Minnesota’s new limited liability company (LLC) law took effect on August 1, 2015 (the New Act). The New Act applies to all LLCs formed in Minnesota after August 1, 2015. By January 1, 2018, the New Act will apply to all Minnesota LLCs, including those formed before August 1, 2015. The New Act governs the internal management of LLCs as well as LLCs’ relationships with third parties, such as banks. The New Act differs from the previous act in a number of consequential ways, especially for banks that enter into lending relationships with LLCs governed by the New Act.
One key change under the New Act impacts what company approvals are needed on behalf of the LLC before it can grant a security interest in its assets as collateral for a loan from any lender, including a bank. Under the previous LLC law, a grant of a security interest in all or substantially all of the assets of an LLC could be approved by a majority vote of the board of governors of the LLC, whether or not such grant was in the ordinary course of business for the LLC. If the LLC had a board, the members of the LLC did not need to approve the grant.
However, under the New Act, unless otherwise provided in the LLC’s operating agreement, a grant of a security interest in all or substantially all of the LLC’s assets must be approved by all of the members of the LLC, regardless of management structure. This is true unless the grant is truly within the ordinary course of business for the LLC, in which case the board or managers can approve, depending on the management structure. This is a significant change to the approval process for granting a security interest in an LLC’s assets, especially since member approval can be more difficult to obtain than board approval.
Banks should be sure that all necessary company approvals have been obtained by their LLC borrower or guarantor prior to taking a security interest as collateral for a loan. Banks should require evidence of these approvals and have the LLC provide a representation to the bank in the loan documents that all approvals have been obtained. The changes in the New Act, and the evidence banks should require relating thereto, may increase the cost of the loan to the borrower given the extra diligence and approvals that are potentially needed.