Articles Posted in Dissociation | Explusion

Conflict and Negotiation Case Study: The Importance of Sincerity
One of the hardest things about being an effective negotiator is the ability to leave your ego at the door.  We need to listen, not impress.

Seasoned Negotiators, Effective Apologies

As negotiation trainer Jim Camp warns, an effective negotiator learns how to let the other side be “ok,” even when you’re not.  The fact is that no matter how well we listen, no matter how well we employ our negotiator’s tool kit to learn the real interests of the other side, we’re going to make mistakes.

New York | New Jersey Oppressed Shareholder Limited Liability Company atorneys
Reading through a recent court opinion out of the New York Supreme Court, I am struck by the way the law has diverged in corporate governance litigation.  There are two distinctly different approaches to the business divorce. Crossing the Hudson can make a world of difference in operating a closely held business.

Business Divorce State by State

Understanding the different approaches taken by the courts of different states is something that should be considered by business owners not just when they form the business, but as they work through the inevitable conflicts that are part of running a business.

locked door
Oh, the fine art of the lockout. For a business divorce litigator, a lockout or expulsion of a minority member is a relatively common occurrence. Managing the lockout, from either the majority or the minority’s perspective, is a key issue that will set the tone of the litigation.

WHY LOCKOUTS MATTER

The minority who is locked out of a business has a very clear disadvantage. In a closely held business, whether it is a limited liability company, a corporation or a partnership, most principals participate in the day-to-day management of the business. A lockout separates the minority from management.

  • The Revised Uniform Limited Liability Company Act adopted in New Jersey permits a court to expel a member of a limited liability company when it is not reasonably practicable for the company to continue with that individual as a member.

  • Expulsion, known as involuntary dissociation, based on the not reasonably practicable standard requires a showing that there is a structural impediment to the members continuing in business together, such as deadlock.

  • When the company is able to make decisions and pursue its business purpose, the not reasonably practicable standard does not exist, whatever the level of animosity among the members.

070116_1250_PartiestoAr1The subject of the Appellate Division’s recent decision in Ames v. Premier Surgical, LLC, Docket No. A-1278-15T1 (June 29, 2026) is who decides whether a dispute is subject to mandatory arbitration. But the nature of dispute here suggests a cautionary tale about withdrawal and valuation, and what happens when the exit rules from a business don’t have clear valuation provision accepted by all as fair.

Limited Liability Company Valuation Dispute Triggered by Member Departure

The direction that you’re headed at the time certainly determines the parties’ perspective in business divorce and succession cases. Here the office to buy a retired surgeon’s shares was just 2.5 percent of his demand, and only about 13 percent of what the membership units cost 15 years earlier.

supreme-court-building-1209701_640

The New Jersey Supreme Court will consider the standards for expulsion of a member from a limited liability company.  The Court granted certification   in  IE Test, LL27518-ie-logo-colorC v. Carroll, Docket NO. A-6159-12T4 (N.J. Super. App. Div., March 17, 2015)(see our discussion here.) The opinion construes N.J.S.A. 42:2B-24(b)(3)(a) of the now repealed Limited Liability Company Act.

The language, however, is nearly identical to that found in New Jersey’s current LLC law, the Revised Uniform Limited Liability Company Act (RULLCA) N.J.S.A. 42:2C-46(e)(3), which governs the involuntary dissociation of members.  Here the court affirmed the expulsion of the defendant based on the impracticability of the business continuing with him as member. the now-repealed Limited Liability Company Act.

Seven-Factor Test Applied to Expulsion

New Rhino
 

Removal of LLC Member May Be ‘Prospective’ Conduct

In what is probably the most significant appellate decision involving New Jersey limited liability companies in a decade, the Appellate Division held that wrongful conduct is not required to expel a member from the LLC, nor is the member entitled to be paid for the value of the interests.

On the contrary, the opinion in All Saints University of Medicine Aruba v. Chilana, Docket No. A-2628-09T1, App. Div Dec. 24, 2012, makes clear the standard can be much lower: conduct that makes it not reasonably practicable to continue the business with the member. The former member, moreover, cannot compel purchase of their interests. They are relegated to the status of assignee, forfeiting all of their management rights but still retaining their financial interest in the business.

Removal of Members in Business Divorce Cases

Expelling a member from a New Jersey limited liability company requires a judicial order, unless the LLC’s operating agreement contains specific provisions that permit for the expulsion of members. Litigation over the expulsion of members, referred to in the New Jersey Limited Liability Company Act as involuntary dissociation, typically focuses on wrongful conduct by the member whose ouster is sought.

 

Continue reading

Landmark Decision Will Make Removal of Members Eaiser

https://www.google.com/imgres?imgurl=https%3A%2F%2Fallsaintsuniversity.org%2Fwp-content%2Fuploads%2F2018%2F09%2Fasu-logo.jpg&imgrefurl=https%3A%2F%2Fallsaintsuniversity.org%2F&docid=S7LrSu0qSDoE6M&tbnid=t3s2NP9t826MTM%3A&vet=10ahUKEwiEirvLkJbjAhXSVs0KHYf2Dd8QMwhaKAcwBw..i&w=571&h=117&safe=off&bih=1057&biw=1920&q=all%20saints%20university%20school%20of%20medicine&ved=0ahUKEwiEirvLkJbjAhXSVs0KHYf2Dd8QMwhaKAcwBw&iact=mrc&uact=8Many limited liability company litigators have presumed that to expel a member from a New Jersey limited liability company you must establish wrongful conduct such as dishonesty or involement in a a competing business. And moreover, if the case is successful, the next assumption was that the company must buy back the interest of the ousted member

Both the trial court and the attorneys involved in All Saints University of Medicine Aruba v. Chilana, Docket No. A-2628-09T1, App. Div Dec. 24, 2012 (read decision below), seem to have made the same assumptions. The appellate court, however, in this recent decision made clear that neither is accurate.

Limited Liability Company Act Permits Expulsion Through Involuntary Dissociation

Similar situations actually arise with some frequency. One of the members of an LLC, for whatever reason, becomes a hindrance to the continued operations of the business. Perhaps the LLC needs capital and the member will not, or cannot, contribute their fair share. Perhaps the LLC relies on the members working in the business on a daily basis and one of them stops coming to work.  (Editor’s note: The Supreme Court has drawn portions of the reasoning of the Apellate Division into question in its 2016 decisions in IE Test v. Kenneth Carroll.  Read our coverage of the decision here.)

Continue reading

friend-request
fb-friends-lead

Is it ok for lawyers to have FaceBook friends who are judges? Francis Pileggi, a Delaware corporate litigator writes about a recent Ohio professional ethics opinion that says it’s alright that FB friends are different than real friends, which is sometimes true and sometimes not.  (Blog Post here)

Lawyers Use FB to Argue

The problem is that it assumes that FB is used by the lawyer only for personal matters and fails to consider just how much influence someone might wield from their posts. I wouldn’t want my adversary posting matters relevant to my case so that they can be read by the judge, nor would I want him or her to use FB posts to build credibility.

Attorney for Buy-Sell Agreement

I often find myself counseling caution to business owners that want to use equity to reward or attract key employees.  The reason, quite simply, is that if the relationship sours, the employee not only has to be fired but you then have to deal — at best — with a disgruntled former employee as owner or, more likely, he or she likely will have to be bought out.

It’s Not Easy to Fire the Owner-Employee

To get a sense of how difficult these circumstances can be, let’s look at Ross Holding and Management Co. v. Advance Realty Group (Ross Holding v. Advance Realty (Del).pdf), a case recently decided in Delaware construing New Jersey law.  Advance Realty Group managed real estate properties on the East Coast and awarded membership interests to key managers.  The managers received “Class A” general ownership units and “Class B” units reserved for management.  Reading between the lines of the opinion, it seems that a new investor came into the business and the old management team got their walking papers.

Contact Information