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A. 1. a.(1)(a) i) a)Briefntg2Y4"%%*/a3BriefntgBrief Outline StyleeLl"  2  1.` ` (#` ` `  PleadingHeader for numbered pleading paperpn     ,,   X X` hp x (#%'0*,.8135@8:><q*"xxxxWWxxxWWkkxxx"(#W 1 X CURRENT STATUS OF THE ULLCA p>"(#W 1 X PROCEDURAL ISSUES p>"(#W 2 X ADVANTAGES OF THE ULLCA p>"(#W 4 X POLICY CONTROVERSIES AND DRAFTING AMBIGUITIES p>"(#W 5  Ye XX` ` 1.` ` Term vs. Atwill LLCs. ` p>"(#W 5  YN XX` ` 2.` ` Member Dissociation as a Dissolution Event. ` p>"(#W 8  Y7 XX` ` 3.` ` Problems Relating to the "Put Right". ` p>"(#W 9  Y  XX` ` 4.` ` Grounds for Judicial Dissolution. ` p"(#W 11  Y  XX` ` 5.` ` Grounds for Expulsion of a Member. ` p"(#W 13  Y XX` ` 6.` ` Member's Power to Withdraw. ` p"(#W 14  Y XX` ` 7.` ` Need for Derivative Actions. ` p"(#W 15  Y XX` ` 8.` ` Written Operating Agreements. ` p"(#W 16  Y! XX` ` 9.` ` Fiduciary Duties. ` p"(#W 17  Y" XX` ` 10.` ` Grounds for Administrative Dissolution. ` p"(#W 17  Y# XX` ` 11.` ` Creditor's Enforcement of Contribution Obligation. ` p"(#W 18  Yh$ XX` ` 12.` ` Limitations on Distributions. ` p"(#W 18  YQ% XX` ` 13.` ` Optional Provisions in Articles. ` p"(#W 19  Y:& XX` ` 14.` ` Information Rights. ` p"(#W 20  Y#' XX` ` 15.` ` Indemnification Rights. ` p"(#W 20  Y ( XX` ` 16.` ` Other Drafting Problems. ` p"(#W 20 #Xw P7gXP#    RECOMMENDATION Although the ULLCA represents an improvement over most existing LLC statutes, several significant policies in the act deserve further consideration. Moreover, the implementation of those policies in the text of the ULLCA creates many complicated provisions that fail to address clearly some important issues. Accordingly, we recommend approval of the ULLCA by the ABA House of Delegates only with the important qualifications that (i) such approval is not an endorsement of all of the provisions of the ULLCA and (ii) the ULLCA should not be adopted by a state without careful review. CURRENT STATUS OF THE ULLCA  Y   The National Conference of Commissioners on Uniform State Laws ("NCCUSL") approved a final Uniform Limited Liability Company Act ("ULLCA") at its annual meeting last August. After approval, the ULLCA went through a "styling" process by the NCCUSL Style Committee, in consultation with the reporter (Professor Carter Bishop of William Mitchell School of Law) and the chairman of the drafting committee (Edward I. Cutler). In addition, Mr. Cutler and Professor Bishop drafted comments to the act. With minor exception, no part of the revision was shared with the advisors until the revised final act was made available to us shortly before Christmas. The styled draft that emerged at the end of December incorporated many changes to the text of the ULLCA previously approved by the Commissioners. Our receipt of the styled ULLCA happened to coincide with the release of Revenue Procedure 9510 and proposed Regulation  1.1402(a)18, significant guidance by the Internal Revenue Service with respect to the treatment of limited liability companies for purposes of classification and selfemployment tax purposes. The drafting committee and we conducted a telephone conference on January 4 to discuss appropriate changes in the ULLCA in response to these releases, which resulted in another revision of the ULLCA on or about January 20, 1995. We, Steven Frost (the ABA Tax Section advisor), Thomas Geu (the ABA Real Property Probate and Trust Law Section advisor), Leigh Griffith and Richard Shapack (of the Tax Section and Real Property Probate and Trust Law Section) met with Dean Harry J. Haynsworth and Professor Bishop on January 29 and with Dean Haynsworth on January 30. Based on these discussions, the reporter and Dean Haynsworth made several changes to the ULLCA and prepared another revised draft on or about February 13, 1995, incorporating those changes. The February 13 version of the ULLCA was then reviewed by members of NCCUSL's executive committee and style committee, resulting in another revised ULLCA that was distributed on or about March 1, 1995. On March 1, 1995, we provided an early draft of this report to Professor Bishop and Dean Haynsworth as a courtesy to assist their preparation of a responsive memorandum. After reviewing that draft report, the style committee or executive committee apparently decided to incorporate several of its suggestions for drafting changes, resulting in another revised ULLCA that was distributed on or about March 8, 1995. (0*0*0*ԌWe have not had sufficient time to thoroughly review the ULLCA versions of March 1 and March 8 prior to the submission deadline for this report. Accordingly, this report is based, for the most part, on the February 13 version except that certain drafting ambiguities in the February 13 version are not listed here because they were corrected in the March 8 version. Also, we have attempted to employ section references that conform to the section numbering in the March 8 version. We cannot be certain that the March 8 version is the final ULLCA. Despite the fact that five different versions of the "final" ULLCA have been circulated in the last ten weeks, the ULLCA has been introduced in the legislatures of at least four states: Illinois, Kansas, Hawaii and West Virginia. We do not know which version was introduced in any of those states. PROCEDURAL ISSUES A few comments about the process may be appropriate before discussing the substance of the ULLCA. First, the drafting committee determined at the outset to complete the ULLCA in 1994. While the drafting and approval of a uniform act in two years is not unprecedented, we believe that the "fast track" was not appropriate for a novel subject matter that has evolved so much in recent years in terms of new state legislation as well as new rules for tax treatment. In order to meet this selfimposed deadline, the drafting committee met four times for threeday drafting sessions during the eight months preceding NCCUSL's approval of the ULLCA: November of 1993 and February, March and May of 1994. In addition, the drafting committee met a fifth time for an afternoon to consider lastminute changes immediately prior to its submission of the ULLCA to NCCUSL in July of 1994. (Some of the changes that appeared in the July "draft for approval" had never even been discussed by the drafting committee.) Each of these drafting sessions resulted in substantial changes to the prior draft of the ULLCA and the tight time schedule made it very difficult to prepare and review the revisions prior to the nextscheduled drafting session. Needless to say, this accelerated process made it virtually impossible to circulate current drafts for comment outside the immediate drafting committee members and advisors. Second, the changes to the text of the act were so substantial during this period that the official comment, for the most part, was ignored and left unchanged until after the ULLCA was approved last August. The ABA advisors did not take part in the preparation of the official comment that emerged as part of the "styled" ULLCA in late December. Since December, the ABA advisors have had to devote most of their time and attention to changes in the text of the act itself made in the "styling" process. Consequently, as of the date of this writing, we have not yet had the time for a thorough review and discussion of the official comment as a whole, although we have noted several problems in the official comments in this report. Because much of the ULLCA is original drafting rather than being derived from preexisting business statutes, we believe that the official comment may be particularly significant in interpreting the Act. It should be noted also that the comment does not indicate the source of those sections of the#'0*(( ULLCA that were "borrowed" from other business laws such as RUPA and the MBCA. Others have commented that such source notes would have been valuable in helping to interpret and apply the ULLCA. Third, the drafting process was made more difficult because the original ULLCA draft was based on the Minnesota statute, which incorporates a very different approach to many issues compared to most existing LLC Acts and the Prototype Limited Liability Company Act. Accordingly, much of the initial drafting effort was devoted to moving from this starting point to more familiar provisions found in UPA, RUPA, RULPA, MBCA and the Prototype LLC Act. Fourth, our goals for the ULLCA appear to be significantly different than those of NCCUSL. All but three of the states have already enacted LLC legislation and the ULLCA will not be any state's first act. Accordingly, we believe that the ULLCA will contribute the greatest benefit to the state of the law by being of exceptional quality, incorporating the best ideas to evolve in recent years and reflecting the most recent developments in the tax laws. At the meeting of the Committee on Partnerships and Unincorporated Business Organizations last November, John McCabe, the legislative director of NCCUSL, commented that, in view of the rapid changes taking place in LLC statutes, the ULLCA should be released to the states for review and enactment in order to see what the various states do with it. If NCCUSL's promulgation of the ULLCA in final form is motivated by a desire to obtain feedback from a broader audience, i.e., state legislatures and local bar drafting committees, we can support approval of the ULLCA by the ABA House of Delegates. In this spirit, we would strongly urge that any ABA recommendation of state consideration and adoption include the admonition that state lawmakers should thoroughly review the ULLCA and modify its provisions as they deem appropriate. We also believe that our concerns regarding the ULLCA should be disseminated broadly to ABA members who are participants in state drafting committees. ADVANTAGES OF THE ULLCA In general, we believe the overall quality of the ULLCA is better than the majority of the LLC statutes that have been enacted to date. The ULLCA is shorter and easier to comprehend than several of the more recently enacted LLC statutes. It also incorporates many good policy choices and refinements of applicable tax rules that have evolved since the enactment of the earliest LLC statutes. Although some of these policy choices remain controversial, the following is a nonexhaustive list of the policies in the ULLCA that we believe will be widely viewed as advantageous.  Y! ` ` The ULLCA is "flexible" rather than "bulletproof". By this we mean that the taxsensitive statutory rules, i.e., those requiring (i) unanimous consent for admission of a transferee as a new member and (i) majority in interest consent to continue the company after dissociation of a member, are default rules rather than mandatory rules. Although mandatory rules would prevent the members from adopting an operating agreement that inadvertently might cause the company to be taxed as a corporation, the flexible approach is more desirable because it#'0*(( permits the members to adapt to changing tax rules and thereby utilize the LLC in a wider variety of situations. Although the tax treatment of onemember LLCs is very much in doubt, the ULLCA permits a onemember LLC in order to take advantage of any subsequent favorable tax guidance on this issue. By not requiring at least two members, the ULLCA avoids an automatic dissolution that would otherwise arise upon the death of a member in a twomember LLC.(#`  Y_ ` ` With a few exceptions discussed later in this report, the ULLCA's default rules are relatively simple. They are designed for the small business owners who cannot afford (or are not inclined) to retain a lawyer to draft a customized operating agreement. Also, the ULLCA allows the members' operating agreement to be entered into orally or be defined by course of conduct, although members are free to reduce their agreement to writing and require that all amendments be in writing. Allowing oral agreements, in our view, is more likely to lead to fair results when disputes arise in informal, "mom and pop" businesses.(#`  Y ` ` The ULLCA has relatively few mandatory rules governing the rights and obligations of the members that cannot be varied by contract among the members. (#`  YK ` ` The ULLCA protects the contractual rights of the members and managers by providing that their operating agreement prevails over conflicting provisions in the articles of organization as to internal matters not involving third parties. This prevents the manipulation of the public filings by some members to circumvent contractual rights of other members. This rule also supports the contractbased nature of the LLC in contrast to the more formalistic corporate approach. There are no technical rules for quorums, notices of meetings or other procedures for ordinary management decisions. (#`  Y| ` ` The ULLCA contains a broad statement of permitted purposes and powers, including purposes that are not necessarily intended to produce a profit.(#`  Y7 ` ` The ULLCA's default rules for dissolution of the company following dissociation of a member allow continuation by vote of a majority in interest of the remaining members, reflecting the latest guidelines provided by the I.R.S. Clauses (A) and (B) of section 801(b)(3)(i), together with subsection (a) of section 801, represent the efforts of the drafting committee and ABA Advisors to translate the tax concept of "majority in interest" under Rev. Proc. 9446 into terms that are used in the ULLCA. (Paragraph 16 of this report, however, notes one drafting ambiguity that should be clarified.)(#`  Yh$ ` ` The ULLCA does not contain restrictions upon the kinds of contributions that may be made for an interest in the company.(#` #'0*((  Y ` ` The ULLCA permits LLCs to merge with a variety of different kinds of entities: corporations, partnerships, or other kinds of business entities.(#` POLICY CONTROVERSIES AND DRAFTING AMBIGUITIES  As noted in our recommendation, we believe that many aspects of the ULLCA require further consideration, and in some cases revision, before any state considers changing its act to the ULLCA. Over the course of the last few months we have discussed the provisions of various drafts with several people, some of whom have been in the drafting process and others who are familiar with limited liability companies, including both supporters and critics of the uniform act. While thorough national review has not been possible as a result of the accelerated drafting schedules and frequent revisions of the act, our discussions and review have identified the following significant policy problems and drafting ambiguities. After state drafting committees and other commentators have had an opportunity to thoroughly review a final ULLCA and consider its underlying policies, other issues and improvements may be identified.  Y 1.` ` Term vs. Atwill LLCs. The distinction between "term" and "atwill" LLCs creates the most serious drafting ambiguities in the ULLCA and also involves one of the most fundamental policy issues. To understand these provisions fully, it is necessary to identify the basic policy question that led to this distinction. Should the ULLCA provide a mechanism under its default rules that would give each member, upon dissociation, the right to compel the company's repurchase of the member's interest if the company continues after dissociation (a "put right")? Several commissioners on the drafting committee believe strongly that each member's unilateral put right in the default situation is an essential part of the proper balance between the rights of the minority and of the controlling majority in the context of closely held businesses (such as LLCs) whose outstanding interests are not marketable to third parties as a practical matter. Those commissioners believe that the appropriate model is that of general partners under the UPA, and that the corporate model has proved to be very inequitable (not to mention the source of much litigation) for oppressed minority owners in closely held businesses. The contrary point of view is that such unilateral dissolution or put rights create too much power in the minority to disrupt the ongoing business stability of the LLC, unfairly tipping the balance of rights in favor of the disgruntled minority at the expense of the rights of the majority. The proponents of this view (including the two of us) believe that, in the default situation, most LLC members will expect that the corporate model will govern, i.e., that no member has the unilateral right to compel dissolution of the company or the repurchase of his or her interest unless it has been bargained for in advance. The question of a default put right upon withdrawal was not discussed extensively within the drafting committee until after Internal Revenue Service representatives had advised the committee informally, on a related issue, that the corporate characteristic of "continuity of life" for tax classification purposes could be avoided without giving each member a statutory right#'0*(( of withdrawal or requiring a dissolution event upon a member's withdrawal. Early in 1994, a draft of the ULLCA which did not contain a member withdrawal right was submitted to the Service and received its informal approval on this issue. At that point, it became apparent that a default put right upon withdrawal was not needed for tax classification purposes but must be evaluated solely as a matter of policy, as one of several possible statutory mechanisms to protect the individual member against potential oppression by the majority. After long debate regarding the relative merits of a default put right, a proposal was approved by the drafting committee, rather late in its deliberations, to create essentially two different default rules based upon whether or not the members have organized the LLC for a specified term. If members have agreed on a term, then no member has a put right under the default rule until the term has expired. If not, then the company is "at will" and each member has the right in the default situation to withdraw and receive the "fair value" of the member's rights to receive distributions from the company. In addition, the unilateral withdrawal of a member from an "atwill" company (but not from a "term" company) may also trigger the dissolution and winding up of the company under 801(b)(3), subject to a continuation vote of the remaining members. (The problems with the dissolution events relating to the withdrawal of a member are discussed under the next following topic heading.) Our principal concern with the decision of the drafting committee is that the term/atwill distinction has injected substantial complexity and many ambiguities into the ULLCA that far outweigh its benefits. In our view, this approach is worse than either of the conflicting views that it replaces. Although we originally argued against a default put right and continue to believe that no member should have a put right under the default rule, we would rather have a simple default put right than the difficulties that arise from the two different default regimes based upon the term and atwill distinction. In our view, the default rules in any LLC statute should be designed for the small, informal company that lacks the resources to retain a specialized lawyer to draft a customized operating agreement. Most importantly, these firms (and the generalist lawyers who represent them) should not have to struggle to understand the default rules that will apply to determine the rights and obligations of the members. The more complicated the default rules, the more difficult and costly it is for lawyers to properly advise these companies and to draft their operating agreements to override voluminous and intricate default rules in order to effectuate the members' expectations. Complex default rules also increase the likelihood that litigation will be necessary to resolve disputes in the default situation. We strongly believe that the formation and operation of LLCs should not require the services of specialized lawyers, and that short and simple default rules are necessary to keep general business practitioners "in the game". Sections 602, 603, 701 and 801(b)(3) of the ULLCA contain default rules that, in our view, will require an inordinate investment of time and effort to understand and master, primarily because of the term/atwill distinction. For example, we have received comments that the word "term" is misleading because it suggests a limit upon the life of the company rather than merely a minimum period for locking in each member's investment. The official comments under sections 601 and 602 illustrate the complexities of this approach. The term/atwill distinction#'0*(( gives rise to many other ambiguities in the act which no amount of time and effort will resolve, including the following:  Y ` ` The definition of a "term company" in section 101(19) refers to a limited liability company in which the members "have agreed to remain members until the expiration of a term specified in the articles of organization." Section 203(a)(5) requires that a term LLC be so designated in its filed articles, together with a statement of the "term specified." The manner for measuring the term is not restricted in the text of the ULLCA, leaving open the possibility that the term might be measured by reference to the occurrence of an event or the completion of an undertaking that is indefinite (e.g., until completion of construction and leaseup of a building, or until the death of Mary Smith.) Nevertheless, the comment under 203 inexplicably states that a term must be described as a "specific and final date for dissolution of the company." According to the comment, the members are not permitted to specify an undertaking of uncertain duration, unless it is coupled with a date certain, "whichever occurs first." If the rationale underlying the comment is that indefinite terms are too vague as a basis for the default put right, it is hard to understand how coupling an indefinite event with a specific date eliminates the inherent uncertainty as to when the term expires. Irrespective of whether this rule is preferable on policy grounds, the comment seems unsupported by the text of the Act. Both the policy question and the drafting problem go away if the term/atwill distinction is eliminated.(#`  Y ` ` What if the filed articles and the operating agreement are in conflict on whether the company is term or atwill, or on the duration of the term? The definition of a "term company" in section 101(19) states that the existence of a term must be both agreed upon by the members and disclosed in the filed articles, implying that the failure to include the term in either the operating agreement or the filed articles results in the company being "atwill". However, the consequences of being a term company seem to involve only the internal rights and obligations of the members regarding their put rights and dissolution of the company, suggesting that the operating agreement controls over inconsistent articles under section 203(c). On the other hand, if the term/atwill distinction is intended to create two different kinds of LLCs for purposes going beyond the mere existence of a default put right, then the designation in the filed articles should perhaps control over any contrary provision in the operating agreement. This policy issue and drafting ambiguity would be avoided by deleting the term/atwill distinction.(#`  Y" ` ` Section 411(b) provides that a term LLC becomes an atwill LLC if it is continued after the expiration of the term by "the members in a membermanaged limited liability company or the managers in a managermanaged company...." This provision necessarily implies that a term company dissolves at the expiration of its term unless some action is taken by the members or managers, and the comment under section 411 says that continuation of the company as an atwill#'0*(( company requires a majority vote of the members or managers. However, the text of section 801 does not (and in our view, should not) list expiration of the term as an event causing dissolution of the company. The statement in the comment that continuation requires a majority vote is inconsistent with the text of the act and, in our opinion, objectionable on policy grounds. If the term/atwill distinction were eliminated, section 411 and its misleading and confusing comment could be deleted.(#`  YH 2.` ` Member Dissociation as a Dissolution Event. Section 801(b)(3) describes the circumstances under which the dissociation of a member will cause dissolution of the company and is one of the most complex and confusing provisions in the ULLCA. The drafting problems are due in large part to the reporter's laudable desire to incorporate into this section new rules that take advantage of liberalized I.R.S. guidelines on partnership tax classification which were released subsequent to the drafting committee's last drafting session in May of 1994 (specifically, Rev. Proc. 9446 and Rev. Proc. 9510.) The process of accommodating new tax rules has been complicated, however, by the ubiquitous (and, we believe, undesirable) distinction between term and atwill LLCs. Clearly, not every kind of dissociation by every member will trigger dissolution of the LLC under 801(b)(3). As a policy matter, our strongly held view is that the ULLCA should minimize the extent to which a member's dissociation will threaten the continuation of the company, consistent with avoiding the corporate characteristic of "continuity of life" under the federal income tax regulations. In Revenue Procedure 9510, the I.R.S. announced that, in general, continuity of life could be avoided so long as the bankruptcy, death or other termination of existence of a member triggers dissolution of the company, and that it is no longer necessary to trigger dissolution upon the unilateral withdrawal or involuntary expulsion of a member. (This revenue procedure confirmed informal advice previously given by I.R.S. representatives to the drafting committee that voluntary withdrawal was not a necessary event of company dissolution under the ULLCA.) In addition, the I.R.S. announced in Rev. Proc. 9510 that, in the case of a managermanaged LLC in which at least one of the managers is also a member, only the bankruptcy, death or termination of existence of a member/manager (and not the other members who are not managers) need trigger dissolution of the company. Unfortunately, section 801(b)(3) exacerbates these taxbased complexities by incorporating an additional variable. In the case of an atwill company, any kind of dissociation (i.e., withdrawal and expulsion as well as bankruptcy, death or other termination of existence) will trigger company dissolution, but in a term company, only bankruptcy, death or other termination of existence will trigger company dissolution. This second variable creates four different classes of LLCs to consider: (1) term LLCs that have at least one manager who is a member, (2) term LLCs that do not, (3) atwill LLCs that have at least one manager who is a member, and (4) atwill LLCs that do not. The resulting complexity in section 801(b)(3) is not likely to be correctly understood by many general practitioners and trial court judges, in our opinion. Moreover, we do not believe there is any policy justification for expanding the kinds of dissociation that will trigger dissolution for atwill companies compared to term companies. #'0*(( Only two kinds of LLCs should be addressed in section 801(b)(3): those that are managed by at least one manager who is also a member and those that are not. Voluntary dissociation (withdrawal) of a member should not be treated as a dissolution event requiring a continuation vote for any kind of LLC.  Y 3.` ` Problems Relating to the "Put Right". As indicated above, a statutory put right on the part of each member can create a financial hardship for the majority of the members who desire business stability and continuity in the default situation. However, reasonable people may differ on this policy issue. Assuming the default put right is retained in the ULLCA, several drafting problems and related policy issues should be considered. First, the valuation method prescribed by section 702(a)(1) is vague as to whether minority and unmarketability discounts should be applied in determining the purchase price to be paid to the dissociated member. As the comment to section 702 indicates, the use of the term "fair value" rather than "fair market value" was apparently intended to give a court discretion to use liquidation value, going concern value, or any other methodology it may choose under the circumstances of a particular case. Additionally, neither the text of the statute nor the official comment indicates whether the consequences of the member's dissociation should be considered in determining the value of his or her distributional interest. In our view, this vagueness makes the put rights too unpredictable in application and should be clarified by reference to market valuations between a hypothetical willing buyer and willing seller. Moreover, this refinement will make the ULLCA more useful for estate and gift tax purposes in the context of familycontrolled firms. Section 2704 of the Internal Revenue Code requires that the valuation of an LLC interest in a family controlled business for tax purposes be determined under the default statutory rules, and the "market" valuation methodology would have the desirable effect (supported strongly by many estate planning lawyers) of depressing tax valuations. Second, the text of the ULLCA seems unclear regarding the extent to which transferees and other successors of a dissociated member may enforce the statutory put right. The kinds of transferees who may desire to assert these rights include not only personal representatives and guardians of deceased and incompetent members, but also bankruptcy trustees, creditors who foreclose a charging order or security interest, donees, and bona fide purchasers. Transferees who acquire a distributional interest from a member prior to a member's dissociation may also seek to assert the put right after the dissociation of their predecessor in interest. Consideration should also be given to the peculiar situation where a member dissociates because of the transfer of his or her entire distributional interest under section 601(3), in which case the transferee acquires the distributional interest simultaneously with the member's dissociation. The only guidance in the text of the ULLCA for determining the put rights of these transferees appears in section 503(e)(1), which provides that a transferee is entitled to "receive, in accordance with the transfer, distributions to which the transferor would otherwise be entitled...." This provision appears to be very ambiguous as to whether the right to compel the company to purchase a distributional interest is to be treated as the right to receive distributions. The comments to sections 603 and 701 attempt to provide a partial answer that a deceased member's successors#' 0*(( in interest may enforce the put right, but does not explain the statutory basis for this conclusion. Assuming the put right is retained in the ULLCA, our policy preference would be to allow the enforcement of put rights only by successors of deceased or incompetent members, and perhaps by other transferees who acquire after (not concurrently with) the dissociation the distributional rights held by the dissociated member at the time of dissociation, recognizing that there is 240day effective statute of limitations that will cut off their rights under section 701(d). Regardless of the policy, however, the uncertainty under the text of the ULLCA can be expected to create significant problems in the real world as parties struggle to find the answers by reading between the lines. Third, the ULLCA is silent on the question of whether a dissociated member (and any transferees and successors) should have the right to share in interim distributions during the period after dissociation until his or her distributional interest has been repurchased. Section 603(b)(1) provides that a dissociated member is treated as a transferee, which suggests that a dissociated member should continue to share in interim distributions until the repurchase of his or her distributional interest. However, it seems unfair to continue making interim distributions to a dissociated member after the valuation date of the distributional interest (i.e., during the period between the valuation date and the actual date of repurchase.) In our view, the statute should expressly say that the sharing of interim distributions should continue until the valuation date for the distributional interest under section 701(a). The failure to address this question will create significant problems in the application of the put right, especially if the concept of a term company (and the deferred purchase obligation inherent in that concept) is retained in the ULLCA. Fourth, section 701(c) gives appropriate acknowledgement that the operating agreement may supersede the default terms regarding the price and payment terms for purchasing the interest of a dissociated member. However, it goes on to say that, if the purchaser defaults, the dissociated member may commence an action to dissolve the company. This provision could be interpreted as restricting the parties' ability to fashion their own default remedies in their operating agreement, a restriction that we believe to be objectionable on policy grounds. The subsection should be modified to eliminate the right to dissolve the company or at least the implication that the dissolution remedy is a mandatory rule. Fifth, section 702(a)(2) gives the court discretion to allow payment of the put option in installments with appropriate security. However, we believe that it is not appropriate to give the dissociated member the right to dissolve the company if the company under section 702(c) defaults on the required installments. As a policy matter, the dissociated member should be given the typical rights of a creditor to enforce the payment obligations, which do not include the right to force liquidation of the company. Worse still, section 103(b)(6) makes this dissolution remedy nonwaivable, so that the parties cannot modify it by contract even if all of them want to.  Y:& 4.` ` Grounds for Judicial Dissolution. In addition to creating a default put right for individual members, the ULLCA gives individual members (as well as former members and#' 0*(( transferees of members) the right to compel the dissolution of the company by judicial decree in a variety of circumstances under section 801(b)(5) and (6). These rights are very serious as a policy matter because they threaten the rights of the majority to enjoy business stability in the LLC form and because the wording of these rights is sometimes vague and ambiguous. This threat to the viability of the company is exacerbated because lawsuits may be brought by any dissociated member in addition to a current member. Because a dissociated member retains (at most) only a distributional interest in the company under section 603(b) with a possible put option under Article 7, the right of a dissociated member to dissolve the company should exist only if he or she holds a distributional interest and should be the same as that of a transferee of a member's interest. Moreover, the dissolution rights in subsection (b)(5) are mandatory under section 103, so that the members are unable to eliminate or even clarify the rights by mutual agreement. We disagree with the paternalistic policy making any of these dissolution rights mandatory. Section 801(b)(5)(i) gives every member and former member the right to petition a court for judicial dissolution of the company if "the economic purpose of the company is likely to be unreasonably frustrated." The word "economic" in this context is objectionable because it implies that every LLC will be organized for an economic purpose, contrary to section 112(a), which expressly allows the formation of LLCs for "any lawful purpose". Also, if the word "frustrated" is intended to mean that it is impossible to accomplish the company's purposes, then the adverb "unreasonably" does not add any useful meaning. Is the court to believe that dissolution of the company is not available if the company's purpose is "reasonably" (as opposed to "unreasonably") frustrated? The meaning that may have been intended is that the company can be dissolved if its purpose cannot reasonably be accomplished. If so, then this provision seems redundant to subsection (b)(5)(iii), which provides for judicial dissolution if it is not "reasonably practicable to carry on the company's business in conformity with the articles of organization and the operating agreement." On the other hand, perhaps the word "frustrated" was intended to mean merely "impaired" and the word "unreasonably" was intended to characterize the actions of the controlling members or managers that caused the impairment. If this was the intention, then the provision seems redundant to subsection (b)(5)(ii), which provides for judicial dissolution if "another member has engaged in conduct relating to the company's business that makes it not reasonably practicable to carry on the company's business with that member." In summary, the words contained in subsection (b)(5)(i) are vague and susceptible to a variety of meanings. If interpreted expansively, we believe that this mandatory rule will create too many opportunities for oppression of the majority by the minority. Section 801(b)(5)(iv) gives a dissociated member and each current member the right to compel liquidation of the company if the company fails to purchase the dissociated member's distributional interest pursuant to the put option. Assuming that the put option remains part of the ULLCA, we believe that the dissociated member's remedies should be those typical of the company's other creditors, which do not include the right to seek judicial dissolution. In our view, the dissolution remedy is too drastic as a policy matter. Also, we see no policy justification for giving any other member a dissolution right for the company's failure to purchase the interest of a dissociated member. #' 0*((ԌSection 801(b)(5)(v) sets forth the most troubling of the grounds for judicial dissolution. It gives each member and former member the right to obtain judicial dissolution on some very nebulous grounds, including if the controlling members or managers "have acted, are acting or will act in a manner that is illegal, oppressive, fraudulent or unfairly prejudicial to the petitioner." (Emphasis added.) This particular combination of stated grounds for dissolution is not found in any common business organization statute other than  40(a)(1) of the Close Corporation Supplement to the MBCA. Section 14.301 of the MBCA has the word "oppressive" but not "unfairly prejudicial". Section 802 of RULPA contains none of these ambiguous grounds for dissolution. Future conduct as a basis for dissolution seems obviously problematic. The word "oppressive" is extremely subjective and does not provide any objective guidelines for determining when a disgruntled member's disappointment with his treatment rises to the level of oppression. Certainly case law can help, but each case is factspecific and cannot be used to predict outcomes in other situations. Similarly, the term "unfairly prejudicial" is also very subjective and obscure. In particular, the word prejudicial is not used in its ordinary sense ("prejudge") but seems to mean merely harmful or adverse to the member's interest. What is or is not "unfair" is certainly in the eye of the beholder and can be expected to create numerous lawsuits. Every business decision of the majority regarding, e.g., the terms of employment of a member or the need for additional capital contributions, will provide fertile grounds for litigation under the "oppressive" or "unfairly prejudicial" standards. As a policy matter, we believe that these dissolution rights tip the balance of power far too much in the direction of the minority against the majority. That this provision is mandatory under section 103 ensures that all LLCs and their members can never escape its harmful potential to destroy the business. Our preference for section 801(b)(5)(v) would be to delete the words "will act," "oppressive" and "unfairly prejudicial" and to substitute the concept of a willful or persistent violation by the controlling members or managers of their duties under the ULLCA or the operating agreement that materially and adversely affects the interest of the petitioning member. In addition, in order to prevent the use of inadvertent or minor violations of the law to dissolve the company, we would change "illegal" conduct to a knowing violation of the law that materially and adversely affects the business of the company or the interest of the petitioning member. We would retain the word "fraudulent" in section 801(b)(5)(v) if it is qualified by the material and adverse effect standard. Consideration should also be given to making illegality of the company's business a ground for judicial dissolution under subsection (b)(5) rather than the basis for automatic dissolution under subsection (b)(4). Section 801(b)(6) gives any transferee of a member's interest the right to commence litigation and persuade a judge that it would be "equitable" to dissolve the company at any time (if the company was at will when the transferee acquired his or her interest) or after the expiration of the term of the company (if the company was a term company when the transferee acquired his or her interest). As a policy matter, we believe that giving anyone the ability to dissolve the company because it is "equitable" will encourage much unwarranted litigation and create instability in the business conducted by the LLC. That this right is given to mere transferees (e.g., including a personal creditor of a member who forecloses a charging order), whose only goal is to extract as much cash as possible in as short a time as possible, makes this#' 0*(( provision very undesirable. When faced with such a lawsuit, the company will not be able to predict the outcome (even with a host of highpriced lawyer specialists) and will be compelled to settle in virtually every instance. One of the benefits of having the LLC characterized as a separate entity under section 201 is that the personal creditors of a member cannot reach the assets of the LLC. The restriction on remedies of personal creditors under section 504(e) also serves this policy. The right of a transferee to compel dissolution undercuts this policy. In our view, a transferee should not be given broader grounds on which to dissolve the company than the grounds afforded to a member under section 801(b)(5)(iii). If transferees (or, for that matter, former members) are to be given rights to compel dissolution under any circumstances, consideration should be given to whether those rights can be overridden by a vote of all the members to continue the company under section 802(b).  Y 5.` ` Grounds for Expulsion of a Member. Section 601(6) gives each member the right to commence a lawsuit to expel any other member for engaging in "wrongful conduct that adversely and materially affected the company's business." This is in addition to judicial expulsion for willful or persistent breach of the operating agreement or fiduciary duties or for conduct that "makes it not reasonably practicable to carry on the business with the member." Black's Law Dictionary defines "wrongful act" to include negligence and "wrongful conduct" to include conduct that contravenes a duty. Our concern here is that the provision is ambiguous as to whether a member may be expelled merely because a court has found the member to have been negligent. The fact that section 601(6) provides separate rights of expulsion for willful or persistent breach of the operating agreement or fiduciary duties certainly suggests that wrongful conduct should be interpreted broadly in order to avoid redundancy to the other grounds for expulsion. As a policy matter, we are concerned that expulsion for mere negligence is too strong a penalty, especially where the statutory standard of care for a member is to avoid gross negligence under section 409. At the very least, the judicial expulsion right should be deleted from the list of mandatory provisions in section 103.  Y| 6.` ` Member's Power to Withdraw. Section 602 presents the subtle distinction between a member's right to withdraw vs. the power to withdraw. The issue here, much debated within the drafting committee, is whether the ULLCA should permit the members in their operating agreement to lock themselves into member status, i.e., to deprive themselves of the power to withdraw unilaterally as a member. This issue is distinct from the existence of a put right upon withdrawal, as to which there is a consensus that the members' operating agreement should control. The narrow question is whether a member should always have the nonwaivable ability to quit being a member and thereafter be free of the fiduciary duties (and any public stigma) associated with member status, even if the withdrawal renders the member liable for damages for breach of the operating agreement and even if the member's investment in the company remains locked into the company under the terms of the operating agreement. Some members of the drafting committee concluded that the member's power unilaterally to withdraw should be a mandatory rule under section 103 because (i) the relationship among the members is contractbased, and the general rule under contract law is that each party has the power to breach a contract and (ii) the relations among members will, in most cases, involve#' 0*(( some degree of fiduciary duties under section 409, and such relationships (e.g., trustee of a trust, officer or director of a corporation) are typically subject to termination by the resignation of the person subject to the duty. To be sure, the parties must be able by contract to provide for damages or other remedies (e.g., covenants not to compete) if a member's withdrawal breaches the operating agreement. Under this view, however, the power to withdraw should not be capable of being contractually waived because it seems to allow a form of indentured servitude. The contrary view adopted by the ULLCA (and supported by one of the authors of this report) is that a member, like a shareholder of a corporation or a limited partner in a term limited partnership, should not have the power to withdraw as a member if that power has been relinquished in the operating agreement. Going even further, some have argued that the power to withdraw should not exist under the default rules, but should exist only if it is expressly provided for under the operating agreement. There will be many instances in which members of a managermanaged LLC will be passive investors with no fiduciary or other duties to the company. In those situations there appears to be no policy justification for permitting withdrawal where the members have agreed to waive this power by contract. Even where members have fiduciary duties, requiring them to remain members may be reasonable if that is their agreement, especially with respect to the duty to disclose information and the duty of loyalty. Most state LLC statutes preserve each member's power to withdraw, but these provisions were largely based on the concern that the power to withdraw was necessary for partnership tax classification. In view of the more liberal rules recently released by the I.R.S., Virginia is considering an amendment to its statute to allow withdrawal of a member only to the extent provided in the operating agreement. An additional problem arises under section 602 with regard to its application. By permitting an operating agreement to deprive a member of both the right and the power to withdraw (a distinction that will be lost on many lawyers), it creates many potential problems in interpreting the language employed in an operating agreement. For example, if an operating agreement states that "each member agrees that it will not withdraw prior to January 1, 1996," the use of the verb "agrees" probably will be interpreted as preserving each member's power to withdraw in breach of the agreement. If, instead, the agreement provides that "no member shall withdraw prior to January 1, 1996" (which is certainly a very common provision), the proper construction seems very much in doubt. Thus, section 602 seems a very significant trap for all but the very sophisticated drafter.  Y 7.` ` Need for Derivative Actions. Because section 410 of the ULLCA permits each member to bring a direct action against the company or any other member to enforce the operating agreement and the fiduciary duties and other provisions of the ULLCA, there does not seem to be a strong policy reason to have additional rights to bring derivative actions under Article 11. Confusion may arise because the direct action and the derivative action are subject to different requirements. In situations where the need for derivative actions is the greatest, i.e., where the members in control of the company are reluctant to pursue a lawsuit because of a conflict of interest, a direct action against the controlling members for breach of their duty of#'0*(( loyalty would be a sufficient remedy. In those situations where the decision not to sue is unrelated to any conflict of interest, the right of an individual member to pursue a third party in the name of the company would undercut the management rights of the majority of the members, especially where their judgment not to sue a third party is based on sound business reasons. Perhaps the derivative action and the direct action should be viewed as overlapping remedies that will give a plaintiff the choice to pursue either remedy if the requirements for bringing each kind of action can be satisfied in a particular case. In such situations, one plaintiff may bring a direct action while another plaintiff may bring a derivative action for the same alleged misconduct of another member. If this happens, consideration should be given to whether the derivative action should supersede the direct action (or vice versa) in order to prevent the defendant from having to pay the company's entire loss in the derivative action and then face another judgment for the indirect loss suffered by the plaintiff in the direct action. In situations where both forms of actions might be available for the same misconduct, the ULLCA could also be interpreted to give the defendant the right to petition the court to change the form of action after the filing of the complaint. The choice between bringing a direct action or a derivative action raises a number of other questions that are not clearly addressed in the ULLCA. For example, in the context of a membermanaged company, does each member have general agency authority to bring an action in the name of the company against a third party? The answer may be "yes" if the lawsuit is within the company's ordinary course of business. The existence of this authority is supported by section 301(a), which provides that each member is an agent of the company, and by section 404(a)(1), which provides that the members have equal management rights. If each member has this agency authority, then the derivative action seems entirely superfluous in a membermanaged company. On the other hand, section 404(a)(2) implies that all matters are subject to majority vote in a membermanaged company and that the commencement of a lawsuit is not within the individual authority of a member. (In fact, the wording of section 404(a)(2) might be interpreted to be inconsistent with any agency authority of an individual member to conduct any "ordinary course of business" transactions for the company.) Section 1101 provides that a member may bring an action in the name of the company "if the members or managers having authority to do so have refused," thereby creating at least the implication that no member has the individual authority as an agent to do so.  Y 8.` ` Written Operating Agreements. In general, we support the drafting committee's policy decision that operating agreements need not be in writing, but may be oral or reflected in the members' course of conduct. The official comments to sections 101 and 103 help to clarify that this is a default rule and that the members may reduce their operating agreement to written form and require that all amendments be in writing. However, there is significant controversy (including differences of opinion between the two of us) regarding whether the ULLCA should require that several specific subjects should be addressed only in a written agreement in order to be effective among the members. #'0*((ԌFirst, one of us believes that all agreements to make contributions should be in writing to be enforceable under section 401. The possibility of oral contribution commitments leaves the door open to swearing contests regarding a subject that goes to the core of the LLC: the personal liability of its members. The fact that creditors are given the right to enforce contribution agreements under section 402(b) makes this issue of critical importance to the maintenance of a credible liability shield. Second, others have commented that the default provisions regarding dissolution of the company under section 801(b)(3), and the requirements under section 404(c)(7) that all members consent to the admission of a new member, should be variable only by written agreement as a way of emphasizing their importance for partnership tax classification. A requirement of a writing would help to minimize the occasions on which the members might, be their conduct or informal discussions, acquire the corporate characteristics of continuity of life or free transferability of interests. This controversy emphasizes the differences among the statutes governing various kinds of business organizations. General partnership agreements are not required to address any subject in writing. Limited partnership agreements require that certain default rules can be varied only by written agreements: contribution obligations under RULPA section 502(a), profit sharing under section 503, distribution sharing under section 504, events of withdrawal under section 603, and continuation of the partnership under section 801. Corporations are permitted to alter statutory rules, if at all, only by written articles or bylaws.  Y 9.` ` Fiduciary Duties. An explanation of the conflicting views on the wisdom of trying to codify fiduciary duties in section 409 is beyond the scope of this report. These issues were debated at great length in connection with the RUPA project and the compromise that was struck in that debate was adopted by the ULLCA drafting committee. This seems a reasonable policy decision that we support in general. However, we believe that the limitations on contractual modifications of the duties set forth in section 103(b)(2), (3) and (4) should be reconsidered. In our opinion, the absence of personal liability on the part of the members (unlike general partners) justifies a less paternalistic policy in regard to protecting people against their own bargains. The limitations on modifying the duty of loyalty ("manifestly unreasonable") seem vague and likely to encourage litigation. As a policy matter, we believe that freedom of contract on this subject would make the LLC more useful in a number of situations involving conflicts of interest. For example, section 103(b)(2) would not permit a contractual waiver of a conflict of interest if a court were subsequently to determine that the waiver was "manifestly unreasonable". Also, there is an apparent conflict between section 409(b)(2) and (3), which prohibits a member from dealing with the company as a party having an adverse interest and from competing with the company, and section 409(e) and (f), which permits a member to lend money to the company and generally to act in the member's own interest. The probable intent is that the member's rights to acquire and enforce the rights of an adverse party are contingent upon :&0*(( the prior approval by the other members pursuant to the operating agreement under section 103(b)(2)(ii). Section 409 should be clarified to express this intent.  Y  10.` ` Grounds for Administrative Dissolution. One of the primary benefits of uniformity, it seems to us, is the confidence that can be generated among members and creditors that the LLC is not subject to peculiar or obscure problems affecting its continued existence. Section 809(1), however, permits the Secretary of State to dissolve the LLC in an administrative proceeding not only for failure to pay fees or file reports required by the Act (with which we agree), but also for failure to pay fees, taxes or penalties required under any other law of the state. As a policy matter, we believe that dissolution of the company is not a wise remedy for the failure to pay taxes or other legal assessments. The ULLCA should be an attractive choice of formation law where members reside in different states, but its attractiveness is severely undercut if all the other laws of the state must also be researched. Tax laws typically include a range of very aggressive administrative collection remedies that are sufficient to do the job without dissolving the company and causing injury to passive investors and third parties dealing with the company. Certainly the ULLCA should not be encouraging such nonuniform remedies. Similarly, section 1006(a)(1)(i) should also be modified to permit the revocation of a foreign LLC's certificate of authority only for failure to pay fees and file reports required by the ULLCA. If these changes were made, section 208(b)(3) and (c)(3) should also be changed to conform the Secretary of State's statements in a certificate of existence or certificate of authority.  Y  11.` ` Creditor's Enforcement of Contribution Obligation. Section 402(b) permits any company creditor to enforce the contribution obligation of a member, notwithstanding a compromise of the obligation agreed upon by the other members, if the creditor can demonstrate that it extended credit or otherwise acted in reliance on the obligation prior to notice of the compromise. We believe that this creditor enforcement right is too broad as a policy matter and reflects an outmoded view of creditor behavior. Third parties seldom, if ever, extend credit to a business entity in reliance upon promises of future contributions (or even contributions already made) without taking a U.C.C. security interest in the promise or at least obtaining the express agreement from the promisor to allow direct enforcement by the company's creditor. We would modify section 402(b) to allow creditor enforcement only where the company has assigned the obligation to the creditor or where the member has expressly agreed to the enforcement by the creditor. To allow enforcement in other situations, in our opinion, creates a windfall for the creditor and will encourage dubious assertions of reliance. In addition, the current rule in section 404(b) seems inconsistent with the rules of section 406, which allow the company to return a member's contribution free of any creditor claims so long as the company is solvent following the distribution. A creditor's reliance upon a member's actual contribution will not entitle the creditor to pursue the member after the contribution has been returned. The reference to section 404(c)(5) in section 402(b) also creates a very undesirable implication that a creditor's enforcement rights will not be affected by a notice of compromise#'0*(( given before the reliance unless the compromise was approved by all the members. The rule in section 404(c)(5) was intended as a default rule that can be modified by the operating agreement, so that contribution obligations can be compromised by a manager or a majority of the members if that is what the members agreed upon in their operating agreement. The crossreference to this default rule in section 402(b) seems to make it a mandatory rule insofar as a creditor's rights are concerned. This implication is hard to resist in light of section 103(b)(7), which prohibits the operating agreement from restricting the rights of creditors. We do not believe the crossreference to section 404(c)(5) was intended to have this effect and should be deleted.  Y  12.` ` Limitations on Distributions. The rules contained in section 406(c) address the date on which the company's solvency is determined for purposes of determining the propriety of distributions to members. Generally, it provides that solvency will be determined as of the date the distribution is authorized unless payment of the distribution is delayed beyond 120 days after authorization, in which event solvency is determined as of the date of payment. A special rule, however, is provided for a distribution intended to redeem or repurchase all or part of a member's outstanding distributional interest. In such a case, the company's solvency is always measured on the date a debt is incurred by the company to make the distributions, irrespective of how long installment payments may be deferred. In our view, this different treatment of deferred redemption payments vs. deferred current distributions may elevate form over substance and is difficult to justify on policy grounds. In each case, the company's creditors effectively lose some of the equity "cushion" from which they expect to be paid in the case of a liquidation of the company. From the perspective of the members, the rule applicable to distributions deferred more than 120 days may be easily circumvented if they cause the company to make a cash distribution and then immediately lend the amount of the distribution back to the company and take a note. Under the ULLCA, the insolvency of the company at the maturity date of that note would not trigger the restrictions of section 406. Moreover, it is a fairly common practice among small business owners to take distributions of current cash flow at different times during a year according to their individual needs, while setting up an account payable or giving a note to the member who allows his share of the distribution to "ride" with the company temporarily. The effect of the 120day rule on deferred current distributions may unfairly deprive that member of the deferred distribution if the company becomes insolvent before payment, and there will be no recourse to the other members for contribution under the ULLCA. For these reasons, we prefer to eliminate the 120day rule for current distributions and measure the company's solvency on the date the company incurs an obligation to make a distribution of any kind to the members.  Y!  13.` ` Optional Provisions in Articles. Section 203(b) permits the inclusion in the filed articles of organization of provisions going beyond the mandatory information required in subsection (a). Any such optional provisions will not override contrary terms in the operating agreement regarding the members' internal rights and obligations, pursuant to subsection (c). Furthermore, the inclusion of such optional provisions will not constitute constructive notice to third parties under the ULLCA except only as set forth in section 301(c), which provides that the articles may limit the statutory authority of a member or manager to convey the company's#'0*(( real property. The primary purpose of allowing optional provisions in the filed articles is to permit the members to induce thirdparty reliance regarding matters which will benefit the company. For example, the members may find it convenient to identify a specific managing agent in the articles who has the authority to sign leases, convey subdivided lots, or do other recurring transactions without the need to provide certified authorizations in each case. Section 209 provides that third parties may recover from the signers of the articles any losses suffered by reason of relying on the statements contained therein. Permitting optional provisions in the articles generated substantial debate within the drafting committee and between the two of us. The proponents of the ULLCA approach view optional provisions as a convenient method to avoid transaction costs and delays in some situations. The contrary point of view is that the potential for inconsistencies between the operating agreement and the articles of organization may produce a variety of disputes that can be avoided by limiting the articles to a few mandatory provisions. Also, several provisions in the ULLCA could be eliminated or simplified by limiting the articles to the few mandatory subjects in section 203(a), as was done in the Prototype LLC Act and the LLC statutes of at least four states. The matters addressed in the articles would be controlling so there would be no possibility of a "false statement" in the articles or conflicts with the operating agreement. Subsection (b) and (c) of section 203 could be deleted, together with subsection (c) of section 207 and section 209 in its entirety.  Y  14.` ` Information Rights. Section 408(a) generally gives to each member (and former members with respect to the period in which they were members) the right to inspect and copy all company records. Subsection (b)(1) obligates the company to furnish to each member, without demand, all information concerning the company which is reasonably required for the exercise of the member's rights and the performance of the member's duties. However, subsection (b)(2) goes too far, in our view, in obligating the company at the request of a member to provide additional information concerning the company's business unless it can show that the request is unreasonable or improper. We believe that this limitation is too vague to be of much help in resisting demands for information that are intended as harassment or fishing expeditions. The general right of access in subsection (a) is sufficient to protect legitimate interests in the default situation, in our opinion.  Y  15.` ` Indemnification Rights. Section 403(a) obligates the company to indemnify each member or manager for liabilities incurred by the member or manager "in the ordinary course of the business of the company or for the preservation of its business or property." This provision might be interpreted to require the company to indemnify a member for liabilities arising from an "ordinary course" activity, even if the activity violated the member's fiduciary duties under section 409. The fourth sentence of the official comment recites that conduct in violation of the duty of care would not be subject to indemnification. This comment is a noble effort to rectify the problem with section 403(a) but falls short in our view because (i) it is not supported by the text of the Act, (ii) it fails to mention the duty of loyalty, and (iii) it broadly states that a member will not be indemnified for any tortious conduct against a third party, which presumably includes ordinary negligence. This seems inconsistent with section 409, which#'0*(( provides that ordinary negligence does not violate a member's duties. In our view, a member's right to indemnification should match the duties articulated in section 409. In addition, we believe the duty to indemnify under section 403(a) should be measured by the member's or manager's actual authority, not apparent authority. For example, if the members of a membermanaged company have agreed that only one designated member should have the authority to act for the company, another member should not be indemnified for incurring a liability in breach of this agreement, even if the liability is incurred in the ordinary course of business. Conversely, if the members have authorized a designated member to undertake a transaction that is outside the ordinary course of business, the designated member should be indemnified for liabilities incurred within the scope of his or her actual authority. The third sentence of the comment states that a member or manager is entitled to indemnification only for acts within his or her actual authority, but this statement seems inconsistent with the text of the act.  Y 16.` ` Other Drafting Problems. The following provisions in the ULLCA contain ambiguities or vague terms that should be clarified but which, in our view, do not seem to implicate controversial policy issues:  YK ` ` The pronoun "them" in clauses (A) and (B) of section 801(a)(3)(i) should be changed to "all the remaining members".(#`  Y ` ` Section 404(c)(6) should be clarified to provide that a redemption or a repurchase required by the ULLCA does not require unanimous consent of the members.(#`  Y   ` ` Section 404(c)(12) should be clarified so that it does not apply to a sale of all the assets in the ordinary course of business or in the course of winding up the company under Article 8. (As a policy matter, perhaps this subsection should be deleted entirely.)(#`  YN ` ` Section 1005(b) appears to require the name of a foreign LLC to meet the "distinguishable on the records" test even if the foreign LLC adopts a distinguishable fictitious name for use in the state. We believe that the word "including" should be replaced by "or".(#`  Y ` ` The transition rules in section 1205(a)(1) contemplate that "grandfathered" LLCs include those that continue the business of a preexisting LLC that has been dissolved. This concept comes from the RUPA transition rules, and should apply only to partnerships formed under the UPA, which cease to exist in a technical sense whenever there is a membership change. The concept does not seem to apply to LLCs, which continue to exist as legal entities until terminated only by filings with the Secretary of State.(#` #'0*((  Y ` ` As a result of the policy decision that the operating agreement should override conflicting articles of organization as to matters involving the internal rights and obligations among the members, references to the articles were generally purged from the provisions of the ULLCA dealing with internal affairs. However, section 407(a) and (b) still retain references to the articles of organization which we believe should be deleted.(#`  Y_ ` ` The phrase "that properly could have been paid" should replace the words "in violation" at the end of section 407(b).(#`  VC (221drft.llc)