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October 25, 2012

New Jersey Limited Liability Company Operating Agreements

Operating Agreements for Limited Liability Companies to Change Under Revised Limited Liability Company Act

Part of an ongoing series on the adoption of New Jersey’s revised limited liability company act.

The amendments to the New Jersey’s Limited Liability Company Act, N.J.S.A. 42:2C-1-94 that begin to take effect in March 2013 will bring a new era in the way the members of a limited liabilit industry-agreement y company structure their affairs. The days in which the members must put their agreements in writing will soon be over, and the owners of New Jersey LLCs should take a hard look at their own operating agreements and course of doing business.

In adopting the Revised Uniform Limited Liability Company Act, the state legislature has approved a fundamental change to the way LLCs operate in New Jersey. We are examining these changes in a series of articles and today focus on the effect of the changed definition of operating agreements.

Written Operating Agreements Not Required

The old law may have been rigid, but at least it was clear. It was not required in New Jersey (as in some other states) to have an operating agreement, but if you did, it had to be in writing. If there was no written operating agreement, then the “default” rules provided by the statute governed. That has changed significantly. The new law defines an operating agreement as

“the agreement, whether or not referred to as an operating agree

ment and whether oral, in a record, implied, or in any combination thereof, of all the members of a limited l

iability company …”

To understand just how much of a change is this definition, we can look at a 2004 decision of the Appellate Division in Kuhn v. Tuminelli, 366 N.J. Super. 431, 841 A.2d 496 (App. Div. 2004). In that case, the plaintiff and defendant owned a limosine service and the defendant embezzled funds by endorsing checks to the company and keeping the funds. Kuhn argued that the defendant did not have authority to convert the checks and named as a defendant the check cashing service that had negotiated the checks.

October 8, 2012

Protecting Profit Margins from Employee Saboteurs

by Jay R. McDaniel, Esq.

Employee Held Liable for Actively Competing With Current Employer

The success of businesses in specialized fields often depends on the employees’ ability to deliver consistent-quality service and implement specialized techniques and processes. Business owners in these fields know that the costs of investment in employee training and development can be very high. What is a business owner to do when employees take this costly knowledge and expertise to a new company and begin competing against the former employer? Fortunately, New Jersey offers relief from such acts, as discussed in the recent Appellate Division case of Baseline Services, Inc. v. Kutz, et al., A-5214-09T3.

Baseline provides metrology services involving repair, maintenance, and calibration of laboratory equipment to its clients. The corporation had a substantial annual contract – in the amount of $269,000 – with Global Pharmaceutical Sourcing Group (GPSG), which is a division of Johnson & Johnson, Inc. The contract was primarily serviced from 2002 to 2006 by two Baseline employees – Kutz and Nicoludis.

November 22, 2011

Canyon Creek Development LLC Member Fails to Meet the Capital Call

by Jay R. McDaniel, Esq.

Small business owners sometimes run into difficulties with their business partners after much time has passed since they first set up the business. They come to discover that the operating agreement either does not address their problem or the result is not what they intended. Small business owners should take care to draft their controlling documents by considering as many scenarios as possible.

Members of limited liability companies are given considerable leeway to craft a management and business structure as they see fit. This control is one of the reasons why the LLC form is attractive to those engaged in new business ventures. The LLC’s operating agreement is the contractual means by which the members will determine the business structure – and courts continuously warn parties that failure to craft the operating agreement carefully will sometimes force unintended results.

October 24, 2011

Contract’s Plain Meaning Voids Parties Understanding

by Jay R. McDaniel, Esq.

A contract means what it says, even if the two parties who came to the agreement may have understood something different. This can be a trap for the business that is not careful to ensure that the contract that it signs at the end of negotiations accurately reflects exactly what it thinks it has agreed to.

It is not particularly unusual that, at the end of a period of negotiations, the contract that is finally written up does not exactly fit the terms the parties thought they had negotiated or that it does not contain all of the terms that the parties thought were relevant. A court, however, is unlikely to read those terms into the agreement, or even permit one of the parties to argue that they should have been there – at least not when the meaning of the agreement is plain from its terms.

Court Review

The New Jersey Appellate Division opinion in MicroBilt Corp. v. L2C, LLC demonstrates just how difficult it can be to get a court to consider that there were important terms missing from the final document that should have been included.

MicroBilt signed a contract with L2C under which L2C would perform credit evaluations of MicroBilt’s potential customers and provide customer credit scores to MicroBilt. MicroBilt later claimed that L2C was also required to supply the underlying data used to calculate the credit score, which L2C obtained from a third party vendor. L2C claimed it could not provide the underlying data because its contract with its vendor prohibited the release.

February 16, 2011

Employer E-Mail Policy Creates Privacy Rights

by Jay R. McDaniel, Esq.

As an employer, we may assume that because we own the computer equipment, that includes any data left on there by our current or former employees. Thus, if an employee wants to use company time or our equipment for personal e-mail, then they do so at their own peril. If we’re not careful, however, we may be wrong.

Whether an employee working in New Jersey has an expectation of privacy in e-mails sent during working hours and whether the employer can read those e-mails –will depend on the policies that the company establishes, particularly those in writing, and its actual practices.To be safe, the policy should be clear and it should be in writing.

The New Jersey Supreme Court recently held that an employee had a reasonable expectation of privacy in workplace e-mails sent to her attorney through a web-based personal e-mail account, but using a company computer, largely because the company was less than clear about its policy. Stengart v. Loving Care Agency, Inc., 201 N.J. 300 (N.J. 2010). (copy of opinion here). In Stengart, employee Marina Stengart’s e-mails sent to and received by her attorney on her work laptop were viewed by her former employer, Loving Care Agency, whom she was then suing for employment discrimination. The e-mails were discovered by her attorneys when her laptop was examined by an expert during the litigation.

January 28, 2011

Partnership Agreement Disclosure to Labor Union Pending Trial Court Decision

by Jay R. McDaniel, Esq.

In some circumstances, a business may be able to claim that its organizational documents are trade secrets. That seems to be the holding of a trial court decision insulating a partnership agreement from disclosure to a labor union.

The case is interesting because non-management owners do not generally have free access to all of the records of a business, but they do have a right of access to organizational documents. This case raises the prospect that a company that in turn enters into other ventures might classify those documents as proprietary or trade secrets and avoid disclosure to parties with an interest in their contents.

The dispute actually arose under New Jersey’s Open Public Meetings Act. The lawsuit, Communications Workers of America and New Jersey Education Association v. John McCormac and Blackstone Capital Partners et al., L-3217-05 (2008), involved a complaint brought by several state workers’ groups against defendant public officials and private equity funds seeking documents which might reveal the investment strategy defendant private equity firms were utilizing to invest state worker pensions.

January 10, 2011

A Shareholder’s Right of Access To Board And Executive Committee Meetings

by Jay R. McDaniel, Esq.

Shareholders in a New Jersey corporation have the statutory right to inspect books and records concerning the corporation and its affairs; but does this right extend to minutes of the board of directors and executive committees? For example, can the shareholder who does not participate in the management of the business get behind the scenes minutes for any reason or no reason at all?

The short answer is that when there is a reasonable need for those records, a New Jersey court is likely to require that they be provided to the shareholder. A recent New Jersey Superior Court decision clarified this issue in holding that the New Jersey Business Corporation Act (“BCA”) §5-28(4) allows a court to grant to a shareholder, with proof of a proper purpose, the right to examine the minutes of the board of directors or executive committees as well. See Cain v. Merck & Co., 415 N.J. Super. 319, 323 (App.Div. 2010).

Empty Complaints Are Insufficient to Gain Access

December 20, 2010

Derivative Claim in Dispute Between Owners May Require Independent Counsel

by Jay R. McDaniel, Esq.

A derivative claim is an action brought by an individual, but to enforce a right owned by the company. Any remedy or recovery belongs to the company.
An individual claim is brought to vindicate the rights of an individual owner. The recovery or remedy belongs to the individual owner.
Although the business is often considered a nominal party in derivative litigation — one without a significant stake in the outcome — it may be necessary to have a separate attorney represent the corporation or limited liability company to avoid conflicts of interest with the lawyers representing individual owners.

September 30, 2010

Owners of Parent Corporations Should Have Remedies Against Officers of Subsidiary Businesses

by Jay R. McDaniel, Esq.

Businesses often create additional new businesses, whether as joint ventures or subsidiaries. The flexibility and favorable tax treatment given to the limited liability company have made it fairly common that an LLC has other business entities as its owners. For the individual owner, however, this situation can present problems. The requirement that the members act at the company level often means less individual control and less ability to address acts of wrongdoing in the subsidiary or joint venture.

The individual owner’s recourse is the double derivative action, a complicated device in which the individual owner. asserts the rights of the parent to assert a claim as an owner of the subsidiary. It’s confusing, but the principle is generally well accepted.

An Example

June 11, 2010

Fiduciary Duties to Minority Interests in Operating Agreement Amendments

by Jay R. McDaniel, Esq.

Limited liability companies are creatures of contract, and the Operating Agreement is the Magna Carta of the business. Because it is a contract, however, all of the members must consent to any changes to the Operating Agreement, which means that the holdout member has a veto. In short, the minority rules on major changes.

The Minority Rule Problem

All of the members, save one, may agree that a change to an operating agreement is in the best interests of the business. Yet that one holdout, for whatever reason, can veto the change because a contract cannot be changed unless all of the parties’ to the original agreement consent.

Part of an ongoing series on the adoption of New Jersey’s revised limited liability company act.

Written Operating Agreements Not Required

Employee Held Liable for Actively Competing With Current Employer

Court Review

Empty Complaints Are Insufficient to Gain Access

A derivative claim is an action brought by an individual, but to enforce a right owned by the company. Any remedy or recovery belongs to the company.

An individual claim is brought to vindicate the rights of an individual owner. The recovery or remedy belongs to the individual owner.

An Example

The Minority Rule Problem