Appellate Division Rejects Notion That Members Can Simply Assent and Not Agree to the Terms of a Newly Drafted Operating Agreement
On May 26, 2021, the Superior Court of New Jersey, Appellate Division issued an important decision in Premier Physician Network, LLC v. Robert Maro, Jr., M.D., et al, (Docket No. A-1152-20) concerning the governance of New Jersey limited liability companies (LLC). The issue before the Court was whether members of an LLC were bound by the terms of an operating agreement by assent as set forth in N.J.S.A. 42:2C-12(b), which states that “[a] person that becomes a member of a limited liability company is deemed to assent to the operating agreement.” The Court held that a draft operating agreement does not become the operating agreement of an LLC unless there is an agreement of the members. Further, that assent only bounds future members of an LLC to an already agreed upon operating agreement.
In Premier, the future members of an LLC agreed to formation upon the execution of a “Letter of Intention Agreement.” After formation, a draft operating agreement was circulated among the members. It was signed by some, but not all members. A few years after formation, some of the members who had not signed the operating agreement voluntarily left the LLC. In response, the LLC sued the departing members alleging that they owed Plaintiff’s shortfall amounts and penalties under the terms of the operating agreement. On a motion for summary judgment, the trial court ruled that the departing members were bound to the terms of the draft operating agreement under N.J.S.A. 42:2C-12(b)—“[a] person that becomes a member of a limited liability company is deemed to assent to the operating agreement.”
On appeal, the Appellate Division reversed and held that the Revised Uniform Limited Liability Company Act (RULLCA) requires that all members must agree to the terms of an operating agreement for it to be valid and controlling. The Court reasoned that given the definition of operating agreement set forth in N.J.S.A. 42:2C-2 and the language of N.J.S.A. 42:2C-12(b), a draft operating agreement does not become the operating agreement of an LLC unless it is “the agreement . . . of all the members of” the LLC, N.J.S.A. 42:2C-2, meaning “all the members” have to agree to it. If an agreement is presented as a draft and is not agreed upon by the existing members, then it remains a draft. Conversely, if a draft agreement is agreed upon by the existing members, then it becomes the operating agreement of the LLC and any subsequent members are thereafter bound by assent.
Given this ruling, it is important for all New Jersey LLCs to re-examine their operating agreements to ensure that they were agreed upon by all members and further that the agreement of all members is properly memorialized. Likewise, all parties looking to form an LLC need to be mindful that such agreements need to be made and documented. Though RULLCA recognizes terms based upon oral agreements and course of dealing, it is very difficult to: (1) prove such terms; and (2) an agreement to such terms by all members. Thus, it is critically important for an LLC to draft, finalize, and agree upon a clear and comprehensive operating agreement as a tool to minimize disputes and surprises.