New Law to Govern Pennsylvania Entities
February 22, 2017
By Joshua D. Cohen & Benjamin A. Haverstick
Effective February 21, 2017, Pennsylvania law will change significantly for business corporations, nonprofit corporations, and especially for limited liability companies (“LLCs”), limited partnerships (“LPs”), limited liability LPs (”LLLPs”) and general partnerships. The new law (“Act 170” or the “Act”), amending the Pennsylvania Associations Code, will apply to all new entities formed on or after February 21, 2017, to all entities electing to be covered by the new provisions between February 21 and April 1, 2017, and automatically to all existing entities beginning on April 1, 2017, regardless of when the entity was formed.
Pursuant to Act 170, Pennsylvania has adopted the most current versions of the Uniform Limited Liability Company Act, the Uniform Limited Partnership Act and the Uniform Partnership Act, with some Pennsylvania-specific modifications. The Act also harmonizes the law to a large extent among all types of business forms in Pennsylvania. The state will now have one of the most flexible and modern legal frameworks for business governance in the U.S., across the entire spectrum of business entity types.
Here are some of the key changes:
- Derivative Lawsuits. The new law clarifies, expands and harmonizes the provisions governing derivative lawsuits for LLCs, LPs, LLLPs, business corporations and nonprofit corporations. A derivative lawsuit is a lawsuit filed in the name of the entity by one or more members/shareholders/partners when the entity does not file such a lawsuit itself. The law establishes procedures for the voluntary formation of special litigation committees in the context of derivative lawsuits, threatened or filed, for all types of entities, and defines certain powers of such committees.
- Liability Shield. The law now clarifies and expands the scope of liability protection for the partners of an LLP and the general partners of an LLLP.
- Charging Orders. Provisions governing charging orders are now codified in detail. A charging order is a remedy for a creditor of a partner/member to obtain the economic rights of the partner/member (“transferable interests” under the new Act) but not the governance or voting rights. The new provisions both clarify the rights of the holder of a charging order, as well as protect the entity and the other partners/members.
- Operating Agreements and Partnership Agreements. The new Act and the legislative commentary favor the implication of an operating agreement (or a partnership agreement, as the case may be) even if no such agreement is formally adopted. Businesses will likely want a clear, written operating (or partnership) agreement, so that there is no confusion over what the “implied” agreement might be.
- Duties of Managers and General Partners. The Act codifies the general legal standard that LLC managers (including managing members) and LP general partners owe a duty of loyalty, a duty of care and an obligation of good faith and fair dealing to the entity and the other members/partners. Also under the new Act, the operating agreement or partnership agreement can alter or limit but not eliminate the duty of loyalty and can specify the types of activities that do not violate the duty of loyalty, may alter the duty of care and can identify standards by which the duty of good faith and fair dealing will be measured. In each of these cases, the change cannot be “manifestly unreasonable” at the time that the agreement is entered into in light of the circumstances existing at that time.
- Nonprofit and Benefit Entities. The law now allows for the formation of nonprofit LPs and nonprofit LLCs. Previously, the law only provided for nonprofit corporations. Similarly, benefit LLCs and benefit LPs can be formed (similar to benefit corporations), which are for-profit entities that also have a charitable purpose.
- Certificates of Authority. The law now allows for an LLC or a partnership to file, amend or cancel a new type of certificate called a Certificate of Authority. This Certificate is filed with the state to create a public record of the person or position in the organization who has the legal authority to sign contracts, convey property, etc. in the name of the entity, and can also be filed in a county Recorder of Deeds office with respect to authority to convey real property (e.g., deeds, easements and mortgages). These Certificates will allow third parties without knowledge to the contrary to rely on the authority specified in the Certificate.
Because Act 170, with legislative comments, is over 500 pages, the above list is not inclusive of everything covered. The new Act touches many areas of the law governing the operations of business entities and creates opportunities for greater flexibility in these entities.