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.
Probably the most litigated issue in my practice involves the expulsion of a member of a limited liability company in response to some 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 – known as involuntary dissociation – for misconduct and some recent decisions indicate that in the states that do, it may 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