On July 1, 2017, Illinois amended its limited liability company act (“Act”) in an effort to make the Act more in line with the Revised Uniform Limited Liability Company Act. Below is a summary of the more noteworthy provisions.
Under the revised Act, limited liability companies may eliminate fiduciary duties (which are owed by those that manage the limited liability company to the limited liability company and its members), except for the duty of care. Although limited liability companies are prohibited from eliminating the duty of care, it may be altered, but such alterations must not allow for intentional misconduct or knowing violations of law. With respect to the duty of loyalty, the revised Act permits limited liability companies to create procedures to authorize or ratify acts that might otherwise violate the duty of loyalty. Such authority must be exercised by disinterested and independent persons after full disclosure of material facts.
Members may inspect and copy their limited liability company’s records, but a transferee may only do so for a proper purpose. The revised Act provides that a limited liability company may impose “reasonable restrictions and conditions on access to and use of information,” including but not limited to trade secrets and information subject to confidentiality agreements with third parties. Furthermore, transferees must show a proper purpose to inspect and copy a limited liability company’s records. The concept of “proper purpose” was borrowed from the Illinois Business Corporations Act and has been interpreted broadly thereunder. In addition, it is important to note that the revised Act imposes time limits on the limited liability companies’ response to the transferee’s request for records.
Conversion and Domestication
Illinois limited liability companies are now allowed to convert into other entities. Prior to the amendment, the Act only allowed partnerships and limited partnerships to convert into limited liability companies, but not vice versa. To “convert” an Illinois limited liability company into another entity, the Illinois limited liability company had to be merged into another entity, with the latter being the surviving entity. The revised Act allows Illinois limited liability companies to easily convert into other types of entities, except for foreign limited liability companies. In order to convert an Illinois limited liability company into a foreign limited liability company, the Illinois limited liability company must go through the domestication process, which very similar to the conversion process.
Statement of Authority and Statement of Denial
The revised Act incorporates new authorization forms: (i) the Statement of Authority and (ii) the Statement of Denial. The Statement of Authority is a publicly filed document that may be filed to define the authority of its members and managers. The Statement of Authority will act as constructive notice as to who has authority to act on behalf of a limited liability companies, unless a person giving value has knowledge to the contrary. The Statement of Denial, on the other hand, operates as a restrictive amendment to a Statement of Authority. Those doing due diligence should consider adding these documents to their checklists.
In addition to the above mentioned revisions, the revised Act also provides the following:
- judgment creditors may only obtain a charging order against the distributional interest of judgment debtors;
- operating agreement may be oral; and
- limited liability companies will be member managed, unless the limited liability company’s operating agreement provides otherwise.
The above summary is not an exhaustive list of the revision to the Act. Members and managers of Illinois limited liability companies should review the entire Act to ensure that their limited liability companies are operating according to the revised Act.