Minority Investors in LLCs: Preemptive Rights, Expulsion, Freeze-Out Mergers, and Other Key Provisions
Protecting Minority Interests, Choice of Entity in Litigation, Implied Covenants, Contractual Discretion, and More
Course Details
- smart_display Format
On-Demand
- signal_cellular_alt Difficulty Level
- work Practice Area
Corporate Law
- event Date
Thursday, June 9, 2022
- schedule Time
1:00 p.m. ET./10:00 a.m. PT
- timer Program Length
90 minutes
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This 90-minute webinar is eligible in most states for 1.5 CLE credits.
This CLE course will guide counsel advising LLC planners, managers, and investors. The panel will discuss recent cases involving contractual waivers of fiduciary duties, the implied covenant of good faith and fair dealing, and contractual discretion by the managers.
Mr. Sluka represents a broad range of individuals and entities in all phases of complex commercial litigation, corporate governance disputes, securities matters, and regulatory investigations. He has successfully represented prominent businesses and individuals from all industries in cases involving directors’ fiduciary duties, valuation of level 3 assets, material misrepresentations, and shareholders’ rights. Mr. Sluka regularly practices in New York State and federal courts.
Mr. McDaniel is an experienced business litigator and counselor who focuses his practice on business divorce, corporate governance and intellectual property disputes including copyright, trademark and trade secret litigation. He has represented publicly and privately held clients in a range of industries, from internet startups to established businesses in construction, entertainment, information technology, importation, distribution, banking and construction. Mr. McDaniel has focused on corporate governance disputes involving closely held corporations, often referred to as business divorce, since the mid-1990s. He has counseled businesses and their principal owners through complex business divorces in a broad range of industries and professions. These include both litigated and negotiated breakups of closely held corporations, limited liability companies and partnerships. Mr. McDaniel writes regularly on business divorce and is the editor and principal author of the Business Divorce Law Report.
Mr. Paul focuses his practice on counseling businesses, healthcare concerns and professionals with respect to limited liability company matters, general corporate matters, joint ventures, acquisitions and sales, fiduciary duty issues and financings. His clients include large-scale healthcare providers, technology companies, distributors, service providers and manufacturers of various sizes, as well as individual healthcare professionals and other professionals. Mr. Paul has lectured both locally and nationally regarding limited liability companies and other legal matters.
Mr. Wender has over 35 years of experience in commercial real estate and general business representation, representing a variety of borrowers with institutional lenders, Freddie Mac, HUD-insured loans and CMBS loan originators, involving hotels, mixed-use developments, automobile dealerships, equipment dealerships, medical and other office buildings, multifamily apartments and shopping centers. In addition, he has provided general business counsel to a hotel management company and currently acts as outside general counsel to a business group of automotive, truck and equipment dealerships and related businesses. Mr. Wender has provided counsel to both management companies and owners in connection with the negotiation of management agreements for municipally-owned hotels and private owners.
Minority owners in an LLC are, in many ways, subject to the whim of the majority, with limited statutory and common law protection. Those considering investment in an LLC, negotiating the operating agreement, in disputes with other members, or contemplating litigation should be aware of the limitation of protection for minority members.
Most state LLC statutes do not provide minority LLC owners with preemptive rights unless their operating agreement provides for them. Likewise, many LLC operating agreements give the majority the right to make capital calls and provide for potentially severe consequences if the minority members fail to meet those capital calls.
Some LLCs have provisions in their operating agreement that allow for the expulsion of members in certain circumstances, such as, for example, upon a majority or supermajority vote of other members. In some states, including those states adopting the Revised Uniform LLC Act, an LLC can request that a court expel a member based on a finding of wrongful conduct, willful and persistent breach of the operating agreement, or that it is not reasonably practicable to continue the LLC with that member.
A freeze-out merger is a combination of transactions in which the majority owners cause the entity, through a written agreement or plan of merger, to merge with and into a new entity, with a minority owner of the original entity receiving no ownership interest in the new entity, and the ownership interest being extinguished and exchanged for cash. While the majority owner must offer the frozen-out minority fair value for their interest, if the minority disagrees with the amount offered, the only remedy is an appraisal proceeding to determine by the court the fair value of the minority owner's interest.
Listen as our panel discusses recent cases involving contractual waivers of fiduciary duties, contractual discretion, and best practices in protecting the interests of minority owners and challenging managers' actions.
- Operating provisions that limit minority owner rights in LLCs
- Delaware law and recent cases involving contractual waiver of fiduciary duties
- Issues for minority investors in challenging management decisions
- Avoiding pitfalls and protecting minority interests in LLCs
The panel will review these and other critical issues:
- Negotiating operating agreement provisions for minority owners
- Methods to protect minority investors in LLCs
- Challenging LLC transactions and management decisions through litigation
- Choice of entity considerations from management and investor perspectives
