Limited Liability Company laws in New Jersey and many states provide a cause of action for the oppression of minority members of company against those in control of the business.
Oppression of a minority LLC member is measured by the reasonable expectations of the minority member in those states that have adopted the Uniform Limited Liability Company Act
Courts assess reasonable expectations by looking at the operating agreement, the behavior of the members and purpose of the members in joining the business.
Majority rule in any limited liability company is not without its risks, in particular the potential for the majority owners to oppress the minority members, together with the difficulty the minority member is likely to have in recouping the investment in the business.
Minority members of a limited liability company may always voluntarily dissociate, or resign, as a member, at which point they give up the right to participate in management. As a “dissociated member,” the minority member who has resigned is entitled to his or her share of profits, but not to participate in decisions or get full information about the operations of the business.
Reasonable Expectations in Limited Liability Company Minority Oppression Cases
Here we look at Manere v. Collins, one of the more thoughtful recent cases considering minority oppression under the Revised Uniform Limited Liability Company Act (RULLCA) in which the court held that the touchstone of oppression is the frustration of the minority member’s reasonable expectations, an approach taken in New Jersey, New York and other states in oppression cases involving corporations.
The court not only adopted the reasonable expectations standard, but identified the factors to be considered in determining whether oppression has occurred.
Limited liability companies became the small business entity of choice, but the rights of minority members were subject to harsh statutory rules. Unless contact between the parties failed to grant the minority member who been treated unfairly some recourse, there often was no remedy. In fact, some of the earliest adopters of LLCs as an acceptable form of business remain hostile territory for minority members.
Asked to consider a claim for minority oppression, many courts viewed the absence of any cause of action for minority oppression in the statute as clear indication that it was not intended to be part of the law or the remedies available. This was true in New Jersey and other jurisdictions.
The RULLCA as it was developed by the Uniform Law Commission, and more particularly the 2013 amendments, now have been adopted in about half the states, softened the statutory regime to afford minority members a remedy for oppression.
Nearly all states have long recognized a claim for the oppression of minority shareholders in a closely held corporation. But as the overwhelming majority of new businesses are closely held limited liability companies, the disputes about power abuses increasingly occur in the context of LLCs rather than corporations; and the terms “oppression” and “reasonable expectations” increasingly appear in cases involving limited liability companies.
Minority LLC Member Asserts Oppression Claim Against Majority
The Connecticut Court of Appeals’ decision in Manere v. Collins demonstrates how the principles developed in the context of close corporations are becoming the standard in many instances in LLC disputes.
The minority member in Manere sought a court order dissolving the LLC under the Connecticut Uniform Limited Liability Act, which comes essentially verbatim from the Revised Uniform Limited Liability Company Act of 2006, last amended in 2013.
The RULLCA, as adopted in Connecticut and New Jersey, provides that a member may sue for
“an order dissolving the company on the grounds that the managers or those members in control of the company: … have acted or are acting in a manner that is oppressive and was, is, or will be directly harmful to the applicant ….”
“Oppressive” is not defined, however, in the uniform statute. The Manere provided the court of appeals its first opportunity on the subject, and the court’s analysis parses the standards that might be applied. Moreover, because the RULLCA is a uniform act, interpretations of courts in other states that have adopted the uniform law should matter.
For example in the jurisdictions that have adopted the Revised Uniform Limited Liability Act, the decision is given more weight as precedent.
The Manere court analyzes the concept of oppression by parsing the RULLCA’s official comments and considers the two principal approaches to identifying oppressive conduct before adopting a standard based on the reasonable expectations of the minority members.
Court Rejects Fair Dealings Standard in Oppression Cases
The court rejects the standard based on “fair dealings,” which considers misconduct in reference to the normal behaviors of ordinary business conduct, specifically looking at whether the conduct
- Is burdensome, harsh and wrongful;
- shows a absence of probity and fair dealing in the affairs of a company to the prejudice of some of its members;
- is a visible departure from the standards of fair dealing, and a violation of fair play on which every shareholder who entrusts his money to a company is entitled to rely.
Ultimately, the Manere court uses a definition based on the reasonable expectations of the minority member, judged from the time of the formation of the entity. When the conduct would contradict those reasonable expectations, it will be found to be oppressive.
The court interpreted the official comments as having tacitly adopted the reasonable expectations standard. That standard is applied, the court notes, in New Jersey, Maryland, anew York, North Carolina and Minnesota. Other courts that have since adopted the reasonable expectations standard include Pennsylvania, Iowa and Washington.
Reasonable Expectations Factors
The court identifies a number of factors to ascertain if conduct did not comport with the minority’s reasonable expectations, whether:
(i) contradicts any term of the operating agreement or any reasonable implication of any term of that agreement;
(ii) was central to the plaintiff’s decision to become a member of the limited liability company or for a substantial time has been centrally important in the member’s continuing membership;
(iii) was known to other members, who expressly or impliedly acquiesced in it;
(iv) is consistent with the reasonable expectations of all the members, including expectations pertaining to the plaintiff’s conduct; and
(v) is otherwise reasonable under the circumstances.
These factors, the Manere court observes, may also change over time.