Limited Liability Companies

Limited Liability Companies by Shaun Courtney, Tim Sanders and Robert Hershey The University of Arizona NativeNet Professional Development Series

2 The University of Arizona NativeNet

Limited Liability Companies 3 How To Use This Book This booklet is one of a series designed to serve as a resource for tribal officials on topics relating to: 1. Governance 2. Economic Development 3. Lands & Resources 4. Safe & Healthy Communities 5. Comparative & International Indigenous Peoples Law Throughout this guide, the following icons may appear. These icons are visual guides to help the user identify areas that may require special attention. Multiple options exist. You will need to choose which direction to go An important point to be aware of Practical tip; helpful hint Should you choose to address matters discussed in this guide that require the assistance of an attorney, this booklet can serve as a foundation for facilitating discussions regarding these matters. This book is not meant to constitute legal advice or to substitute for the advice of a qualified attorney on legal matters.

4 The University of Arizona NativeNet Limited Liability Company (LLC) Statute Overview A Resource for Tribal Leaders A Project of the University of Arizona Indigenous Peoples Law and Policy Program and the Native Nations Institute Table of Contents Use This Book as a Resource Introduction Code: General Provisions Code: Organization Code: Members and Managers Code: Non-Liquidating Distributions Code: Merger, Conversion, and Domestication Code: Dissolution and Winding Up Code: Wholly-Owned Tribal Entities Forming a Company Further Reading About the Project

Use this Book as a Resource Limited Liability Companies 5 This booklet is designed to be a resource for tribal officials to help them navigate the process of creating an LLC code. It is organized into chapters that correspond to categories you will want to address in your code. Within each chapter you will find sections about specific provisions that warrant detailed explanation or that present important decisions that will need to be made as you consider your own code. Visual guides are included to help you identify areas that require special attention: Throughout the booklet, references will be made to both the Ho-Chunk Limited Liability Code (5HCC03) and the Uniform Limited Liability Company Act (ULLCA); both documents are incorporated as appendices to this booklet. In addition, specific provisions are included in the text of this booklet where appropriate; in these excerpts, any references to a state in the ULLCA have been changed to denote a reservation. A tribe wishing to enact an LLC code is encouraged to choose one of these two exemplars as a template and modify it according to the tribe s specific needs after reviewing the information in this booklet. Of course, your tribe may choose to draft a completely new statute with the assistance of a qualified attorney, in which case this booklet can serve as a guide to the different types of provisions you will want to consider including. When you see a box like this, it contains the text of provisions from the Ho-Chunk Code or the Uniform LLC Code. The choice of template depends on the tribe s particular needs. In general, the Uniform Code is much more descriptive than the Ho-Chunk Code, although both contain very similar provisions. In several cases, the Uniform Code imposes more restrictive constraints on how LLCs may undertake certain operations;

6 The University of Arizona NativeNet in these cases, you will need to consider the tribe s goals regarding control over LLCs and which template is better suited to those goals. A tribe considering using one of these two templates must balance concern for detail and specificity with brevity and flexibility. For several provisions, this booklet outlines the difference between these two codes and allows for a comparison of the two legislative styles. Once a template is chosen, the tribe should not omit any of the provisions without careful consideration of the effect of leaving out the provisions. Any enactment of tribal statutes should only be carried out after consultation with an attorney. This book is not meant to constitute legal advice or to substitute for the advice of a qualified attorney on legislative matters. Introduction The allure of the limited liability company is its unique ability to bring together the best features of all other business forms in a single business organization. If the company incurs a debt, the amount of responsibility that the owners, or members, are accountable for is limited. Often this responsibility varies according to the amount contributed to fund or invest in the company. While anything up to that amount may be lost, the company s members are not personally liable beyond that contribution. In this way, the individuals are protected, similar to a corporation. Partnerships do not have such protection for their owners. In addition, a limited liability company itself is not taxed. Instead, the individual members pay taxes on the profits or dividends that the company distributes to them. Corporations are taxed and their owners, or shareholders, pay taxes again on the dividends the corporation pays to them. In that way, corporate profit is taxed twice. Like partnerships however, limited liability companies only pay taxes once. Corporations, including those having made a Subchapter Selection, do not offer their shareholders

Limited Liability Companies 7 all the pass-through tax benefits of a partnership. The purpose of this guide is to share the basic framework of typical limited liability codes and highlight areas of decisions in drafting and common issues that should be addressed such as: should the tribe recognize limited liability companies not organized under tribal law to accommodate the widespread multistate activities of modern businesses; should the tribe require more than one owner to incorporate and operate an LLC; may an LLC be formed for purposes other than to make a profit; should owners have the power and right to withdraw from a company and receive a distribution of the fair value of their interests; should a member's dissociation cause a dissolution of the company; who has the apparent authority to bind the company and what are the limits of that authority; what are the legal fiduciary duties owners and managers owe to the company and to each other; how are the rights to manage a company allocated among its owners and managers; do the owners have the right to sue a company and its other owners in their own right as well as derivatively on behalf of the company; may existing partnerships and corporations be converted to limited liability companies and may limited liability companies merge with other limited liability companies and other business organizations; what law should govern foreign limited liability companies; and, are any or all of these and other rules simply default rules that may be modified by agreement or are they nonwaivable? The tribe can include as few or as many rules as it deems

8 The University of Arizona NativeNet necessary into its limited liability code. What is not cemented in tribal law, or their limited liability company code, is left to the companies to determine in an agreement among the members. Provisions can be included in the code as a default subject to sophisticated agreements between companies. The fewer rules the tribe has, the more space it leaves the members to design a company that will meet their needs. Unfortunately, this does not protect companies that do not have access to the expertise of limited liability company attorneys. The default provisions can be relied on for protection in such instances. To further protect these companies, the law can include nonwaivable provisions. Some codes group their nonwaivable provisions in a single section. On the other hand, the tribe can create a less strict framework that is very flexible and inviting to limited liability companies. General Code Provisions Definitions: This section defines terms used throughout the act, confining interpretation to those definitions when provided. This can limit parties from using definitions that may be more beneficial or detrimental to their case in the event of litigation. The tribe can use this section to selectively limit or expand the meaning of specific terms. When developing this section, the tribe should take care to thoroughly review the issues regarding the specific terms it selects to include in its definitions section. For a comparison of definitions used in different codes, see ULLCA 102 and 5HCC03 5.

Nature and Purpose: Limited Liability Companies 9 Denoting the limited liability company as a "separate entity" aids in shielding the members from liability. The purpose can limit the limited liability companies only to those that are organized for profit or expand it to include charitable organizations. (a) A limited liability company is an entity distinct from its members. (b) A limited liability company may have any lawful purpose, regardless of whether for profit. (c) A limited liability company has perpetual duration. -ULLCA 104 LLC codes typically indicate that an LLC may be formed for any lawful purpose, and some enumerate several examples of activities an LLC may undertake. Your tribe s decision whether or not to include specific examples will depend on how large you want the LLC code to be as well as the extent to which you wish to stimulate business formation and growth by providing such examples. Some courts may interpret the enumeration of examples as an intent to exclude anything not mentioned. Regardless of how your tribal court has ruled on similar issues in the past, you should carefully consider this possibility in your decision and, at minimum, include specific language stating that the examples are not intended to be exhaustive or to exclude other purposes not listed.

10 The University of Arizona NativeNet A limited liability company may be organized under this Act for any lawful purpose. Unless otherwise provided in article of operation [sic], a LLC organized and existing under this Act has the same powers as an individual to do all things necessary and convenient to carry out it business, including but not limited to all of the following. [ ]g. Lend money, invest and reinvest its funds, and receive and hold real or personalproperty as security for repayment. [ ]l. Make donations to and otherwise devote its resources for the public welfare or forcharitable, scientific, educational, humanitarian, philanthropic, or religious purposes. [ ]p. Provide benefits or payments to members, managers, employees, and agents of the LLC, and to their estates, families, dependants or beneficiaries in recognition of the past services of the members, managers, employees, and agents of the LLC. -5HCC03 9 Duration: Companies exist indefinitely and terminate at-will unless the articles of incorporation set a specific duration of time the company will exist and stipulate that the company is to expire at the end of that term. Generally, members of an at-will company may demand a payment of the fair value of their interests at any time. Owners of a term company must generally wait until the expiration of the term to obtain the value of their interests. The tribe can limit the lifespan of a company by dissolving it at a certain time or upon the occurrence of a specific event, or the tribe may allow it to exist indefinitely, or in perpetuity. The tribe may want to consider providing avenues to override perpetuity such as member con sent or other terms or events specified in

Limited Liability Companies 11 the operating agreement. If the operating agreement includes its own duration provision that would override this default rule and the tribe does not require the limited liability company to file its operating agreement and make it public, it may not be public knowledge whether the company is for a term or is at-will. Principles of Law, Powers, and Sovereign Immunity: The tribe can prohibit the operating agreement from altering the capacity for the company to sue and be sued. In addition, the tribe will want to demarcate the boundaries of its sovereign immunity and clarify that tribal law will govern the affairs of the company. This is covered below in the section on Sovereign Immunity. The code should clarify whether affairs includes member actions with third parties, as members may not be considered to be part of the internal affairs of the company, which could include their torts or actions and decisions that bind the company. SECTION 105. POWERS. A limited liability company has the capacity to sue and be sued in its own name and the power to do all things necessary or convenient to carry on its activities. SECTION 106. GOVERNING LAW. The law of this [tribe] governs: (1) the internal affairs of a limited liability company; and (2) the liability of a member as member and a manager as manager for the debts, obligations, or other liabilities of a limited liability company. SECTION 107. SUPPLEMENTAL PRINCIPLES OF LAW. Unless displaced by particular provisions of this [act], the principles of law and equity supplement this [act]. -ULLCA 105-107 Office and Agent: A fundamental element of a limited liability code is a process for designating a person who will be accountable for receiving and confirming delivery of documents for a company. To hold a company liable for its obligations, other entities must be able to

12 The University of Arizona NativeNet locate the company. Therefore, the company must designate one person at a specified address who will always be able to deliver documents to the company. In this way, if a company is not located on the tribe s land or nearby, the company can still be found easily through the designated agent. Because of the importance of the contact agent, the code is often very specific about transferring the responsibility and seamlessly changing agents so that there is someone designated at all times to serve in this capacity. The tribe should choose whether or not to re - quire LLCs to designate and continuously maintain an office on tribal land and/or an agent who is a tribal member. Not including these requirements can allow businesses to operate off of tribal lands more easily. Some tribes require the office and agent to be located in one place on the reservation, as serving process on a company is simplified when all of the tribal companies agents are centrally located. OFFICE AND AGENT FOR SERVICE OF PROCESS. (a) A limited liability company shall designate and continuously maintain [on this reservation]: (1) an office, which need not be a place of its activity [on this reservation]; and (2) an agent for service of process. (b) A foreign limited liability company that has a certificate of authority under Section 802 shall designate and continuously maintain [on this reservation] an agent for service of process. (c) An agent for service of process of a limited liability company or foreign limited liability company must be an individual who is a resident of this [reservation] or other person with authority to transact business [on this reservation]. -ULLCA 113

Limited Liability Companies 13 Registered Office and Registered Agent. A limited liabilities [sic] company s registered agent is the company s agent for service of process, notice, or demand required or permitted by law to be served on the company under the laws of the Nation. a. Each LLC shall continuously maintain a registered office and a registered agent. The registered office may, but need not, be the same as any of its places of business. The agent may be the same person then serving in a designated office of the Nation rather than a specified person if the Nation is a Member in the LLC of which the Nation s officer is the appointed agent. b. An LLC may change its registered office or registered agent, or both, by including the name of its registered agent and the street address of its registered office, as changed, in articles of amendment to its articles of organization or in articles of merger.[ ] -5HCC03 7 Organization This chapter describes several documents that codes typically require to initiate the legal formation of the company and the accompanying liability; to provide the tribe with the rules the company has agreed will govern it; and to share information with the tribe through annual reports or otherwise. This section can also include procedures for amending documents which were filed with the tribe. Certificate/Articles of Organization: This section provides the process by which a limited liability company becomes an organization. The tribe can outline what information it needs to know about the company and require that information, labeled here as a certificate of organization, to be

14 The University of Arizona NativeNet filed with the tribe. Typically, the company comes into existence at the time the certificate is filed. Some codes allow the person who files the certificate to file the certificate but delay the effective date. In addition, while a person may orchestrate the formation of a company, that person may or may not actually be a part of the company or have any future interest in the company. In such a case where there are no members, the code may provide a window of time to secure at least one member before allowing the company to legally form and assume liability. Some statutes explicitly require each LLC to have at least one member. This decision is typical of those mentioned at the beginning of this booklet where the tribe must choose between specificity and flexibility; your tribe may want to allow an LLC to start with no members and to name them later, or it may wish to require all LLCs to always have members. You will also need to decide whether to require the organizers to be members and which pieces of information are mandatory. Articles of Organization. a. [ ] The organizer(s) need not be members of the LLC at the time of organization or thereafter. b. A limited liability company shall have one or more members. -5HCC03 13 Operating Agreement: The operating agreement is essentially the contract that governs the affairs of a limited liability company. Although many agreements will be in writing, the agreement and any amendments may be oral or in the form of a record. The rules of the limited liability code are the default in the absence of any agreement made in an operating agreement between the parties.

Limited Liability Companies 15 The agreement can include the scope and limits of the company s, members, and managers powers, rights, and responsibilities, as well as all internal issues. The loyalty, care, and fiduciary duties can be altered or eliminated altogether (except the duty of care which may be governed by a different area of law, such as contract under tribal law), although it should be noted that negotiating these protections can leave weaker parties dangerously vulnerable. This section can potentially allocate extraordinary amounts of power, and it should be noted that those allocations can conflict with other agreements such as a contract between a member and a manager. The operating agreement can provide protections against unshielded mergers, allow members to define the managerial roles, or provide indemnification and exculpation processes. Since they are binding on all members, amendments must usually be approved by all members unless otherwise provided in the agreement. The code or operating agreement can mandate the unanimous consent of disinterested, independent decision makers to change the operating agreement, or can make the requirement less stringent if there is full disclosure. The operating agreement is vitally important to the organization and should be developed carefully with a thorough examination by an expert of the effects and implications of establishing each provision. To ensure the effectiveness of limited liability company operating agreements, the tribe might explicitly state in the code that the limited liability company may enforce its operating agreement. Your tribe will need to decide whether or not to include provisions that spell out the structural requirements and legal implications of operating agreements. For an example of this level of specificity, see ULLCA 110-112.

16 The University of Arizona NativeNet Court Actions: Members or managers can bring a court action on behalf of themselves or the company regarding their rights against another member, a manager, or the company. To bring an action on behalf of him or herself, the member must have suffered harm beyond that suffered by the company, otherwise they would simply be suing on behalf of the company. Codes vary regarding whether managers and members can sue and under what conditions. The section on court actions lays out those procedures, including the number of votes required to support a court action and whether such votes include members with an interest in the outcome. 7. Liability of Members to Third Parties. The debts, obligations, and liabilities of a LLC, whether arising in contract, tort, or otherwise, shall be solely the debts, obligations, and liabilities of the LLC. Except as otherwise specifically provided in this Act, a member or manager of a LLC is not personally liable for any debt, obligation, or liability of a LLC, as defined in the Articles of Operation. 18. Parties to Action. A member of a LLC is not a proper party to a proceeding by or against a LLC solely by reason of being a member of the LLC, except if any of the following exist. a. The object of the proceeding is to enforce a member s right against or liability to the LLC. b. The action is brought by a member under Section 19. 19. Authority to Sue. Unless otherwise provided in articles of operation an action on behalf of a LLC may be brought in the name of the LLC by: a. One or more members of the LLC, if authorized by a majority in interest of members, excluding the vote of any member who has an interest in the outcome of the action that is adverse to the interest of the LLC. b. One or more managers of a LLC if the management of the LLC is vested in one or more managers, or if the managers are authorized to sue by a majority in interest if members. -5HCC03 17-19

Members and Managers Becoming a Member: Limited Liability Companies 17 The tribe will want to outline what is required for a person to become a member at startup or after the company is formed. The code might allow admission of members to occur in a variety of ways, including a vote unanimous or not by the existing members, a contribution, or acquisition of interest in the company via a transfer or otherwise. It might also note how the initial member(s) came to be members and if there was any requirement beyond naming them on the certificate of organization. It will also be necessary to specify whether all members have equal shares of membership or whether some members may have a greater share than others. The Uniform Code, for instance, appears to require all members to have equal shares (see below), whereas the Ho-Chunk Code allows for varying degrees of membership interest (based on several references to majority in interest as opposed to majority of members ; see below). (a) Any distributions made by a limited liability company before its dissolution and winding up must be in equal shares among members and dissociated members, except to the extent necessary to comply with any transfer effective under Section 502 and any charging order in effect under Section 503. -ULLCA 404(a) (b) After a limited liability company complies with subsection (a), any surplus must be distributed in the following order, subject to any charging order in effect under Section 503: [ ](2) in equal shares among members and dissociated members, except to the extent necessary to comply with any transfer effective under Section 502. -ULLCA 708(b)

18 The University of Arizona NativeNet l. Majority in Interest means members contributing more than fifty percent (50%) of the value of total capital contributions to the limited liability company excluding any interest which is not to be counted as voting on a matter as described elsewhere in this Act. -5HCC03 5(l) Becoming a Manager: Managers are those who handle the day to day operations of the company. The managers may or may not be members, and most statutes allow companies to select whether to be membermanaged or manager-managed. If your code allows both styles of management, it is important to examine all sections of proposed code dealing with persons acting for the company and ensure that such sections account adequately for both management styles. Contributions: Here, the tribe can generate an exhaustive or selective list of the types of contributions companies are allowed to accept to establish membership interest, such as money, services, property, contracts, promises, etc. FORM OF CONTRIBUTION. A contribution may consist of tangible or intangible property or other benefit to a limited liability company, including money, services performed, promissory notes, other agreements to contribute money or property, and contracts for services to be performed. -ULLCA 402

Limited Liability Companies 19 Contributions. a. A member s contributions to a LLC may consist of cash, property, or services rendered, or promissory notes or other written obligations to provide cash or property or to perform services. b. The value of a member s contribution shall be determined in the manner provided in articles of operation. If the articles of operation does not fix a value to a contribution, the value of a contribution shall be approved by a majority in interest of the members, shall be properly reflected in the records and information kept by the LLC under paragraph 24a. The value of contributions so determined shall be binding and conclusive on the LLC and its members. -5HCC03 27 Duties: The articles of incorporation must clarify whether the members will manage the company or whether the members will hire others to manage the company. The default law can be construed so that unless the articles reflect that a company will be managed by managers, the company will be managed by its members. This designation controls whether the members or managers have apparent agency authority or management authority, and the nature of fiduciary duties in the company. Members who are not managers are not subject to fiduciary duties. Often the responsibilities are divided equally among the members including voting, the selection and removal of managers, managing in specific instances, making decisions regarding mergers and property, and amendment. This section can outline how disagreements will be resolved. When there is a manager vacancy and the company is a manager-managed company, the code can provide for a member to assume managerial duties during the interim; otherwise if members begin to manage companies in transition there can be confusion regarding who is to be held legally liable for those management decisions. This also makes liability clear regarding the

20 The University of Arizona NativeNet information that the member has access to as an interim manager so that it is not used after the member ceases to fill that role. The Limited Liability Company code will need to account for the duties of both members and managers. These duties should be split into separate sections describing duties of each party in a member-managed company and duties of each party in a manager-managed company. Duties can be defined affirmatively (by dictating what members and managers must do) or negatively (by dictating what members and managers must not do); see below for an example of both of these approaches. Your tribe will probably want to incorporate elements of both. Duties. Unless otherwise provided in articles of operation: a. No member or manager shall act or fail to act in a manner that constitutes any of the following: (1) A willful failure to deal fairly with the LLC or its members in connection with a matter in which the member or manager has a material conflict of interest. (2) A violation of criminal law, unless the member or manager had reasonable cause to believe that the person s conduct was lawful or no reasonable cause to believe that the conduct was unlawful. (3) A transaction from which the member or manager derived an improper personal profit. (4) Willful misconduct. b. Every member and manager shall account to the LLC and hold as trustee for it any improper personal profit derived by that member or manager without the consent of a majority of the disinterested members or managers, or other persons participating in the management of the LLC, from any of the following: (1) A transaction connected with the organization, conduct, or winding up of the LLC. (2) A use by a member or manager of the property of a LLC, including confidential or proprietary information or other matters entrusted to the person as a result of the person s status as member or manager. (3) Articles of operation may impose duties on its members and managers that are in addition to, but not in abrogation of, those provided in paragraph a, above. -5HCC03 21

Limited Liability Companies 21 Agency Power: Agency power is the legal authority to act on behalf of the company. An agent is a person who is authorized to make decisions, enter into contracts, and generally conduct the operations of the company. The owners or members of a company may not be able to commit the time or effort to run the day to day operations of the company, so such power is often vested in an agent. `In order to ensure that it is clear who is authorized to act on behalf of the company, it is advisable to enumerate default rules regarding agency power in both member-managed and managermanaged companies. Agency Power of Members and Managers. a. Except as provided in paragraph b, below: (1) Each member is an agent of the LLC, but not of the other members or any of them, for the purpose of its business. (2) The act of any member, including the execution in the name of the LLC of any instrument for apparently carrying on in the ordinary course of business the business of the LLC, binds the LLC in the particular matter, unless the person with whom the member is dealing has knowledge that the member has no authority to act in this matter. (3) If the Nation is a Member, the Nation s authority shall be exercised only by a duly adopted resolution of the Legislature. b. If management of the LLC is vested in one or more managers: (1) No member, solely by being a member, is an agent of the LLC or of the other members or any of them. (2) Each manager is an agent of the LLC, but not of the members or any of them, for the purpose of its business. The act of any manager, including the execution in the name of the LLC of any instrument for apparently carrying on the ordinary course of business of the LLC, binds the LLC unless the manager has, in fact, no authority to act for the LLC in the particular matter, and the person with whom the manager is dealing has knowledge that the manager has no authority to act in the matter. c. No act of a member or, if management of the LLC is vested in one or more managers, of a manager that is not apparently for the carrying on in the ordinary course of business the business of the LLC shall bind the LLC unless in fact authorized at the of the transaction or at any other time. -5HCC03 14

22 The University of Arizona NativeNet You can also decide how much flexibility to give companies to change these default rules. Because of the importance of knowing who is authorized to act on a company s behalf, it is advisable to specify procedures regarding formal identification of agents. See, e.g., ULLCA 302. Liability: The advantage of a limited liability company is that members are shielded from liability. The code should state this but should also clarify that the limited liability code does not protect members from other applicable law such as those covering misrepresentation, fraud, torts, etc. Although the company may be held liable as a respondeat superior for the actions of an employee, in general each member is still accountable for his/her conduct. Indemnification: Indemnification refers to the process whereby a company can agree to cover debts or liabilities incurred by managers in the course of their duties. Many statutes explicitly allow indemnification, presumably because it might be difficult for some companies to attract competent managers if they did not have an indemnification clause in their operating agreement. Allowing companies to choose whether to include an indemnification clause gives each company the choice whether to indemnify its managers or not. Some statutes include the option of purchasing ditrector s insurance to cover the company in the event of a liability for which the company has agreed to indemnify a manager. Statutes vary regarding the extent to which companies may indemnify managers and the amount of li-

ability companies may insure against. Limited Liability Companies 23 INDEMNIFICATION AND INSURANCE. (a) A limited liability company shall reimburse for any payment made and indemnify for any debt, obligation, or other liability incurred by a member of a member-managed company or the manager of a manager-managed company in the course of the member s or manager s activities on behalf of the company, if, in making the payment or incurring the debt, obligation, or other liability, the member or manager complied with the duties stated in Sections 405 and 409. (b) A limited liability company may purchase and maintain insurance on behalf of a member or manager of the company against liability asserted against or incurred by the member or manager in that capacity or arising from that status even if, under Section 110(g), the operating agreement could not eliminate or limit the person s liability to the company for the conduct giving rise to the liability. -ULLCA 408 Right to Information: The member is often given rights to access information about the company as they have a vested interest in its performance and activities. Because the liability of members is shielded, the code or the company may give them more or less access. The member may be able to sue to enforce whatever rights are given. There are additional implications to consider when a tribes acts as a member of an LLC; your tribe may want to add specific provisions in the code to account for access to information in such situations. Records and Information. a. A LLC shall keep at its principal place of business all of the following: (1) A list, in alphabetical order, of each past and present member and, if applicable, manager. (2) A copy of the articles of organization and all amendments to the articles, together with executed copies of any powers of attorney under which any articles were executed. (3) A record of all matters referred to in this Act as maintained in such records which are not otherwise specified in the articles of operation.

24 The University of Arizona NativeNet b. Upon reasonable request, a member may, at the member s own expense, inspect and copy during ordinary business hours any LLC record unless otherwise provided in articles of operation. c. Members or, if the management of the LLC is vested in one or more managers, managers shall provide true and full information of all things affecting the members to any member or to the legal representative of any member upon reasonable request of the member or the legal representative. d. Failure of a LLC to keep or maintain any of the records of information required under this Section shall not be grounds for imposing liability on any person for the debts and obligations of the LLC. -5HCC03 24 Dissociation: The process of how a member can sever a relationship with the company and the effects of that action should be included in the code. This gives the member instructions on how to exit and dictates whether the member will receive any compensation or a return of their contribution at all, at the time of departure or at the dissolution of the company. Some codes and companies in their operating agreements use the dissociation of a member to trigger the dissolution of a company; others do not. Dissolution will be discussed in more detail later. Transfer of Interest: This default rule provides instructions regarding who can receive and hold an interest in a company, whether they can transfer their interest, and how to transfer it if it is not outlined in the operating agreement. It also provides direction regarding persons who are interested in becoming members and may need to acquire an interest beforehand.

Limited Liability Companies 25 Assignment of LLC Interest. a. Unless otherwise provided in articles of operation: (1) An LLC interest is assignable in whole or in part. (2) An assignment of a LLC interest entitles the assignee to receive only the distributions and to share in the allocations of profits and losses to which the assignee would be entitled with respect to the assigned interest. (3) An assignment or a LLC interest does not dissolve the LLC. (4) Unless and until the assignee becomes a member of the LLC under Section 37, the assignment of a LLC interest does not entitle the assignee to participate in the management or exercise rights of a member. (5) Unless and until the assignee of a LLC interest becomes and [sic] member of the LLC under Section 43, the assignor continues to be a member. (6) The assignor of a LLC interest is not released from any personal liability arising under this Act as a member of the LLC solely as a result of the assignment. b. Unless otherwise provided in articles of operation, the granting of a security interest, lien, or other encumbrance in or against any or all of a member s LLC interest is not assignable and shall not cause the member to cease to have the power to exercise any rights or powers of a member. -5HCC03 41 Non-Liquidating Distributions Allocation and Access: The code may allow a company to decide in its operating agreement how distributions will be allocated. There are different categories the agreement or the code can designate that provide a preferred designation for some which can mean that they receive their distributions before others upon dissolution. These categories become important in the event the company is unable to pay all of its obligations upon dissolution. The code can specify either that distributions must be made to members in equal shares or that distribu tions be made according to the share of interest in the

26 The University of Arizona NativeNet absence of any superceding agreement. This choice will largely be determined by the decision whether to allow varying degrees of membership interest. Often allocations are distributed according to the contributions people have given. Your code should address such issues as who has rights to distributions, when those rights manifest themselves, and in what priority individuals can exercise their rights. The code could create detailed rules explaining whether dissociating members can collect on their investment prior to dissolution, whether members can request non-monetary distributions, or whether creditors have priority over members when there are limited funds. In most cases, these decisions could also be left up to the companies, but it is advisable at any rate to require companies to give creditors priority over members, because to fail to do so could put companies at a disadvantage in terms of securing credit from outside sources. SHARING OF AND RIGHT TO DISTRIBUTIONS BEFORE DISSOLU- TION. (a) Any distributions made by a limited liability company before its dissolution and winding up must be in equal shares among members and dissociated members, except to the extent necessary to comply with any transfer effective under Section 502 and any charging order in effect under Section 503. (b) A person has a right to a distribution before the dissolution and winding up of a limited liability company only if the company decides to make an interim distribution. A person s dissociation does not entitle the person to a distribution. (c) A person does not have a right to demand or receive a distribution from a limited liability company in any form other than money. Except as otherwise provided in Section 708(c), a limited liability company may distribute an asset in kind if each part of the asset is fungible with each other part and each person receives a percentage of the asset equal in value to the person s share of distributions. (d) If a member or transferee becomes entitled to receive a distribution, the member or transferee has the status of, and is entitled to all remedies

Limited Liability Companies 27 available to, a creditor of the limited liability company with respect to the distribution. -ULLCA 404 Right to Distribution. At the time that a member becomes entitled to receive a distribution from a LLC, the member has the status of and is entitled to all remedies available to a creditor of the LLC with respect to the distribution. -5HCC03 35 Limitations and Liability: To protect the reliability and resulting strength of limited liability companies, codes can ensure that distributions cannot be made to members if the company would not be able to pay its debts as they fall due or its total liabilities would surpass its assets plus the amount required to wind up the company were the it to dissolve. These speculative future estimations are usually acceptable to base a decision on if rooted in reasonable accounting practices and principles and the code often outlines the dates on which to base calculations in relation to the distributions. a. A LLC may not declare or make a distribution to any of its members, if after giving effect to the distribution, any of the following would occur. (1) The LLC would be unable to pay its debts as they become due in the usual course of business. (2) The fair market value of the LLC s total assets would be less than the sum of its total liabilities plus, unless articles of operation provides otherwise, the amount that would be needed for the preferential rights upon dissolution of members, if any. -5HCC03 36(a) Managers (or members who assume the role of managers) can be held liable for distributions that violate the code; in addition, the receiver may be required to return the distribution if they knew the distribution violated the code. However the code

28 The University of Arizona NativeNet can also limit the time window within which these people can be held accountable. The code might clarify that these liabilities remain regardless of whether the member, manager, transferee or other ceases in their role. Liability for Wrongful Distribution. a. Except as provided in paragraph b, below, other than the Nation, or manager who votes or assents to a distribution in violation of Section 36 or of articles of operation is personally liable to the LLC for the amount of the excess distribution, subject to contribution from all other managers or members participating in such action. b. A proceeding under this Section is barred unless it is brought within two (2) years after the date on which the effect of the distribution was measured under Section 30. -5HCC03 37 Merger, Conversion, and Domestication Merger, Conversion, and Domestication are three processes that can change the nature of a company without dissolving it entirely. In each of these processes the company continues in some form but its status or relation to other companies has been altered in some way. Merger is discussed in greatest detail below because it is the most common of the three processes, but Conversion and Domestication involve many of the same issues and decision points. Decision to Merge: Because mergers can substantially affect and change a company, members or those with an interest in the company usually have a say in the decision and it is often put to unanimous vote. Your tribe will want to be sure to include default

Limited Liability Companies 29 rules regarding how mergers may be executed, and you may wish as well to allow for companies to make their own rules about the approval required to merge. Approval of Merger. a. Unless otherwise provided in articles of operation a LLC that is a party to a proposed merger shall approve the plan of merger by an affirmative vote of a majority in interest of members. b. Unless otherwise provided in articles of operation the manager or managers of a LLC may not approve a merger without also obtaining the approval of the LLC s members under paragraph a, above. c. Each foreign LLC that is a party to a proposed merger shall approve the merger in the manner and by the vote required by the laws applicable to the foreign LLC. d. Each LLC that is a party to the merger shall have any rights to abandon the merger that are provided for in the plan of merger or in the laws applicable to the LLC. e. Upon approval of a merger, the LLC shall notify each member of the approval and of the effective date of the merger. -5HCC03 53 Action Plan and Filings: The plan of the merger must lay out the terms and conditions of the merger, including how the interests will be converted. The details of what must be in the agreement documents such as name and date the merger goes into effect, who has to sign what in agreement, and where those documents, including the articles of incorporation of the surviving company are filed, can all be specified in the code. The statutory provision referring to the action plan may be very brief or may specify the information to be included, as seen below. In addition to a plan of merger, your tribe s statute should include details regarding the articles of merger that must be filed. See ULLCA 1004 and 5HCC03 55 for examples.

30 The University of Arizona NativeNet Plan of Merger. Each LLC that is a party to a proposed merger shall enter into a written plan of merger to be approved under Section 53. -5HCC03 54 (b) A plan of merger must be in a record and must include: (1) the name and form of each constituent organization; (2) the name and form of the surviving organization and, if the surviving organization is to be created by the merger, a statement to that effect; (3) the terms and conditions of the merger, including the manner and basis for converting the interests in each constituent organization into any combination of money, interests in the surviving organization, and other consideration; (4) if the surviving organization is to be created by the merger, the surviving organization s organizational documents that are proposed to be in a record; and (5) if the surviving organization is not to be created by the merger, any amendments to be made by the merger to the surviving organization s organizational documents that are, or are proposed to be, in a record. -ULLCA 1002(b) Effects of Merger: In general, when a merger becomes effective, the surviving organization continues or comes into existence and the former organization ceases to exist as a separate entity; its property, rights, privileges, immunities, powers, and purposes vest in the surviving organization but the debts, obligations, or other liabilities, legal and otherwise, also follow. A foreign organization must consent to the jurisdiction of the courts of the tribe to enforce any debt, obligation, or other liability. Issues regarding sovereign immunity when one party to the merger is tribally-owned need to be considered; this is discussed in more detail in the chapter on tribally-owned entities.

Limited Liability Companies 31 Conversion: Any business entity other than a limited liability company may convert to a limited liability company and vice versa unless the law of that company s jurisdiction does not allow it. The process includes filing a plan of conversion which would include the name and form of the organization before conversion and after, the terms and conditions of the conversion, including the manner and basis for converting interests in the converting organization into any combination of money, interests in the converted organization, and other consideration. Again because of the potentially dramatic effects on a company, the tribe will want to consider requiring a unanimous vote of the members to effect a conversion. CONVERSION. (a) An organization other than a limited liability company or a foreign limited liability company may convert to a limited liability company, and a limited liability company may convert to an organization other than a foreign limited liability company pursuant to this section, Sections 1007 through 1009, and a plan of conversion[ ] -ULLCA 1006 Domestication: Some codes allow business entities to switch between domestic and foreign status. In general, the merger and conversion rules are relatively similar to those for domestication, as they deal with similar issues. DOMESTICATION. (a) A foreign limited liability company may become a limited liability company pursuant to this section, Sections 1011 through 1013, and a plan of domestication, if: [ ] (b) A limited liability company may become a foreign limited liability company pursuant to this section, Sections 1011 through 1013, and a plan of domestication, if: [ ] (c) A plan of domestication must be in a record and must include: [ ] -ULLCA 1010

32 The University of Arizona NativeNet Dissolution and Winding Up Causes of Dissolution: Dissolution of a company can be forced by a court for a violation, initiated voluntarily by a decision of its members or as otherwise outlined in the operating agreement, or because the duration of the company has been reached. The code can impose any acceptable reasons for dissolution or leave it all to the operating agreement. A person who wrongfully causes dissolution of the company may lose any member or manager rights. Some statutes provide that a company dissolves when any member dissociates, while others allow individual companies to decide whether or not dissociation will trigger dissolution. If the latter option is implemented, it is imperative that the statute make clear what is to happen upon dissociation in cases where the company has failed to outline such a process in the articles of organization. Dissolution. A limited liability company is dissolved and its affairs shall be wound up upon the happening of the first of the following: a. The occurrence of events specified in articles of operation. b. The written consent of all members. c. An event of dissociation of a member, unless otherwise provided in articles of operation or continuation is consented to by all remaining members. d. Entry of a decree of judicial dissolution under Section 46. -5HCC03 45 Winding Up: Upon dissolution, the code may require certain actions in

Limited Liability Companies 33 a particular order to protect vulnerable members and preserve fairness; at least a set of basic default rules should be adopted such as even apportionment or apportionment according to contribution, in the absence of any specified process in the operating agreement. Nearly all limited partnerships will choose to allocate profits and losses in order to comply with applicable tax, accounting, and other regulatory requirements. DISTRIBUTION OF ASSETS IN WINDING UP LIMITED LIABILITY COM- PANY S ACTIVITIES. (a) In winding up its activities, a limited liability company must apply its assets to discharge its obligations to creditors, including members that are creditors. (b) After a limited liability company complies with subsection (a), any surplus must be distributed in the following order, subject to any charging order in effect under Section 503: (1) to each person owning a transferable interest that reflects contributions made by a member and not previously returned, an amount equal to the value of the unreturned contributions; and (2) in equal shares among members and dissociated members, except to the extent necessary to comply with any transfer effective under Section 502. (c) If a limited liability company does not have sufficient surplus to comply with subsection (b)(1), any surplus must be distributed among the owners of transferable interests in proportion to the value of their respective unreturned contributions. (d) All distributions made under subsections (b) and (c) must be paid in money. -ULLCA 708 Claims: The code can protect creditors by forcing the company to pay its debts first before making any distributions after dissolution. A company may not be aware of all claims against it at the time of dissolution, so the statute should designate processes for dealing with known and unknown claims.

34 The University of Arizona NativeNet 50. Known Claims Against Dissolved LLC. a. A dissolved LLC may notify its known claimants in writing of the dissolution and specify a procedure for making claims. b. A claim against the LLC is barred if: (1) A claimant who was given written notice under paragraph a, above, does not deliver the claim, in writing, to the LLC by the deadline specified in the notice. (2) A claimant whose claim is rejected by the LLC does not commence a proceeding to enforce the claim within ninety (90) days after receipt of the rejection notice. 51. Unknown or Contingent Claims. A claim not barred under Section 50 may be enforced: a. Against the dissolved LLC, to the extent of its undistributed assets. b. If the dissolved LLC s assets have been distributed in liquidation, against a member of the LLC, other than the Nation, to the extent of the member s proportionate share of the claim or of the assets of the LLC distributed to the member in liquidation, whichever is less, but a member s total liability for all claims under this Section may not exceed the total value of assets at the time distributed to the member. -5HCC03 50-51 Wholly-Owned Tribal Entities Many tribes operate for-profit enterprises for the benefit of their members, and an LLC is a common vehicle for operating such companies. If your tribe is like most, you are probably considering adopting an LLC code specifically to allow for the establishment of tribally-owned companies. Because of the nature of tribes as legal entities separate from individuals and corporations, entities that exercise some governmental authority and enjoy sovereign immunity, there are certain issues that arise when an LLC is wholly-owned by a tribe. Thus in addition to all the sections and provisions included so far, we include this section on wholly-owned tribal entities. Your tribe will need to decide whether it wishes to spell out the consequences associated with the establishment

Limited Liability Companies 35 and operation of such LLCs. If your tribe is planning to establish wholly-owned LLCs, including a chapter in the LLC code dealing with wholly-owned entities is a good idea, as including such a section will help avoid ambiguities down the line. Even if your tribe does not have immediate plans for such entities, it is advisable to consider including a chapter of this nature in the event that the tribe decides to create them in the future. Sovereign Immunity: When a company is wholly owned by a tribe, the question automatically arises whether the tribe s sovereign immunity carries over to the company. Most tribes choose to have sovereign immunity transfer by default to any wholly-owned companies, but it is common to reserve the right to issue limited waivers of sovereign immunity. The primary issue here is what types of relationships the LLC will have with other entities. Retaining sovereign immunity provides some protection to the company, but there is a risk of decreased willingness of outside parties to contract with the company if the company is immune from suit. It is in the area of contracts and commercial transactions that the waiver of sovereign immunity has received the most attention in recent years. [FN230] Sovereign immunity remains a necessary component of tribal sovereignty. From an economic standpoint, it ensures that tribes are able to protect the public trust from unlimited suits. [FN231] As is true for governments generally, however, the trend has been toward limited waivers of tribal immunity as means of stimulating economic development. [FN232] The key factor here (from an allocation of resources standpoint) is that tribes and not the federal government are determining the scope of the waiver to employ based on individual tribal circumstances. As one tribal attorney puts it "sovereign immunity is best understood as the power of a government to define the forum, procedure, and limits to be placed upon suits against itself." -80 N.D. L. Rev. 597

36 The University of Arizona NativeNet The decision whether to allow limited waivers of sovereign immunity to tribally-owned LLCs is one that should be considered carefully. At any rate, it is important to be particularly careful with the language of any statute allowing such a waiver, as the tribe will want to ensure that none of its sovereignty is compromised by waiving the sovereignty of the company. In general, courts have found that sovereign immunity is preserved unless the tribe explicitly waives it. An Indian tribe enjoys sovereign immunity from suit except where Congress authorizes the suit or the tribe waives its immunity. [ ]. Tribal immunity extends to both the corporate and governmental activities of the tribe. -Marceau v. Blackfeet H.A., 455 F.3d 974 In addition, courts look to whether the business entity functions as an arm of the tribe; casinos formed under the auspices of the tribal government are often imbued with the sovereign immunity of the tribe, whereas separately formed business entities (particularly companies formed under Section 17 of the Indian Reorganization Act) typically waive sovereign immunity and are also typically organized as businesses owned by the tribe rather than an arm of the tribe. Although the Supreme Court has expressed limited enthusiasm for tribal sovereign immunity, the doctrine is firmly ensconced in our law until Congress chooses to modify it. See Kiowa Tribe v. Mfg. Techs., Inc., 523 U.S. 751, 757-60, 118 S.Ct. 1700, 140 L.Ed.2d 981 (1998). This immunity extends to business activities of the tribe, not merely to governmental activities. [ ]. When the tribe establishes an entity to conduct certain activities, the entity is immune if it functions as an arm of the tribe. [ ] The question is not whether the activity may be characterized as a business, which is irrelevant under Kiowa, but whether the entity acts as an arm of the tribe so that its

Limited Liability Companies 37 activities are properly deemed to be those of the tribe. -Allen v. Gold Country Casino, 464 F.3d 1044 Because of this perspective the courts have adopted, tribes must tread carefully when considering waivers of immunity for entities that function as arms of the tribal government. Although no case law has yet done this, it is possible that a court might interpret a waiver of immunity for one of these entities to extend to the tribal government itself. This is precisely what makes it so imperative that tribes conduct business operations under LLCs where possible rather than through arms of the tribal government, particularly wherever a limited waiver of sovereign immunity will be a practical necessity. Merger Considerations: Because of the issues involved with sovereign immunity, tribes need to be especially cautious when tribally-owned companies are involved in mergers and other transitions. In Marceau, one of the cases quoted above, the tribe had issued a waiver of sovereign immunity to the Housing Authority, allowing it to be sued. The Housing Authority subsequently ceased to exist as a separate entity and became an arm of the tribal government. Nevertheless, the court in Marceau ruled that the Housing Authority could be sued. Although the court did not discuss specifically the implication of folding the Housing Authority back into the tribe, the decision suggests that turning an entity into an arm of the government does not reinstate sovereign immunity that has been waived. Marceau did not address how sovereignty of the rest of the tribe would be affected by the fact that the Housing Authority could be sued, but because case law on this point is not settled, it is a good idea for tribes to be careful that business

38 The University of Arizona NativeNet ventures and governmental functions stay separate. General Recommendations: Keep in mind that sovereign immunity is a very valuable asset to a tribe, both in terms of identity and economic development. It cannot be stressed enough the importance of carefully considering any decision to waive sovereign immunity or to change the status of entities for which some immunity has been waived. Again, using LLCs can help in this process and allow a tribe to execute some waivers without worry; nevertheless, as with any enactment of statute, an attorney familiar with this area of law should be consulted prior to making any final decisions. Forming a Company Articles of Organization Articles of organization can be very simple and often can be filed as a single-page document. This document need only conform to the specific elements required in the statute. The following sample Articles of Organization are taken from 5HCC03: Article 1. Name of Limited Liability Company: Article 2. Street Address of the Initial Registered Office: Article 3. Name of the Initial Registered Agent at the above Registered Office: Article 4. Management of the Limited Liability Company shall be vested in: ( ) a manager or managers OR ( ) its member(s). Article 5. ( Name of LLC ) is wholly owned by the Ho-Chunk Nation. Article 6. ( Name of LLC ) shall not possess the Ho-Chunk Nation s sovereign immunity from suit, and may sue and be sued.

Limited Liability Companies 39 Article 7. Formation of this Limited Liability Company has been authorized by Ho-Chunk Nation Legislative Resolution. Article 8. Executed on (date). Name and complete address of organizer(s): (Signature(s) of Organizer(s)) This document was drafted by. Operating Agreement Also known as articles of operation, the operating agreement is the governing document of the company, and often serves as a supplement to the statutory provisions themselves. The operating agreement can change some of the default rules offered in the statute (if permitted by the statute), or can add additional rules or restrictions in areas that are not covered by the statute. As such, operating agreements tend to be rather lengthy, which is why a sample is not included. For a sample of such a document, see the Ho-Chunk Code that is incorporated as an appendix to this document. Further Reading Tribal Legal Code Project - Tribal Corporations Codes: http://www.tribal-institute.org/codes/part_eight.htm Chitimacha Governmental Corporations Ordinance: http://www.tribalresourcecenter.org/ccfolder/chitimcodet- 9gov.htm Colville Governmental Corporations Chapter: http://www.ntjrc.org/ccfolder/colville_lawandorder_ CHPT7-1.html Grand Ronde Governmental Corporations Ordinance: http://www.tribalresourcecenter.org/ccfolder/gr720gov-

40 The University of Arizona NativeNet corp.htm Ho-Chunk Limited Liability Company Act: http://www.ho-chunknation.com/government/legis/code/ Title%205%20Business%20and%20Finance/5HCC03_LLC.pdf Uniform Limited Liability Company Act: http://www.law.upenn.edu/bll/ulc/fnact99/1990s/ullca96.pdf About the Project This project of the Indigenous Peoples Law and Policy Program (IPLP) and the Native Nations Institute (NNI), both at the University of Arizona, began as a code-drafting project for one tribe but turned into a more general booklet because of the wideranging potential for a resource of this type. This booklet is the first in a series of tribal government resources to be developed, and was inspired by a similar resource on constitutions created by students at Harvard s Kennedy School of Government under the direction of Joe Kalt. Inquiries and suggestions for future volumes may be directed to the Indigenous Peoples Law and Policy Program at the University of Arizona. This booklet was produced by University of Arizona graduate students Shaun Courtney and Tim Sanders, under the supervision of University of Arizona Professor Robert Hershey. Copyright 2006 by The Indigenous Peoples Law and Policy Program at the University of Arizona

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42 The University of Arizona NativeNet