Unanimous Consent of LLC Members Not Required to Continue Company

Limited liability operating agreement
It may take a unanimous action of the members of a limited liability company to dissolve the entity or to change the date on which the company will dissolve according to the terms of its operating agreement. But unless the Operating Agreement specifically requires the members to act unanimous to extend the company, a simple majority may suffice.

That was the holding of the New Hampshire Supreme Court in McDonough v. McDonough, a case in which one of the members of this family business attempted to enforce a dissolution provision in the operating agreement to force the purchase of his shares.

Limited Liability has Limited Term of Existence

The limited liability company’s operating agreement provided that the company would have a term, and that it would dissolve on September 2015. Brother Patrick wanted the company to dissolve, but the other two brothers Matthew and Patrick voted pursuant to a provision in the operating agreement to extend the life of the LLC. The clause at issue provided that “The Company shall have a term beginning on the date the Certificate of Formation is filed . . . and shall continue in full force and effect for a term of twenty (20) years, unless sooner terminated or continued pursuant to the further terms of this Agreement.”

Limited liability companies do not contain a termination date unless the operating agreement or certificate of incorporation so provides. The members in many states can include a specific term as part of the certificate of formation but apparently did not do so in this case.

The minority brother, meanwhile, argued that unanimous consent of the members was required. Because the operating agreement provided for a specific date of dissolution, he contended, any change in that date constituted an amendment to the operating agreement. Both parties moved for summary judgment.

Court Distinguished Operating Agreement from Certificate of Formation

The Court drew the distinction between the Certificate of Formation, which puts the world on notice that the company is operating as an LLC, and the operating agreement, which defines the relationships between the parties. The legislature had not specifically provided that the continuation of a limited liability company beyond its expiration date would require a unanimous vote, so the Court turned to the language of the operating agreement.

The Court reasoned that the statute specifies the decisions that must be made by a majority and those for which a simple majority is sufficient, and held that it did not resolve the dispute. Applying the terms of the operating agreement, the court reasoned, there was no indication that a unanimous vote was required.

The minority brother also argued that he was now bound to his brothers for as long as they continued to extend the life of the company, since there was no way for him to retrieve his investment. The court did not reach the issue of what might be a reasonable remedy for that complaint, if any, because it was not adequately preserved below.

The result might have been different under some other statutes. The Revised Uniform Limited Liability Company Act, as adopted in New Jersey, requires unanimous consent for acts “outside the ordinary course of the company’s activities.” N.J.S.A. 42:2C-37. See Model Act ยง 40(c)(3)(A). Under New York and Delaware law, meanwhile, permit a dissolution or merger of an entity by a simple majority, but are silent about acts outside ordinary realm of the company’s operations and do not contain language that would appear to prevent a similar result.

Of court the members of a limited liability company can agree on any procedures for dissolution, or for continuing the limited liability company.

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