - 106(a) LLC is bound by the operating agreement even if it has not manifested assent to the operating agreement Written - 10.50.990 defines an operating agreement as a written agreement among all the members of a limited liability company about conducting the affairs of the company. Yes - 10.50.150(c)(2) Amending the operating agreement of a company requires the unanimous, written consent of all members of the company unless the operating agreement or articles of incorporation provide otherwise. Unclear - the statute is silent. Unclear - the statute is silent. Unclear - the statute is silent. GOVERNANCE STRUCTURE Management templates Provided Yes - 407 Provides default rules for two types of management structure: member-managed and managermanaged. Required No - 407(b) & (c) - Default rules are subject to the operating agreement under 105 (see comments to 407). Yes - 10.50.110 contemplates both member-managed and manager-managed structures. Member-managed is the default. No - Similar to ULLCA in that, 10.50.100 provides that default rules are subject to changes in an operating agreement. Page 1 of 15
Voting/consent 407 - provides centralized list of matters requiring member consent for member-managed and manager-managed LLCs. Default rules are: Majority consent of members or managers required for matters within the ordinary course of business; unanimous consent of members required for matters outside ordinary course of business and to amend the operating agreement. See 407(b)(3)-(4); 407(c)(1),(3); 1023(a); 1033(a); 1043(a); 1053(a) (default rule is unanimous consent for mergers, interest exchanges, conversions and domestications). 10.50.150 is similar to ULLCA - provides centralized list of matters requiring member consent for member-managed and manager-managed LLCs. Default rules are: majority consent of members or managers required for matters within the ordinary course of business; unanimous consent of members required for matters outside ordinary course of business and to amend the operating agreement. See also 10.50.510 (requiring unanimous consent for mergers). GOVERNANCE DUTIES Definition and structure Loyalty 409(b) & (i)(1) Members in a member-managed LLC and managers in a manager-managed LLC owe to the LLC and members fiduciary duty of loyalty: account for LLC property, refrain from self-dealing and competition and appropriation of a company opportunity. 10.50.140 assumes managers and managing members owe a duty of loyalty. It provides that a transaction between the LLC and managers or managing members is not void or voidable if the material facts of the transaction are fully disclosed or known to the members and the transaction is approved by the disinterested members in good faith. Care 409(c) & (i)(1) Members in a member-managed LLC and Managers in a manager-managed LLC owe to LLC and the members a duty of care: refrain from grossly negligent or reckless conduct, intentional misconduct, and knowing violations of law. Contractual duty of good faith and fair dealing 409(d) & (i)(3) Members and managers shall discharge duties and obligations consistently with the contractual obligation of good faith and fair dealing. This duty cannot be eliminated; but the operating agreement may prescribe the standards by which performance is to be measured, if not manifestly unreasonable. 10.50.135 Members in a member-managed LLC and managers in a manager-managed LLC shall perform the duties of management with the care, including reasonable inquiry that an ordinarily prudent person in a like position would use under similar circumstances. Silent on the contractual duty This duty is not discussed anywhere in the Alaska LLC act. Page 2 of 15
Operating agreement power to limit, eliminate loyalty, care and good faith and fair dealing 105(c)(6), (d)(3) If not manifestly unreasonable [defined in (e)], the operating agreement may: There is no express provision discussing whether or not members/managers can limit or eliminate the duties in the operating agreement. i. restrict or eliminate aspects of the duty of loyalty stated in 409(b) & (i)(1); ii. alter duty of care except to authorize intentional misconduct or conduct involving bad faith, willful or intentional misconduct, or a knowing violation of law; iii. eliminate or alter other fiduciary duties not codified in the Act; and iv. prescribe standards to measure performance of the obligation of good faith under 409(d). Operating agreement power to limit or eliminate liability for breach of duties Yes - 105(c)(7) except for conduct involving bad faith, willful or intentional misconduct, or a knowing violation of law. Yes 10.50.148 Provided the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the company, and, with respect to a criminal action or proceeding, the person had no reasonable cause to believe the conduct was unlawful. AGENCY POWER OF MEMBERS Authority to bind LLC determined by agency law not status Yes mem Statement of authority Statement of denial Permitted 302 Statements of authority pertaining to position may be filed in the Secretary of State s office (and, in the case of real estate, in the office where real estate records are kept) to provide notice that only certain members or managers have authority to conduct business on behalf of the LLC. Permitted 303 Operates as a restrictive amendment to a statement of authority. Not addressed. Not addressed. MEMBERSHIP Definition 102 was a Page 3 of 15
Becoming a member 401 If the LLC is to have only one member upon formation, that person becomes a member as agreed by the person and company s organizer. The member may be the organizer. 10.50.155 describes how a person may become a member: If LLC is to have more than one member upon formation, those persons become members as agreed before the company s formation. Organizer acts on their behalf and may be one of them. After formation, a person becomes a member in one of four ways: 1) under operating agreement; 2) through an Article 10 transaction; 3) by members unanimous vote; or 4) after company has no members for 90 days, transferees entitled to receive a majority of the company s distributions may consent to adding a new member. See 701(a)(3)(A). A person may become a member without acquiring a transferable interest or being obligated to contribute. If a transferee becomes a member, the transferee is liable for the member s contribution obligations and for claw back of improper distributions made to the member. See 502(h) (1) directly from the limited liability company (A) in compliance with an operating agreement of the company; or (B) with the written consent of all of the members of the company if an operating agreement of the company does not provide for acquiring an interest directly from the company; or by assignment of the interest by a company member in compliance with AS 10.50.165. Page 4 of 15
FINANCES (2) Page 5 of 15
Acceptable forms of contributions 402 Allocation of distributions Express provisions for capital accounts and profit and loss allocations Liability for contributions Limitations on distributions Liability for improper distributions 404 Default rule is that distributions before dissolution must be in equal shares among members and dissociated members, except to comply with transferee obligations and charging orders. 405 No distribution allowed if company would be (1) unable to pay debts; or (2) if total assets would be less than total liabilities, plus any amount needed to satisfy preferential rights. No ULLCA follows both RUPA (1997) (Last Amended 2013) and ULPA (2001) (Last Amended 2013) by omitting the default rule for allocation of losses. Distribution rules are sufficient to determine tax allocation of losses. 403 A person s obligation is not excused by death, disability, or other inability to perform; creditors may enforce this obligation. If a person does not make a required non-cash contribution, the person is obligated at the option of the company to contribute money value. An obligation may be compromised by members unanimous consent. 405 Alternative tests (1) not able to pay the debts as they become due in the ordinary course of business; or (2) total assets less than total liabilities. 406 Two types of liability specified: (1) personal liability of the members/managers who consent to an improper distribution; and (2) liability to return the excess by recipients who knew the distribution was improper. Two year statute of limitations to bring action for recovery of excess. 10.50.295-300 Interim distributions are allocated according to the articles of organization or an operating agreement. Absent any provisions in the articles of organization or an operating agreement, interim distributions to each member of the company shall be equal. Yes 10.50.290 Unless otherwise provided in an operating agreement of the company, a member of a limited liability company shall be repaid the member s contribution to capital and shares equally in the profits and other assets of the company remaining after all liabilities, including liabilities to members, are satisfied. Similar to ULLCA 10.50.280(b) unless the operating agreement provides otherwise, a member s written promise to the LLC to contribute cash or property or render services is not excused by reason of the member s death, disability, or other inability to perform. 10.50.280(c) If a person does not make a required non-cash contribution, the person is obligated at option of the company to contribute money value. Similar to ULLCA 10.50.305 prohibits distributions if company would be (1) unable to pay debts; or (2) if total assets would be less than total liabilities, plus any amount needed to satisfy preferential rights. 10.50.320 There is no provision for members/managers who consent to unlawful distribution. Members who receive a prohibited distribution and knew of facts indicating the impropriety of the distribution are liable for the amount received. Such members are entitled to contribution from each member for the amount received knowing that the distribution was wrongful. There is no statute of limitations. Page 6 of 15
Right to transfer financial interest Yes 502 Reflects the pick your partner principle and delimits the rights of transferees; a member can transfer only his/her financial interest, not management or governance rights. Transfer of certificates evidencing the interest is permitted. A transferee has no right to information except an accounting after dissolution. Yes But unlike ULLCA, both management rights and distribution rights can be assigned in whole or in part. 10.50.375 Until assignee becomes a member, the assignee is only entitled to the assignor s distribution; the assignor retains governance rights. Assignee has no liability of a member (and an assignor is not released of liability) solely as a result of assignment. An operating agreement may establish different terms. The act is silent as to whether an assignee receives information rights, but one could infer that assignees have no information rights since they are only entitled to an assignors distributions. DISASSOCIATION AS A MEMBER AND DISSOLUTION Dissociation 601 wron other Effect of Dissociation 603 The member s right to participate in the management and conduct of the business terminates. The former member is a mere transferee and has only the right to receive distributions. The dissociation does not trigger any distributions; but the former member does receive a proportionate share of future distributions. 10.50.185(d) Unless otherwise provided in an operating agreement of the company and except for termination under AS 10.50.205 (removal of a member), after a member resigns from a limited liability company, the rights of the former member are those of an assignee. Page 7 of 15
This LLC Comparison Chart Dissolution 701 Lists the causes of dissolution, including court ordered dissolution (see below); 10.50.400 Lists three default causes of dissolution: 702-707 winding up and disposition of assets. 708-710 authorizes the Secretary of State to administratively dissolve an LLC for failure: (1) to pay taxes of fees owed to the SOS; (2) 6-month delinquency in filing an annual report; or (3) failure to have a registered agent for 60 consecutive days. There is a right of Reinstatement within two years if the deficiencies are cured. (1) At the time or on the happening of events specified for dissolution in the operating agreement of the company; (2) upon the written consent of all members; and (3) entry of a decree of judicial dissolution because it is not reasonably practicable to carry on its business in conformity with its articles of organization or operating agreement. See also 10.50.405. The commissioner may dissolve an LLC if: (1) the company is delinquent six months in filing its biennial report or in paying a fee or a penalty; (2) the company has failed for 30 days to appoint and maintain a registered agent in the state; (3) the company has failed for 30 days after change of its registered office or registered agent to file in the office of the commissioner a statement of the change; or (4) a misrepresentation of material facts has been made in the application, report, affidavit, or other document submitted under this chapter. Companies retain a two-year reinstatement right. JUDICIAL PROTECTION OF ENTITY AND MEMBERS Court Ordered Dissociation (Expulsion) 602 mem Page 8 of 15
Court Ordered Dissolution 701(4) On application by a member that: 10.50.405 Extraordinarily narrow Provides that on application by or for a member of a limited liability company, the superior court may order the company (1) the conduct of all or substantially all the LLC s activities is unlawful; dissolved if the court determines that it is impossible for the company to carry on the purposes of the company. (2) it is not reasonably practicable to carry on the LLC s activities in conformity with the certificate of organization and the operating agreement; or (3) the managers or those members in control of the LLC have acted, are acting, or will act in a manner that is illegal, or fraudulent or in a manner that is oppressive and was, or will be directly harmful to the applicant. This right cannot be modified or eliminated by the operating agreement. Remedies other than dissolution authorized Express authorization for direct and derivative provisions MANDATED DISCLOSURE INFORMATION Yes to both Express distinction between direct/derivative lawsuits; 801 allows a member to bring a direct action for injuries to that member and 802-06 allows a member to bring a derivative action to enforce the right of an LLC. Special litigation committee authorized. 10.50.730 permits actions by or against an LLC, but grounds for a direct action are not specified. 10.50.735 limits derivative suits brought on behalf of an LLC to two situations: (1) a member (regardless of management structure) if he has consent (affirmative vote) by majority of members having a majority of the voting power of all disinterested members; or (2) if a manager managed LLC, by a manager if he has consent (affirmative vote) by the quantum of votes provided in other provisions of the act (see 10.50.150). No provision for a special litigation committee. Page 9 of 15
the n LLC Comparison Chart Certificate/articles of organization 201 Annual reports 212(a) Annual report must state: (1) name of the LLC; (2) name and street and mailing address of its registered agent in this state; (3) street and mailing addresses of its principal office; (4) if the company is member managed, name of at least one member; (5) if company is manager managed, the name of at least one manager; and (6) in the case of a foreign company, its jurisdiction of formation and any alternate name adopted under 906(a). (3) 10.50.750 An LLC shall file biennial reports. Pursuant to 10.50.755, those reports must set out: (1) the name of the company and the state or country where it is organized; (2) the address of the registered office of the company in this state, and the name of its registered agent in this state at that address, and, in the case of a foreign limited liability company, the address of its principal office in the state or country where it is organized; (3) the names and addresses of the managers of the company, or, if the company is not managed by a manager, the names and addresses of the members of the company; the name and address of each person owning at least a five percent interest in the company and the percentage of interest owned by that person in the company. Page 10 of 15
Access to records 410 Separate provision for member-managed and managermanaged LLCs. In a member-managed LLC members may inspect and copy any records maintained by the company that are material to the member s rights and duties under the operating agreement under the following conditions: 1) member gives reasonable notice (response due not later than 10 days after receipt of the demand); 2) member inspects records during office hours; and 3) member inspects records at a reasonable location specified by the company. Without demand, the company must furnish to members any information material to members exercise of duties and rights. In a manager-managed LLC, managers have the information rights of members in a member-managed LLC, and members have information rights related to the member s interest as a member. The LLC has 10 days to accept, reject or limit the requested access. Dissociated members have rights to information relating to the time the former member was a member. A transferee is not entitled to any information rights. Under 105(c)(8) an operating agreement may impose reasonable restrictions on access and use of information obtained under 410 and may specify appropriate remedies, including liquidated damages, for breach of any restrictions. 10.50.870(a) A limited liability company shall make its books and records of account, or certified copies of them, reasonably available for inspection and copying at its registered office or principal office in the state by a member of the company. Member inspection shall be upon written demand stating with reasonable particularity the purpose of the inspection. The inspection may be in person or by agent or attorney, at a reasonable time and for a proper purpose. Only books and records of account, minutes, and the record of members directly connected to the stated purpose of the inspection may be inspected or copied. 10.50.870(b) Holds an LLC who wrongly denies a proper inspection liable to the member for 10 percent of the value of the members ownership interest or $5,000, whichever is greater. (4) No specific provision for nondisclosure or confidentiality of information or records. CREDITOR RIGHTS AGAINST MEMBERS Exclusive remedy Yes mem the L Page 11 of 15
Foreclosure Authorized LLC Comparison Chart Yes 503(c) Court may foreclose the charging order/lien and order the sale of the transferable interest. No 10.50.380 Other legal or equitable remedies, including foreclosure on the member s limited liability company interest and a court order for directions, accounts, and inquiries that the debtor member might have made, are not available to the judgment creditor attempting to satisfy a judgment out of the judgment debtor s interest in the limited liability company and may not be ordered by a court. Effect of foreclosure at sale 503(c) Purchaser of a foreclosed interest only obtains financial rights and does not become a member, except in the case of a foreclosure of a charging order lien against the sole member of an LLC. See 503(f). No statutory provision. Redemption rights Yes 503(d) & (e) Before foreclosure, the member or transferee whose interest is subject to the charging order may satisfy the judgment; or the LLC or a member not subject to the charging order may pay the judgment creditor the full amount due. No statutory provision. REORGANIZATION Provided for Yes dome types anoth dome Vote required Unanimous consent Subject to the operating agreement, 407(b)(4)(A) for member-managed LLCs and 407(c)(3)(A) for manager-managed LLCs requires the consent of all members to approve an Article 10 transaction. Unanimous consent 10.50.510 and 10.55.108 Subject to an operating agreement or, in the case of an entity converting into an LLC, the document governing the entity s internal affairs. Page 12 of 15
Appraisal (Dissenters ) rights No express provision because unanimous consent is required for Article 10 transactions; but 1007 preserves appraisal rights authorized by other law for other entities that are parties to transaction and also authorizes enforcement of contractual appraisal rights in an LLC s operating agreement or the Plan. No express provisions for dissenters rights. (default is unanimous consent) For those transactions taking place under Alaska s Entity Transaction Act, dissenters are afforded those rights they would have been entitled to under the entity s organic law or those provided in the plan. 10.55.109. TECHNICAL IMPROVEMENTS Organization and navigation Draft ove Formation Permissible purpose Choice of law internal affairs doctrine recognized Scope of liability shield 201 An LLC is formed when the certificate of organization is effective and at least one person has become a member. 108 An LLC is not restricted to for-profit business activities, but may engage in any lawful purpose, regardless of whether for profit. This expands the availability of LLCs to family vacation homes and organizations whose activities might be classified as non-profit. 104 Law of this state governs internal affairs of an LLC formed in this state and cannot be altered under 105(c)(1). 901 Law of the state of formation governs internal affairs and liability shield (including the internal series shield) of a foreign LLC. 304 No status liability for members and managers, including after dissolution; formality failure is not a piercing element. 10.50.080 An LLC is organized when the articles of organization for the company that conform to the filing requirements of this chapter are delivered to the department for filing. 10.50.010 An LLC may be organized under this chapter for any lawful purpose, including the rendering of a professional service. No specific provision similar to ULLCA 104. Under 10.50.600 the law of the state or other jurisdiction under which a foreign limited liability company is organized governs the organization and internal affairs of the company. No specific provision regarding series internal shield. Same as ULLCA. 10.50.265 A person who is a member of a limited liability company or a foreign limited liability company is not liable, solely by reason of being a member, under a judgment, decree, or order of a court, or in another manner, for a liability of the company to a third party, whether the liability arises in contract, tort, or another form, or for the acts or omissions of another member, manager, agent, or employee of the company to a third party. Page 13 of 15
Freedom of contract No express provision but principles inherent throughout. The Act contains a basic set of internal affairs default rules, most of which can be altered by the operating agreement. No express provision. Name requirements and other filing requirements; registered agents Statue of Frauds applicable to operating agreement Indemnification Foreign LLCs modern language re: Acts not constituting doing business in state 112-20 and 201-212 contain state-of-the-art filing provisions that will accommodate electronic filing of documents, if and when authorized by the enacting state, and also modernized registered agent provisions. Yes Common law statute of frauds applies. 408 Authorized unless limited in the operating agreement. No indemnification for breach of distribution limitations or breach of management duties and responsibilities. Specific authorization for advancement of fees and expenses. Article 9 Specific provisions relating to foreign LLCs. 905 Lists specific activities that do not constitute transacting business in this state. Same basic provisions as ULLCA, but scattered throughout statute and numerous technical differences. For example, no requirement in name provisions that the words in the record be in English/Roman numerals. 10.50.075 (articles of organization); 10.50.820-50 (filing requirements); 10.50.020-053 (name); 10.50.055-063 (registered agent). Unclear e.g., transfers of real property, contracts that cannot be completed within oneyear, etc. 10.50.148 Authorized to indemnify manager, managing member, employee, or agent of the company in a completed, pending, or threatened action, whether civil, criminal, administrative, or investigative, as long as the person acted in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the company. If the action is criminal, the person could not have reasonable cause to believe the conduct was unlawful. Like ULLCA, specific authorization for advancement of fees and expenses. Similar to ULLCA, Alaska organizes its provisions relating to Foreign LLCs in one article, Article 13. Similar to ULLCA, 10.50.720 lists specific activities that do not constitute transacting business within the meaning of the LLC act. The list is very similar to ULLCA. Consequences of doing business without having proper certificate of authority 902(b) An unregistered foreign LLC that transacts business in the state may not maintain an action or court proceeding. 10.50.675 states that foreign LLCs conducting affairs in this state may not maintain an action or other proceeding in a court of this state until it has registered in this state. The failure of a foreign limited liability company to register in this state does not: (1) impair the validity of a contract or act of the company; (2) affect the right of another party to a contract of the company to maintain an action or proceeding on the contract; or (3) prevent the company from defending an action or other proceeding in a court of this state. MISCELLANEOUS Page 14 of 15
Knowledge and Notice 103 Page 15 of 15