We’ve talked before about the new LLC Act in Connecticut (which goes into effect in July 2017) here and here. The new Act will have a provision allowing a member to seek a court order expelling another member from the LLC. It’s a remedy that should help keep more limited liability companies alive rather than dissolved by court order. To expel a member, the plaintiff would have to show one of the following:
(1) The member engages in wrongful conduct that has or will adversely and materially affect the LLC;
(2) The member materially breaches the operating agreement or his or her duty in a willful or persistent manner; or
(3) The member engages in conduct in the LLC’s affairs that makes it not reasonably practicable to carry on the LLC’s affairs with the person as a member.
While there exists some Connecticut law, for example cases under the Uniform Partnership Act, which will help courts analyze the third factor’s “reasonably practicable” element, the New Jersey Supreme Court has offered up some guidance. New Jersey has the same LLC provision and its highest Court recently created a seven-factor test to assess whether an LLC can “reasonably” carry on, notwithstanding a member’s conduct. (Lawyers love “tests”) The factors are:
(1) the nature of the LLC member’s conduct relating to the LLC’s business;
(2) whether, with the LLC member remaining a member, the entity may be managed so as to promote the purposes for which it was formed;
(3) whether the dispute among the LLC members precludes them from working with one another to pursue the LLC’s goals;
(4) whether there is a deadlock among the members;
(5) whether, despite that deadlock, members can make decisions on the management of the company, pursuant to the operating agreement or in accordance with applicable statutory provisions;
(6) whether, due to the LLC’s financial position, there is still a business to operate; and
(7) whether continuing the LLC, with the LLC member remaining a member, is financially feasible.
Expulsion cases are certain to be fact-intensive, and costly to litigate. This test should be the framework for any attorney meeting with a client who, as a member of an LLC, seeks some protection or relief from another member who is not carrying his or her fair share, or is engaging in certain conduct that may not be “wrongful” but nevertheless is the type of conduct that should result in the member losing his status as a member of the LLC. Marshaling the facts around these seven factors will help the client and lawyer make an informed decision whether to proceed with litigation or work harder towards an alternative solution.