Chapter 3: Members and Managers
becoming a member:
The tribe will want to outline what is required for a person to become a member at startup or after the company is formed. The code might allow admission of members to occur in a variety of ways, including a vote— unanimous or not—by the existing members, a contribution, or acquisition of interest in the company via a transfer or otherwise. It might also note how the initial member(s) came to be members and if there was any requirement beyond naming them on the certificate of organization.
It will also be necessary to specify whether all members have equal shares of membership or whether some members may have a greater share than others.
The Uniform Code, for instance, appears to require all members to have equal shares (see below), whereas the Ho-Chunk Code allows for varying degrees of membership interest (based on several references to “majority in interest” as opposed to “majority of members”; see below).
EXAMPLES
(a) Any distributions made by a limited liability company before its dissolution and winding up must be in equal shares among members and dissociated members, except to the extent necessary to comply with any transfer effective under Section 502 and any charging order in effect under Section 503. (b) After a limited liability company complies with subsection (a), any surplus must be distributed in the following order, subject to any charging order in effect under Section 503: [...](2) in equal shares among members and dissociated members, except to the extent necessary to comply with any transfer effective under Section 502. l. “Majority in Interest” means members contributing more than fifty percent (50%) of the value of total capital contributions to the limited liability company excluding any interest which is not to be counted as voting on a matter as described elsewhere in this Act. BECOMING A MANAGER:
Managers are those who handle the day to day operations of the company. The managers may or may not be members, and most statutes allow companies to select whether to be “member-managed” or “manager-managed”.
If your code allows both styles of management, it is important to examine all sections of proposed code the company and ensure that adequately for both management dealing with persons acting for such sections account styles.
Contributions:
Here, the tribe can generate an exhaustive or selective list of the types of contributions companies are allowed to accept to establish membership interest, such as money, services, property, contracts, promises, etc.
EXAMPLES
FORM OF CONTRIBUTION. A contribution may consist of tangible or intangible property or other benefit to a limited liability company, including money, services performed, promissory notes, other agreements to contribute money or property, and contracts for services to be performed.
Contributions.a. A member’s contributions to a LLC may consist of cash, property, or services rendered, or promissory notes or other written obligations to provide cash or property or to perform services.b. The value of a member’s contribution shall be determined in the manner provided in articles of operation. If the articles of operation does not fix a value to a contribution, the value of a contribution shall be approved by a majority in interest of the members, shall be properly reflected in the records and information kept by the LLC under paragraph 24a. The value of contributions so determined shall be binding and conclusive on the LLC and its members. duties:
The articles of incorporation must clarify whether the members will manage the company or whether the members will hire others to manage the company. The default law can be construed so that unless the articles reflect that a company will be managed by managers, the company will be managed by its members. This designation controls whether the members or managers have apparent agency authority or management authority, and the nature of fiduciary duties in the company. Members who are not managers are not subject to fiduciary duties. Often the responsibilities are divided equally among the members including voting, the selection and removal of managers, managing in specific instances, making decisions regarding mergers and property, and amendment. This section can outline how disagreements will be resolved.
When there is a manager vacancy and the company is a “manager- managed” company, the code can provide for a member to assume managerial duties during the interim; otherwise if members begin to manage companies in transition there can be confusion regarding who is to be held legally liable for those management decisions. This also makes liability clear regarding the information that the member has access to as an interim manager so that it is not used after the member ceases to fill that role.
The Limited Liability Company code will need to account for the duties of both members and managers. These duties should be split into separate sections describing duties of each party in a member-managed company. Duties can be defined affirmatively (by dictating what members and manager must do) or negatively (by dictating what members and managers must not do); see below for an example of both of these approaches. Your tribe will probably want to incorporate elements of both.
EXAMPLES
Duties. Unless otherwise provided in articles of operation:a. No member or manager shall act or fail to act in a manner that constitutes any of the following:(1) A willful failure to deal fairly with the LLC or its members in connection with a matter in which the member or manager has a material conflict of interest.(2) A violation of criminal law, unless the member or manager had reasonable cause to believe that the person’s conduct was lawful or no reasonable cause to believe that the conduct was unlawful.(3) A transaction from which the member or manager derived an improper personal profit.(4) Willful misconduct.b. Every member and manager shall account to the LLC and hold as trustee for it any improper personal profit derived by that member or manager without the consent of a majority of the disinterested members or managers, or other persons participating in the management of the LLC, from any of the following:(1) A transaction connected with the organization, conduct, or winding up of the LLC.(2) A use by a member or manager of the property of a LLC, including confidential or proprietary information or other matters entrusted to the person as a result of the person’s status as member or manager. (3) Articles of operation may impose duties on its members and managers that are in addition to, but not in abrogation of, those provided in paragraph a, above. Agency Power:
Agency power is the legal authority to act on behalf of the company. An agent is a person who is authorized to make decisions, enter into contracts, and generally conduct the operations of the company. The owners or members of a company may not be able to commit the time or effort to run the day to day operations of the company, so such power is often vested in an agent.
In order to ensure that it is clear who is authorized to act on behalf of the company, it is advisable to enumerate default rules regarding agency power in both member-managed and manager-managed companies.
EXAMPLES
Agency Power of Members and Managers.a. Except as provided in paragraph b, below:(1) Each member is an agent of the LLC, but not of the other members or any of them, for the purpose of its business.(2) The act of any member, including the execution in the name of the LLC of any instrument for apparently carrying on in the ordinary course of business the business of the LLC, binds the LLC in the particular matter, unless the person with whom the member is dealing has knowledge that the member has no authority to act in this matter.(3) If the Nation is a Member, the Nation’s authority shall be exercised only by a duly adopted resolution of the Legislature.b. If management of the LLC is vested in one or more managers:(1) No member, solely by being a member, is an agent of the LLC or of the other members or any of them.(2) Each manager is an agent of the LLC, but not of the members or any of them, for the purpose of its business. The act of any manager, including the execution in the name of the LLC of any instrument for apparently carrying on the ordinary course of business of the LLC, binds the LLC unless the manager has, in fact, no authority to act for the LLC in the particular matter, and the person with whom the manager is dealing has knowledge that the manager has no authority to act in the matter.c. No act of a member or, if management of the LLC is vested in one or more managers, of a manager that is not apparently for the carrying on in the ordinary course of business the business of the LLC shall bind the LLC unless in fact authorized at the of the transaction or at any other time. You can also decide how much flexibility to give companies to change these default rules. Because of the importance of knowing who is authorized to act on a company’s behalf, it is advisable to specify procedures regarding formal identification of agents. See, e.g., ULLCA §302.
Liability:
The advantage of a limited liability company is that members are shielded from liability. The code should state this but should also clarify that the limited liability code does not protect members from other applicable law such as those covering misrepresentation, fraud, torts, etc. Although the company may be held liable as a respondeat superior for the actions of an employee, in general each member is still accountable for his/her conduct.
Indemnification:
Indemnification refers to the process whereby a company can agree to cover debts or liabilities incurred by managers in the course of their duties. Many statutes explicitly allow indemnification, presumably because it might be difficult for some companies to attract competent managers if they did not have an indemnification clause in their operating agreement. Allowing companies to choose whether to include an indemnification clause gives each company the choice whether to indemnify its managers or not.
Some statutes include the option of purchasing director’s insurance to cover the company in the event of a liability for which the company has agreed to indemnify a manager. Statutes vary regarding the extent to which companies may indemnify managers and the amount of liability companies may insure against.
EXAMPLE
INDEMNIFICATION AND INSURANCE. (a) A limited liability company shall reimburse for any payment made and indemnify for any debt, obligation, or other liability incurred by a member of a member-managed company or the manager of a manager-managed company in the course of the member’s or manager’s activities on behalf of the company, if, in making the payment or incurring the debt, obligation, or other liability, the member or manager complied with the duties stated in Sections 405 and 409. (b) A limited liability company may purchase and maintain insurance on behalf of a member or manager of the company against liability asserted against or incurred by the member or manager in that capacity or arising from that status even if, under Section 110(g), the operating agreement could not eliminate or limit the person’s liability to the company for the conduct giving rise to the liability. Right to Information:
The member is often given rights to access information about the company as they have a vested interest in its performance and activities. Because the liability of members is shielded, the code or the company may give them more or less access. The member may be able to sue to enforce whatever rights are given. There are additional implications to consider when a tribes acts as a member of an LLC; your tribe may want to add specific provisions in the code to account for access to information in such situations.
EXAMPLE
Records and Information.a. A LLC shall keep at its principal place of business all of the following:(1) A list, in alphabetical order, of each past and present member and, if applicable, manager. (2) A copy of the articles of organization and all amendments to the articles, together with executed copies of any powers of attorney under which any articles were executed.(3) A record of all matters referred to in this Act as maintained in such records which are not otherwise specified in the articles of operation.b. Upon reasonable request, a member may, at the member’s own expense, inspect and copy during ordinary business hours any LLC record unless otherwise provided in articles of operation.c. Members or, if the management of the LLC is vested in one or more managers, managers shall provide true and full information of all things affecting the members to any member or to the legal representative of any member upon reasonable request of the member or the legal representative.d. Failure of a LLC to keep or maintain any of the records of information required under this Section shall not be grounds for imposing liability on any person for the debts and obligations of the LLC. Dissociation:
The process of how a member can sever a relationship with the company and the effects of that action should be included in the code. This gives the member instructions on how to exit and dictates whether the member will receive any compensation or a return of their contribution at all, at the time of departure or at the dissolution of the company. Some codes and companies in their operating agreements use the dissociation of a member to trigger the dissolution of a company; others do not. Dissolution will be discussed in more detail later.
Transfer of Interest:
This default rule provides instructions regarding who can receive and hold an interest in a company, whether they can transfer their interest, and how to transfer it if it is not outlined in the operating agreement. It also provides direction regarding persons who are interested in becoming members and may need to acquire an interest beforehand.
Assignment of LLC Interest.a. Unless otherwise provided in articles of operation:(1) An LLC interest is assignable in whole or in part.(2) An assignment of a LLC interest entitles the assignee to receive only the distributions and to share in the allocations of profits and losses to which the assignee would be entitled with respect to the assigned interest.(3) An assignment or a LLC interest does not dissolve the LLC.(4) Unless and until the assignee becomes a member of the LLC under Section 37, the assignment of a LLC interest does not entitle the assignee to participate in the management or exercise rights of a member.(5) Unless and until the assignee of a LLC interest becomes and [sic] member of the LLC under Section 43, the assignor continues to be a member.(6) The assignor of a LLC interest is not released from any personal liability arising under this Act as a member of the LLC solely as a result of the assignment.b. Unless otherwise provided in articles of operation, the granting of a security interest, lien, or other encumbrance in or against any or all of a member’s LLC interest is not assignable and shall not cause the member to cease to have the power to exercise any rights or powers of a member .