New York State recently enacted a bill to amend the notice publication requirements of limited liability companies and similar entities1 formed or doing business in New York State. The new law will become effective on June 1, 2006. Among other changes, the new law amends the limited liability company law2 by requiring, with certain exceptions, the disclosure of the names of investors with the ten "most valuable" membership interests in the limited liability company. The penalty for failure to comply with the publication requirement is (i) suspension of the authority of the entity to carry on, conduct or transact any business in New York State and (ii) a prohibition on bringing a legal proceeding in New York State, in each case during the pendency of non-compliance. The latter was the sole consequence under the prior law.
Although the bill has become law, a further amendment to the new law is currently before the legislature concerning possible significant revisions to be implemented prior to the June 1 effective date.
I. Publication Requirements For Entities Formed After June 1, 2006
A limited liability company formed after June 1, 2006 will have 120 days after its initial articles of organization become effective3 to publish a copy of the articles of organization or a notice containing the substance of such articles for four4 consecutive weeks in one daily and one weekly newspaper in the county where the company intends to be located.5 The company must then file proof of publication with the New York Department of State. The amendments contain new forms of a Certificate of Publication (for the company) and an Affidavit of Publication (for each newspaper) to be used for the purpose of filing the proof of publication.6
The most significant changes to the publication requirements involve the information which must be published and the consequences for failure to comply with these publication requirements.
a. Content Of Published Notice
Prior to the amendment, limited liability companies were required to publish a notice containing the name of the company, the date its articles of organization were filed, the county within the state where its offices would be located, a statement designating the Secretary of State as its agent for service of process, a dissolution date, if any, and the purpose of the business of the company.
After June 1, 2006, newly formed limited liability companies will have to include all the information previously required as well as (i) a more specific identification of the exact address of the offices of the company,7 (ii) the names of the ten persons who are "actively engaged in the business and affairs of the limited liability company and who are members of the limited liability company having the most valuable membership interests"8 and (iii) a statement that the inclusion of these names should not be construed as indicating anything with respect to the liability or lack thereof of the persons listed.9 There is no requirement to disclose the names of non-members who manage the company.
To determine the holders of the ten "most valuable membership interests," the company may choose to use any of the following: (i) the member's right to a share of the profits and losses of the limited liability company, (ii) the member's right to receive distributions from the limited liability company and (iii) the member's right to vote and participate in the management of the limited liability company.10 The amended statute states that the information in the published notice will be "presumed to be complete and accurate" and in full compliance with the statute, provided that any error was "not willfully made with the intention of deceiving the public."
If any of the information contained in the notice changes at any time after the publication of the first of the four weekly publications, the company need not update the information! Therefore, it appears that the use of previously-formed "shelf " companies will be permitted.
b. Consequences Of Non-compliance
Prior to the effectiveness of the amendment, the only negative consequence of failure to comply with the publication requirement was the inability to maintain legal action in New York until proof of publication was filed. However, under the new rules, a company that does not file proof of publication within the 120 day time limit will have its authority to "carry on, conduct or transact any business" in New York "suspended" during the period of noncompliance, effective upon the expiration of the 120 day period. This suspension can be subsequently annulled at any time upon the filing of proof of publication in substantial compliance with the law.11 However, it is unclear whether the annulment would be retroactive and relate back to the date of the suspension.
The statute provides that the failure to file proof of publication and suspension of authority to conduct business shall not "limit or impair the validity of any contract or act of such limited liability company." The statute continues: "...during the company's suspension for such non-compliance, the rights or remedies of other parties under any contract, act or omission of the suspended company or the right of another party to maintain any action or special proceeding on any such contract, act or omission or the right of the suspended company to defend any such action shall not be limited or impaired." It seems clear that a "suspended" company may not maintain any legal proceeding during the period of non-compliance. However, what is less clear are the other consequences of suspension. Some have expressed concern that persons who believed they were conducting business through a New York limited liability entity, with no personal liability, could lose the protection of the "limited liability" status for failure to comply with the publication requirement. Furthermore, although the new law provides for an annulment of the suspension upon compliance with the publication rules, it is not clear that the cure would be retroactive.
The following types of limited liability companies are exempt from the requirements relating to the publication of the names of certain members: "(i) an investment adviser as defined in the Investment Advisers Act of 1940 ("IAA") or a commodity pool operator or commodity trading advisor as defined in the Commodity Exchange Act ("CEA") or (ii) a collective investment vehicle or any direct or indirect subsidiary and affiliates thereof sponsored, advised or managed by an investment adviser, commodity pool operator or commodity trading advisor as set forth in item (i) of this sentence."12
In deciding whether to take advantage of this exemption by claiming "investment advisor" status, consider whether there may be adverse consequences because of inconsistent positions taken under federal or other state laws. In most states, investment advisers must still register with the various state regulators if they have a certain number of clients or provide specific types of services. Furthermore, in order to rely on some federal exceptions to registration requirements, a company may need to represent that it is not holding itself out as an investment adviser.
II. Grandfather Provisions
a. Grandfathered Entities In Compliance With Prior Law
A limited liability company formed prior to January 1, 1999 is automatically deemed in compliance with the new publication requirements. A limited liability company formed thereafter but before June 1, 2006 which was in compliance13 with the prior law's publication requirements will have no new publication requirements.
b. Grandfathered Entities Not In Compliance With Prior Law
Any limited liability company formed prior to June 1, 2006 which did not comply with the prior law's publication requirements has 18 months from June 1, 2006 to cure such non-compliance by publishing its articles of organization or a notice containing the substance of such articles "in the manner required...by this subdivision as in effect prior to such effective date,"14 followed by the filing of proof of such publication with the department of state. Failure to cure the non-compliance within 18 months will subject the limited liability company to suspension in the same manner and with the same limitations as non-compliant limited liability companies formed after June 1, 2006.15 1 In addition to domestic limited liability companies, the amendments also affect foreign limited liability companies, professional service limited liability companies, foreign professional service limited liability companies, limited partnerships, foreign limited partnerships, registered limited liability partnerships and foreign limited liability partnerships.
2 There are corresponding amendments to the partnership law.
3 Effectiveness occurs at the time such articles are filed with the department of state or at such later date specified in the articles. See Section 203(d) of the limited liability company law.
4 The prior law required publication for six weeks.
5 Appropriate newspapers will be designated by the county clerk. If no newspapers are designated in the appropriate county, newspapers in the next closest county must be used.
6 The forms of Affidavit and Certificate are contained in amendments to Section a-1 and e-1 of the limited liability company law.
7 If the address is not yet known, a statement to that effect must be included in the notice.
9 A memorandum in support of the bill, sponsored by New York State Senator Dean G. Skelos, explained that the bill would require up to ten individuals with the most "vested financial interest" to disclose their names to the public. According to the Skelos memorandum, this would help consumers protect themselves from "unscrupulous business people who conduct their affairs with immunity from personal liability under the guise of a business name that imparts no information as to the true identity of the persons behind such name."
9 The law provides that the specific liability of any individual is not increased by reason of such notice.
10 If there are less than ten names to include under any permitted calculation, the company must use the calculation resulting in the most names being listed .
11 Excluding the requirement that proof of publication must be filed within 120 days.
12 This is not limited to entities registered with the Securities and Exchange Commission. Under the IAA, an investment adviser is defined generally as a person who, for compensation, engages in the business of advising others, directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities. The CEA defines a commodity pool operator as, generally, an entity that solicits, accepts or receives property for the purposes of trading in commodities for future delivery on a contract market or derivatives transaction facility and a commodity trading adviser as a person who, for profit, advises others, directly or indirectly, as to the value of trading in (i) contracts on commodities for future delivery, on a contract market or a derivatives transaction facility, (ii) certain commodity options, or (iii) or certain leverage transactions.
13 Such limited liability company must have filed at least one affidavit of the printer or publisher of a newspaper with the department of state prior to June 1, 2006 to be deemed in compliance.
14 This language is unclear, as the "subdivision" referred to was not in existence prior to the effective date.
15 See Section I above.
Monica C. Lord is a Partner practicing corporate and securities law. Sidney Friedman is an Associate practicing general corporate law.