The rights of minority members in a limited liability company (LLC) can be protected to various degrees by both statutory law and the operating agreement of the LLC (Agreement).  A minority member, who may be subject to certain risks as the holder of a non-controlling interest, can ensure that his rights are carefully framed and safeguarded through several methods of operation in the Agreement.

The provisions of the Agreement can be expanded or constricted upon consent of the members of the LLC to confer rights to minority members. For specific actions, the Agreement can institute special voting requirements – either through supermajority or unanimous consent – to account for the interests of all members of the LLC. The Agreement may contain provisions that limit the compensation of managing members or provide the option of a buyout only in certain circumstances and at an agreed-upon value. From a procedural perspective, minority members can be authorized to bring an action against a member or manager for wrongdoing. The Agreement can contain language specifying the process for taking action against a member, or moreover, authorize the removal of a manager or managing member by a minority member if certain conditions occur (such as inability to meet financial objectives).

The minority interests of an LLC may have further protections envisioned by the revised LLC statute in California. The limited liability company act in California was replaced as of January 1, 2014 with the California Revised Uniform Limited Liability Company Act (RULLCA), which is applicable to all LLC activity occurring after the effective date. The default provisions require that certain actions receive the approval of all the members of the LLC, including, among other things, the sale, lease or exchange of a majority of LLC assets, and actions that are outside the “ordinary course” of business. This clause, which mandates unanimous approval for major activities by the LLC, ensures that even minority interests are represented as a default rule.

Similarly, RULLCA expressly outlines the fiduciary duties owed to the LLC and to the other members, including minority members. Specifically, members owe the duty of loyalty, the duty of care and any “other fiduciary duty.” RULLCA permits modification, but not annulment, of the duty of loyalty upon full disclosure and informed consent of all members as it pertains to such modification.

Many states have recognized fiduciary duties owed to members, including minority members, that have developed under statutory or case law. The explicit provisions governing fiduciary duties in RULLCA are significant, particularly for minority members, who may need to assert the existence of fiduciary duties in situations that threaten their interests. This may include actions taken to devalue the minority member’s interest, isolate the minority member from significant business decisions, effect a buy-out using deceptive tactics, or disallow access to books and records.

Contact Shane Coons at 949-333-0900 or visit his website at www.ShaneCoonsLaw.com to find out more about his practice.