On November 21, 2016, the Pennsylvania House of Representatives signed into law legislation that became known as Act 170 (the “Act”) which adopted the newly revised Uniform Partnership Act, Uniform Limited Partnership Act, and Uniform Limited Liability Act. The Act made important revisions to the laws of partnerships, limited partnerships, and limited liability companies. In this piece, I will only focus on some of the changes in the Act that will affect a limited liability company (“LLC”).
The Act took effect in two stages:
- On February 21, 2017 for all entities that are formed on or after February 21, 2017; and
- April 1, 2017 for all entities formed before February 21, 2017, unless they elect to be subject to the new law by amending their partnership/operating agreement to do so.
The Act highlights the operating agreement’s role in governing the LLC and the rights and obligation of its members. The Act now allows the operating agreement to create the status of a member-managed, or manager-managed LLC. Previously, if an LLC wanted to be considered manager-managed, it would need to be declared on the certificate of organization filed with the Commonwealth. The Act also allows the LLC and its members to modify some aspects of the duty of loyalty and duty of care, but does not allow it to eliminate the duties altogether. The operating agreement may alter aspects of the duty of care and duty of loyalty, or identify specific types of actions and transactions that do not violate duties, and which are not “manifestly unreasonable.”
The Act also eliminates the concept of “statutory apparent authority.” Previously, under Pennsylvania law, a member of an LLC, solely by being a member, was considered an agent of the LLC. This is no longer the case. Now, an LLC may file a certificate of authority which states the “authority, or limitations on the authority” of a specific person or a person holding a certain position within the LLC, to transfer real property held by the LLC, or enter into transactions, and otherwise bind the LLC.
Finally, the Act addresses the method for which a judgement creditor can execute against a member’s interest in an LLC. The Act states that a charging order is the sole method by which a judgment creditor can obtain any value from a member’s interest in an LLC. The charging order would give the creditor a lien on the member’s transferable interest, which is the member’s right to receive any distributions from the LLC, but it does not confer upon them any rights to manage the LLC that a member would possibly have. If the charging order does not satisfy the creditor’s judgment in full, the creditor may foreclose on the member’s interest. As with the charging order, the purchaser in foreclosure would only acquire the transferable interest, and would not be considered a member of the LLC.