Whenever someone is referred to us because they are in a dispute with a member of their LLC or another shareholder of a corporation, the word dissolution must enter the discussion. But like a marital divorce, we know dissolution gets ugly, especially in closely-held businesses or family businesses, and never solves the underlying problems. We always try to find a way to avoid litigation but sometimes that is the client’s only recourse and a lawsuit seeking dissolution of the company the only path. But if Connecticut adopts the new Limited Liability Company Act, LLC members may have another remedy that corporate shareholders have always enjoyed – the fair market buyout of another’s interest, thereby keeping the business alive, and keeping people employed. The ValueAdder Business Valuation Blog has an easy-to-understand explanation of fair value here.
First, let’s consider the Connecticut corporation act. Under that law, shareholders involved in a corporate dissolution lawsuit can file an election to purchase the other shareholder’s interest in the corporation. Section 33-900 of the Connecticut General Statutes allows the corporation or one or more of its shareholders to purchase the plaintiff’s shares at fair value by filing an election to purchase the shares within 90 days of the lawsuit being filed. The statute even allows the court to accept a late-filed election. Once the election is filed, the shareholders and the corporation may agree on the shares’ fair value and the terms of the purchase. And if they don’t agree, the court can hold a hearing to make the determination. If successful, the ideal situation is the corporation continues, and the plaintiff (almost always a minority shareholder) goes away having been paid in cash for his or her shares.
The “election to purchase” is a great tool when a minority shareholder files a lawsuit because they are being oppressed. Minority shareholder oppression is when a majority shareholder uses his or her control over the corporation to minimize the minority’s participation in the company or reduce their share of the profits, typically while breaching their fiduciary duties. The new LLC Act, while it won’t have an express provision for buyout, will allow a judge hearing an LLC dissolution action to order some other remedy. Because dissolution is an equitable proceeding, an equitable buyout of the other member(s) interests should be one remedy that lawyers seriously consider when representing harmed minority members.
While the new LLC act does not have specific provisions for this process, we see the corporate buyout procedure becoming a popular remedy for creative lawyers to pursue that are representing LLC members in dissolution actions. The “oppressed” minority member can effectively compel the other members to buy out his or her membership interests at fair value. It’s a solution to LLC dissolution.