Articles Posted in Operating Agreement | Shareholder Agreement

by

  • There is no statutory right to receive a distribution of profits from a limited liability company before it dissolves and winds up its affairs.  Distributions before then are discretionary.

  • Profit distributions are in the discretion of the majority members or commonly in the discretion of the managers of the limited liability company.

  • A minority member who is not receiving distributions may have a claim under the operating agreement or as an oppressed minority member if the majority refuses to make profit distributions.

Profit distributions are a frequent source of dispute among the members of a limited liability company.  The fundamental question of who decides when distributions are made, how much is made, and how to deal with the tax issues related to distributions, profits and losses can all be the source of conflict.

More Questions? Learn More.  You can call me at 973-602-3915 or use our Contact form to reach me by email.

The short answer to the question of when a limited liability company must distribute profits is that ‘it depends.’  And many minority owners of LLC interests are frustrated to learn that they have less control over the process than they anticipated.New Jersey minority oppressed LLC member attorney

Limited Liability Companies Often Do Not Have Operating Agreements

Entrepreneurs choose limited liability companies as the form of a new business far more often than corporations or partnerships.  They are cheap and easy to form and do not require the type of documentation and formalities that you generally see associated with other entities, corporations in particular. Continue reading

by

  • A ‘passive’ member with no rights or responsibilities in the management of a limited liability company cannot be held liable for refusing to participate in a PPP loan application.

  • Dissociated LLC members with no management rights can withhold their voluntary consent to proposed actions.

  • The waiver of fiduciary duties in an operating agreement is enforceable under New Jersey law if it is not manifestly unreasonable.

 

Jeanne Qin Lamme was a “passive” owner in the businesses owned by her late husband, Joseph Lamme.  Her status was as a dissociated member under New Jersey’s Revised Limited Liability Company Act meant that she had no management rights in the business.New Jersey dissociated LLC member may refuse to cooperate | New Jersey LLC disputes attorney

So when Jean Lamme refused to assist the business in securing a federal Paycheck Protection Program (PPP) loan during the Covid pandemic, did she set herself up for a lawsuit and damages? Not if she had no duty to cooperate.

Widow of Owner Refuse Request for PPP Loan Application

That’s the holding in an Appellate Division opinion in Lamme v. Client Instant Access, a lawsuit between Lamme and her late husband’s business associate, Joseph Vacarella.  It’s worth considering the decision because members of small businesses say “no” – frequently to the detriment of the business – simply because they can. Continue reading

by

  • Well-drafted business governance documents include buy-sell agreements to address deadlock among the owners.

  • A shotgun buy-sell is an offer that sets only the price.  It can be accepted as either an offer to buy out the other side or to sell to the other side at the price in the offer.

  • Shotgun buy-sells are an efficient means to set the price of a transaction, but may be flawed when the owners have unequal knowledge of the business or inadequate financial resources.

    What happens when the owners of a business can’t come to an agreement on an issue that is critical to the business? This happens when neither side has a majority. For example, when there are two 50-50 owners or when unanimous agreement is required and there are holdouts. Our discussion today concerns how the owners of a small business may use contractual arrangements to address this problem.

    These contracts are known generally as buy-sell agreements, and that is that they require one party to sell and the other to buy. Now, buy-sell agreements can also include shotgun sales, which is a buy-sell agreement that’s triggered by a deadlock. And we’re going to focus today on the shotgun sale. That refers to the type of agreement that allows one party to set the price and then allows the other the party to decide whether, based on that price, they’re going to buy or sell.

    Continue reading

by

  • The removal of a member from a limited liability company, known as involuntary dissociation, is permitted by statute in most states and may also be permitted in an operating agreement.

  • Removal is permitted when a member has engaged in wrongful conduct that has or will materially affect the company or when the member has repeatedly breached the operating agreement.

  • Removal may also be permitted when a member files for bankruptcy or if it is not reasonably practicable for the LLC to continue with them as a member.

There are plenty of choices that we make in our lives that we would like to undo. Some we can and some we can’t. Breaking up with a business partner is the topic of this discussion. More particularly, how a member of a limited liability company can be expelled from the business. We’ll cover the circumstances in which members can be expelled, when it’s easy and when it’s not.

Continue reading

by

  • Limited liability company statutes often require the unanimous approval of the members before actions may be taken outside the ordinary course of business or for any amendment of the Operating Agreement.

  • The requirement for unanimous action creates a minority veto – any member can veto the actions of the majority – often leading to deadlock.

  • States that have adopted the Uniform Limited Liability Company Act, including New Jersey, Pennsylvania and Connecticiut, require unanimous actions.  Other states, including Delaware and New York, permit major actions to be taken by simple majority vote.

These days we’re seeing a  political world in which we have a national politics that is very, very closely divided, and one or two people have tremendous control over the rest of the country.  It’s not just the Congress, but over everyone. And they’re basically, even though they only have one vote, they’re able to stop things, able to derail a process. They have a minority veto. Continue reading

by

  • An email from the sole owner of a limited liability company announcing that employees had become partners with a profit interest was not sufficient to constitute admission as a member of the LLC.

  • The fact that the party claiming an equity interest in an LLC had refused to execute an operating agreement was a strong indication that the issuance of equity was still the subject of negotiations.

  • A court is likely to consider the completeness of the terms of an alleged oral agreement to admit a new member; without sufficient details the agreement will be deemed incomplete and unenforceable. 

  • The issue of whether an individual is a member of a limited liability company is properly tried by a judge rather than a jury.

What does it take to make someone a member of a limited liability company?  The Revised Uniform Limited Liability Company Act (RULLCA) as adopted in New Jersey and most operating agreements contain some requirement for unanimous consent.  The requirement on unanimous consent reflects the policy underlying the “pick your partner rule” in smalll business organizations: no one should be forced to share ownership of a closely held business against their will.mail-1454731_1920-1024x1024

Unanimous Consent Required for Admission of New LLC Members

The contours of what is unanimous consent is often not clear, however.  Does a promise of admission as a member or partner constitute consent?  What about the formality of signing an operating agreement?  These are facts that vary by the case and the circumstances.

The line between equity owner and a highly compensated senior employee – sometimes with the title of partner – is often blurred, particularly in certain professions such as lawyers in which the non-equity or contract partner is a common occurrence.  In a case recently before the Appellate Division in New Jersey, the business at hand was a private equity fund and a senior employee. Continue reading

by

  • Managers of a limited liability company owe to the company fiduciary duties of loyalty and care, must act in good faith, and refrain from reckless or unlawful conduct.

  • A member who seeks information about a manager-managed limited liability company must state the purpose for the request under the Uniform Limited Liability Act.

  • In a dispute involving a family farm, the trial court exercises equity to look through the details of disputed loan payments and find that they were to benefit of the limited liability company and its members.

Some cases make you wince when you think about the underlying relationship.  This case in which a son sued his father over the repayment of a mortgage is one of them.  It comes from the Iowa Court of Appeals and is interesting from my perspective because the underlying statute is the same as applies here in New Jersey and because it demonstrates the scope of equity to reframe disputed issues into a more manageable solution.field-213364_1920-e1612533257149-1024x379

The dispute in Erwin v. Erwin (opinion here) addressed the dispute between Michael Irwin and his son, Richard, that grew out of the father’s attempt to pass the family farm without incurring tax liability.  The father and Richard’s mother, who owned the farm individually, formed a limited liability company, Erwin Farms II, LLC, in 2012 and passed the land to the company.  At the time of the transfer, the land was subject to a mortgage. Richard received a block of non-voting membership units.  The remaining membership units, including all of the voting units, were owned by the parents.

The operating agreement of the company  named Michael Erwin as manager.  In addition to the existing mortgage, after the land was transferred to the LLC, the Erwin parents took two loans for improvements.  By the time of the trial, those loans had all been paid. Continue reading

by

  • An agreement to arbitrate that is contained in the governance documents of a business, e.g, an operating agreement or shareholder agreement,  may result in multiple proceedings when the dispute ripens into litigation.

  • A party may seek to stay a pending federal court action based on a collateral arbitration proceeding that is part of a state court action under the abstention doctrine, but it is sparingly applied.

  • Parties to a business dispute may be required to simultaneously litigate in different forums when not all of the parties are subject to an agreement to arbitrate the dispute.

Multiple lawsuits from a business divorce may not be entirely commonplace, but it does happen when the controlling governance documents contain an arbitration clause, but there are outsiders not bound by the agreement to arbitrate that are involved in the dispute.  These may be former employees, agents, competitors or vendors.gavel-2492011_1920-1024x569

Simultaneous Arbitration and Litigation in Court

The result is that some of the parties may be obligated to arbitrate, or that some of the dispute may not be subject to the agreement to arbitrate.  Consider the case in which there are disputed events that occurred while the parties still had fiduciary obligations to each other – such as between partners or employer and employee – and those that occur outside the fiduciary obligation.  These might include unfair competition or claims arising from a competitor hiring someone under a restrictive covenant. Continue reading

by

  • There are circumstances in which a member of a limited liability company in most states may be expelled as a member from the company.  This is known as involuntary dissociation.

  • An action may be brought by the LLC seeking a court order of involuntary dissociation on the basis that the member has engaged in wrongful conduct that has or will harm the company, has repeatedly breached the operating agreement, or because it is not ‘reasonably practicable’ for the company to continue with him or her as a member.

  • Dissociated members lose their rights to participate in management, but retain their financial interest and a right to receive distributions. 

  • In litigation over an involuntary dissociation, a court may order a sale of the interests of a member to the LLC or to any other party to the litigation.

    Limited Liability Company AttorneysThe expulsion of a member is likely the most litigated issue in disputes involving members of a member of a limited liability company.  The expulsion, or involuntary dissociation, is a remedy for wrongful conduct or breach of the operating agreement. We represent majority owners when they are trying to remove a member and we represent the minority member who is fighting removal. Not all states permit removal or expulsion for misconduct and some recent decisions indicate that in the states that do, it will likely be harder than once thought.

Involuntary Dissocation of a Limited Liability Company Member

There was a belief, perhaps unreasonably so, that Courts were unwilling to keep people in business together when plainly the owners were no longer capable of maintaining a working relationship. The New Jersey Supreme Court, in the first decision by any state supreme court on the topic, held that the concept of “not reasonably practicable” to stay in business together means more than a personality conflict. It requires a structural inability to act, such as ongoing deadlock or significant wrongful conduct. Continue reading

by

  • Law firms should recognize that lawyer resignations and the loss of clients are inevitable in the modern law practice due to prohibitions on agreements that restrict competition.

  • Law firms can protect the interests of clients and the firm by adopting best practices that govern lawyer resignations.

  • Law firms should recognize the investments made in the firm’s intellectual property and adopt policies that limit misappropriation.

Law firms must survive in a world in which key employees are free to leave at any time and to take as much of the firm’s business with them as they can.  Many lawyers, motivated by the financial incentives that are part of their separation,  believe that there are no rules limiting their solicitation of clients, copying of key documents and compensation for their old firm.  This view may be mistaken, but sorting it out after the resignation or withdrawal is expensive, time-consuming football-1717630_1280-1024x682and threatens to draw off the time and attention of key managers.

The grab and go is the unexpected resignation without notice combined with the immediate unilateral solicitation of clients. Its corollary is the law firm lockout, in which a lawyer that has indicated his or her intention to leave is locked out of the firm and cut off from clients while the clients are intensely solicited by the firm.

Best Practices to Manage Lawer Resignations

Here is a list of some of 10 policies that a law firm should have in place before a key lawyer decides to move his or her practice.  But first, the reality check.  Lawyers will leave and lawyers will take clients.  Not only that, but lawyers have a right to leave and take clients.  The only issue on the table is managing the process.

Law firms, the individual lawyers that work there and the clients that we serve are better served by articulating a clear set of rules beforehand, by adopting key internal policies and by recognizing that resignation need not equate with conflict.  Lawyers and their former law firms should remember that life goes on after the departure.  But when one side tries to gain an unfair advantage over the other, however, life gets complicated and messy. Continue reading

Contact Information
Jay R. McDaniel, Esq.
(973) 602-3915
Weiner Law Group LLP
New Jersey Office
629 Parsippany Road
Parsippany, NJ 07054
New York City Office
90 Broad Street
New York, NY 10004
This newsletter may be considered advertising for legal services under the laws and rules of professional conduct of the jurisdictions in which we practice. The information on this site is of a general nature, is not intended as legal advice, and must not be taken as legal advice. We provide legal advice only to clients of the firm. You should not rely on the content of this article, but should consult a lawyer about legal issues. This letter does not establish any attorney-client relationship. We are are admitted to practice in the states of New Jersey and New York.

Attorney Advertising

Before making your choice of attorney, you should give this matter careful thought. The selection of an attorney is an important decision. If this letter contains inaccuracies or is misleading, you may report the same to the Committee on Attorney Advertising, Hughes Justice Complex, P.O. Box 37, Trenton, NJ 08625.

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

Please do not include any confidential or sensitive information in a contact form, text message, or voicemail. The contact form sends information by non-encrypted email, which is not secure. Submitting a contact form, sending a text message, making a phone call, or leaving a voicemail does not create an attorney-client relationship.

Copyright © 2023, Jay R. McDaniel, Esq.
JUSTIA Law Firm Blog Design