On May 22, 2016 several amendments to the Minnesota Revised Uniform Limited Liability Company Act, Chapter 322C of the Minnesota statutes, were passed into law. While most of the changes are immaterial or administrative in nature, the amendments also include a change to the default governance rules for board-managed limited liability companies.

Here is a list of the amendments, which are retroactively effective as of August 1, 2015:

  • Sections 322C.0201 and 322C.0205: Filings fees payable to the secretary of state in connection with the formation of an LLC or the filing of other records with the secretary of state have been included in the text of the statute. The amounts of the fees have not been changed from current levels, but including the fee amounts in the statute means that a future fee change would require a formal amendment to Chapter 322C.
  • Section 322C.0208: No filing fee will be required for the filing of annual renewals with the Secretary of State.
  • Sections 322C.1007 and 322C.1011: These sections, relating to conversions and domestications, were amended to clarify that the statutory requirement that a conversion or a domestication must be authorized by the “governing statute” of a foreign LLC does not mean that the governing statute must use the same terminology to describe the processes in question.
  • Section 322C.0407: Member consent is not required for grants of security in LLC property or for transfers to downstream direct or indirect subsidiaries.

The change to the member consent requirement in Section 322C.0407 warrants some further exploration. Subdivision 4 of that section sets forth the default rules for board-managed LLCs. Corresponding sets of rules are found in subdivisions 2 and 3 for member-managed LLCs and manager-managed LLCs, respectively. For both board-managed and manager-managed LLCs, the statute establishes a set of actions that require unanimous member consent. Among those actions is the sale or other disposition of all or substantially all of the LLCs assets, with or without goodwill and outside the ordinary course of business. The recent amendment to subdivision 4 means that unanimous member consent will not be required for a transfer meeting the foregoing description if it is only a “transfer” by reason of the granting of a security interest (whether or not it is in the ordinary course), or if the transfer is “to an organization all the ownership interests of which are owned directly or indirectly through wholly owned organizations by the company.”

A similar change was not made to subdivision 3’s member consent requirement, so, for a manager-managed LLC, unanimous member consent is still required under the default rules in connection with (for example) a secured financing facility. This puts lenders in an interesting position. In order to ensure the grant of the security interest has been properly authorized, the lender would need to (i) understand the distinction that has just been introduced into Chapter 322C, (ii) determine whether the LLC is manager-managed or board-managed, and (iii) ask follow up questions if the LLC is manager-managed to determine whether the grant of the security interest has been unanimously approved by the members or whether the LLC’s operating agreement makes this a moot point. Because, of course, the rules set forth in Section 322C.0407 only apply “to the extent the operating agreement does not otherwise provide” for the matter. (See 322C.0110, Subd. 2).

Practitioners should note that the exclusion from the member-consent requirement for transfers of assets to subsidiaries is only effective for wholly-owned subsidiaries. Even if an LLC is the owner of the overwhelming majority of the ownership interests in a subsidiary, the presence of a single other owner kills the member-consent carve out for the transfer.

Finally, the amendment raises once again the question of what exactly it would mean for an operating agreement to “otherwise provide” with respect to an issue. For example, would a clause in a manager-managed operating agreement granting the manager the authority “to enter into financing arrangements on commercially reasonable terms” be sufficient to override the statutory requirement for unanimous member consent? Only a court will be able to answer that question.