What happens when the relationship between members of an LLC becomes acrimonious perhaps even the subject of litigation? Can a forced expulsion of a LLC member happen because of his or her actions? There are not easy answers to these questions.
The expulsion provisions in New Jersey’s Revised Uniform Limited Liability Company Act (“LLC Act”) statute are relatively new. However, case law has developed to show that the grounds for expelling another member are difficult to meet. That said, the hurdle is not insurmountable. First off, the LLC Act allows for disassociation of another member under a variety of circumstances including:
- where a member gave notice of withdrawal;
- where the member was validly expelled under a provision of the operating agreement;
- or where the member is a corporate entity or partnership that has dissolved or had its charter revoked.
N.J.S.A. § 42:2C-46(a)-(d)
In litigation, there is a more common provision for a forced disassociation. It exists under N.J.S.A. § 42:2C-46(e), and provides as follows:
“On application by the company, the person is expelled as a member by judicial order because the person:
(1) has engaged, or is engaging, in wrongful conduct that has adversely and materially affected, or will adversely and materially affect, the company’s activities;
(2) has willfully or persistently committed, or is willfully and persistently committing, a material breach of the operating agreement or the person’s duties or obligations under section 39 of this act; or
(3) has engaged, or is engaging, in conduct relating to the company’s activities which makes it not reasonably practicable to carry on the activities with the person as a member;” [N.J.S.A. § 42:2C-46(e) (emphasis added))].
IE Test v. Carroll
New Jersey’s Supreme Court has ruled that the burden of proof to proceed with expulsion is pretty high. The Court in IE Test laid out controlling principles that must be considered, chief among them that the company seeking to expel a member must show that it would be “unfeasible, despite reasonable efforts, to keep the LLC operating while the disputed member remains affiliated with it.” Additionally, the “wrongful conduct” to which the company is accusing the member must relate directly to the LLC’s operations.
Of course, even if the company succeeds in expelling a member under these provisions, this sets the stage for a potential forced buyout of the member’s interest, which ultimately is within the Court’s discretion. N.J.S.A. § 42:2C-47(c)(“A court that expels a member from a company … may order the sale of the interests held by such person … to either the company or to any other persons who are parties to the action if the court determines, in its discretion, that such an order is required by any other law, rule or regulation, or that such an order would be fair and equitable to all parties under all of the circumstances of the case.”).
Again, these are difficult issues. Therefore, if you are facing a forced expulsion, or need to address problematic LLC members, please give me a call. Also, please reach out with other shareholder and partnership questions.