Uniform Protected Series Act
Caution State Law Variances!
SECTION 107. ADDITIONAL LIMITATIONS ON OPERATING AGREEMENT.
(a) An operating agreement may not vary the effect of:
(1) this section;
(2) Section 103;
(3) Section 104(a);
(4) Section 104(b) to provide a protected series a power beyond the powers [cite this state's limited liability company act] provides a limited liability company;
Reporter's Comment to Subsection (a)(4) [Section 104(b)] – A protected series may have no greater power than the limited liability company act accords a limited liability company. However, nothing in this act precludes the operating agreement from reducing, restricting, or eliminating particular powers.
(5) Section 104(c) or (d);
(6) Section 105;
(7) Section 106;
Reporter's Comment to Subsection (a)(7) [Section 106] – This provision is less restrictive than might appear at first glance, especially with regard to Section 106(d) (extrapolation for subsection (a) matters which the operating agreement does not address). By its terms, subsection (d) invites the operating agreement to provide the applicable rules for filling gaps.
EXAMPLE: The members of a manager-managed series limited liability company learn of this act's extrapolation approach to subsection (a) matters, do not like the approach, and amend the agreement to include a definition of "disinterested" and further to provide:
If this agreement does not provide for a matter described in Section [citing the applicable provision of the state's LLC statute, as augmented by the act], the agreement is amended so far as necessary to provide for the matter. The amendment is stated and adopted by:
(i) the manager, if disinterested; or
(ii) if the manager is not disinterested, the affirmative vote or consent of all members owning a majority of the rights to receive distributions as members at the time the vote or consent is to be effective
(8) Section 108;
Reporter's Comment to Subsection (a)(8) [Section 108] – Section 108 contains the mechanics for extrapolation, which are non-variable. Section 108 is not self-executing; it applies only when invoked by some other provision of this act, each of which is also invariable. See paragraphs 7,14, and 19-21 of this subsection. But see also the comment to Subsection (a)(7).
(9) Section 201, except to vary the manner in which a limited liability company approves establishing a protected series;
Reporter's Comment to Subsection (a)(9) [Section 201]) – Under the exception, the operating agreement might, for example, decrease the quantum of member consent required to authorize establishing a protected series or grant the authority exclusively to the persons managing the limited liability company.
(10) Section 202;
(11) Section 301;
(12) Section 302;
(13) Section 303(a) or (b);
(14) Section 304(c) or (f);
(15) Section 401, except to decrease or eliminate a limitation of liability stated in Section 401;
Reporter's Comment to Subsection (a)(15) [Section 401] – The operating agreement may reduce the protections provided by Section 401 but may not increase (i.e., strengthen) them. However, an agreement between a series limited liability company and a creditor may certainly do so viz a viz that creditor.
EXAMPLE: A bank ("Bank") makes a loan ("Loan") to a limited liability company with the money to be used by the company. The loan agreement states that the three protected series of the company "are not party to nor guarantor of the Loan and have no obligation to repay any or all of the Loan" and that the Bank will have "no recourse to or claim against" the protected series "with regard to the Loan regardless of any legal or equitable claim Bank might otherwise have, except for an act by a protected series that is independently tortious toward Bank." Although this agreement can be seen as reinforcing or strengthening the horizontal shield, Section 401(b), between the company and the protected series, Subsection (a)(15) does not apply. The company's agreement with the Bank is not part of the operating agreement.
(16) Section 402;
Reporter's Comment to Subsection (a)(16)-(18) [Sections 402 - 404] – If an enacting state's limited liability company act states a restriction similar to Uniform Limited Liability Company Act (2006) (Last Amended 2013), Section 105(c)(15) (prohibiting an operating agreement from "restrict[ing] the rights under this ACT of a person other than a member or manager"), these provisions may well be redundant. See Section 106(b) of this act (providing that, if an enacting state's limited liability company act "restricts the power of an operating agreement, the restriction applies to a matter under this ACT according to the rules in Section 108"). However, not all limited liability company acts follow the uniform act on this point. And, for those that do, these provisions are useful for the avoidance of doubt.
Legislative Note: Subsection (b) is derived essentially verbatim from Uniform Limited Liability Company Act (2006) (Last Amended 2013), Section 105(c)(8). If an enacting state's limited liability company act includes the uniform provision or comparable language, subsection (b) is redundant and should be deleted.
(17) Section 403;
(18) Section 404;
(19) Section 501(1), (4), and (5);
Reporter's Comment to Subsection (a)(19) (Section 501(1), (4), (5)) – The operating agreement may not change the stated grounds for judicial dissolution but may determine the forum in which a claim for dissolution under Section 501(4) or (5) is determined. For example, arbitration and forum selection clauses are commonplace in business relationships in general and operating agreements in particular.
(20) Section 502, except to designate a different person to manage winding up;
(21) Section 503;
(22) ARTICLE 6;
Reporter's Comment to Subsection (a)(22) – Although the operating agreement may not vary Article 6, Section 604 incorporates by reference the merger-related provisions of an enacting state's limited liability company act. Some of those provisions are variable, especially, for example, the quantum of consent necessary to approve a limited liability company's participation in a merger.
(23) ARTICLE 7;
(24) ARTICLE 8, except to vary:
(A) the manner in which a series limited liability company may elect under Section 803(a)(2) to be subject to this ACT; or
(B) the person that has the right to sign and deliver to the [Secretary of State] for filing a record under Section 803(b)(2); or
(25) a provision of this ACT pertaining to:
(A) registered agents; or
(B) the [Secretary of State], including provisions pertaining to records authorized or required to be delivered to the [Secretary of State] for filing under this ACT.
Reporter's Comment to Subsection (a)(25) – This provision derives from Uniform Limited Liability Company Act (2006) (Last Amended 2013), Section 105(c)(3) (prohibiting the operating agreement from varying "any requirement, procedure, or other provision of this ACT pertaining to: (A) registered agents; or (B) the [Secretary of State], including provisions pertaining to records authorized or required to be delivered to the [Secretary of State] for filing under this ACT"). However, not all limited liability company acts follow the uniform act on this point. For those that do, this provision is included for the avoidance of doubt.
Reporter's Comment to Subsection (a) – To understand a prohibition listed in this subsection, it is of course necessary to read the provision stating the prohibition. Solely to provide a general sense of the prohibitions listed in this subsection, the following chart:
subsection (a) Reporter's Comment to Paragraph number - Section Number of Non-Variable Provision - Caption (or description if not full section)
2 - Section 103 - Nature of Protected Series
3 - Section 104(a) - capacity to sue and be sued
4 - Section 104(b) - powers
5 - Section 104(c)-(d) - no longer duration than series limited liability company; powers and purposes restricted
6 - Section 105 - Governing Law
7 - Section 106 - Relation of Operating Agreement, This ACT, And [Limited Liability Company Act]
8 - Section 108 - Rules for Applying [Limited Liability Company Act] to Specified Provisions of ACT
9 - Section 201 - Protected Series Designation; Amendment
10 - Section 202 - Name
11 - Section 301 - Associated Asset
12 - Section 302 - Associated Member
13 - Section 303(a) or (b) - initial ownership of protected-series transferable interest
14 - Section 304 (c) or (f) - duties of protected-series manager derivative claim provisions
15 - Section 401 - Limitations on Liability
16 - Section 402 - Claim Seeking to Disregard Limitation of Liability
17 - Section 403 - Remedies of Judgment Creditor of Associated Member or Protected-Series Transferee
18 - Section 404 - Enforcement of Judgment Against Non-Associated Asset
19 - Section 501(1)(4) (5) - Dissolution of the company dissolves each protected series of the company judicial dissolution
21 - Section 503 - Effect of Reinstatement of Series Limited Liability Company or Revocation of Voluntary Dissolution
22 - Article 6 - Entity Transactions Restricted
23 - Article 7 - Foreign Protected Series
24 - Article 8 Section 803 - Miscellaneous Provisions Transitional Provisions
25 - applicable generally to - provisions related to registered agents
or the filing office
JayNote: Section 107(a) sets forth the provisions of the UPSA that cannot be "toggled on or toggled off" by the Operating Agreement, and a provision in an Operating Agreement which attempts to do that should normally be unenforceable for that reason.
CAUTION: Most of the Section 107(a) restrictions are noted in the Reporter's Comment to the particular section restricted, but not always. The Drafting Committee discussed putting these restrictions not in a separate section (which became this § 107) but instead note these restrictions in the statutory language of the provisions to which they apply; that idea was discarded as unduly cumbersome, and thus this § 107 came about, but it essentially requires drafters to repeatedly reference this section to see whether or not they can do certain things in the Operating Agreement.
(b) An operating agreement may not unreasonably restrict the duties and rights under Section 305 but may impose reasonable restrictions on the availability and use of information obtained under Section 305 and may provide appropriate remedies, including liquidated damages, for a breach of any reasonable restriction on use.
This section states restrictions beyond those covered by Section 107(b). (Section 107(b) extrapolates to the protected-series level limitations imposed by an enacting state's limited liability company act on the power of an operating agreement.)
Occasionally the comments to this act refer to a variable provision as a "default rule" and a mandatory provision as "non-variable." These references are merely to draw attention to the default/non-variable distinction in particular contexts and have neither the intent nor the power to affect the default/non-variable status of the many provisions of this act whose comments lack a comparable reference.
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