Catch You on the Flip Side: A Comparative Analysis of the Default Rules on Withdrawal from a Louisiana Limited Liability Company

AuthorAlbert O. 'Chip' Saulsbury, IV
Pages675-702
Catch You on the Flip Side: A Comparative Analysis
of the Default Rules on Withdrawal from a Louisiana
Limited Liability Company
PRELUDE
The greatest albums of all time, such as Sgt. Peppers Lonely
Hearts Club Band, Pet Sounds, and Revolver, are complete works
such that you can simply drop the needle on either side of the
record and never come across a bad track.
1
Similar to a record,
there are two sides in every transaction. When a member
withdraws from a limited liability company (LLC), the LLC and its
remaining members are on the ―flip side‖ of that transaction.
Unfortunately, the current default rules on the withdrawal of a
member from a Louisiana limited liability company contain several
inequitable provisions that cause the needle on both sides of the
record to scratch.
The default rules in Louisiana Revised Statutes section 12:1325
state that a resigning member is entitled to receive the ―fair market
value of the member‘s interest as of the date of the member‘s
withdrawal or resignation.‖
2
A very limited number of states
3
join
Louisiana in choosing the ―fair market value‖ approach, which
results in minority discounts being applied to the membership
interest in the limited liability company.
4
Although this valuation
method only applies if the LLC‘s articles of organization or
operating agreement do not provide for another method,
5
as the
popularity of LLCs grows, the aggregate level of sophistication of
LLC members will likely decrease.
6
Therefore, the effects of the
Cop yright 2011, by ALBERT O. ―CHIP SAULSBURY, IV.
1
. See ROLLING STONE: THE 500 GREATEST ALBUMS OF ALL TIME 914
(Joe Levy ed., 3d ed. 2005).
2
. LA. REV. STAT. ANN. § 12:1325 (Supp. 2010) (emphasis added).
3
. See NEV. REV. STAT. ANN. § 86.331 (West 2005); N.M. STAT. ANN. §
53-19-37 (West 2003); TENN. CODE ANN. § 48-216-101 (2002).
4
. For an explanation of the d ynamics of minority discounts, see GLENN G.
MORRIS & WENDELL H. HOLMES, BUSINESS ORGANIZATIONS § 38.08, in 8
LOUISIANA CIVIL LAW TREATISE 328 (1999) (―The minority discount is supposed
to reflect the market perception that minority shares, because of their lack of
control over corporate [or limited liability company] distributions, are worth
substantially less than majority shares in the same corporation [or LLC].‖).
5
. LA. REV. STAT. ANN. § 12:1325.
6
. ―Sophistication‖ within this Comment refers to a businessman‘s ability
to carefully organize and plan a business from a legal perspective. A
businessman‘s sophistication level is separate fro m knowledge of the market or
skill within a particular trade. As the overall level of sop histication of persons
choosing the LLC form decreases, a corresponding increase in the number of
676 LOUISIANA LAW REVIEW [Vol. 71
default rules become more important because they will control in
more instances.
Scholars consistently criticize the application of minority
discounts, and there is a national trend against their use.
7
This issue
is especially relevant and timely in the wake of the Louisiana
Supreme Court‘s ruling in Ca nnon v. Bertr and, which signals a
shift away from minority and illiquidity discounts of a
withdrawing partner’s interest in a partnership.
8
The Louisiana
Legislature derived the withdrawal provisions of the Louisiana
Limited Liability Company Act from the Louisiana Civil Code
articles on withdrawal from a partnership and codified the
approach taken by courts in jurisprudence prior to Cannon.
9
Because Louisiana partnership law shifted away from the exclusive
application of ―fair market value‖ and its resulting discounts,
10
the
Louisiana Limited Liability Company Act should follow the
principles of the law on which it is based by eliminating the ―fair
market value‖ standard.
11
On the flip side of the transaction, Louisiana‘s current default
rules on withdrawal of a member from an LLC also subject the
LLC and its remaining members to a single member‘s unilateral
desire to withdraw without agreement among the parties.
12
The
distribution resulting from the member‘s withdrawal can seriously
handicap the LLC‘s ability to effectively pursue success in the
marketplace and eventually lead the company to financial ruin.
13
To combat this defect, the Louisiana Limited Liability Company
Act should limit a member‘s ability to withdraw unilaterally and
possibly cause financial harm to the LLC.
The current default rules on withdrawal from a Louisiana
limited liability company produce not only unfavorable results on
both sides of the transaction but also results that are especially
detrimental to the LLC and its remaining members. Amendments
LLCs formed without stipulating specific procedures for the withdrawal of a
member will occur because these businesse s will be planned less carefully. With
more operating agreements silent on this issue, the default rules control in more
instances, and therefore their effects become more important.
7
. See MORRIS & HOLMES, supra note 4, § 44.19, at 54445; see also
Susan Kalinka, Dissocia tion of a Member from a Louisiana Limited Liability
Company: The Need for Reform, 66 LA. L. REV. 365 (2006).
8
. Cannon v. Bertrand, 2 So. 3d 393 (La. 2009); see a lso discussion infra
Parts III.A.
9
. See Shopf v. Marina Del Ray P‘ship, 549 So. 2d 833 (La. 1989).
10
. See Cannon, 2. So. 3d at 39697.
11
. See LA. REV. STAT. ANN. § 12:1325 (Supp. 2010).
12
. See discussion infra Part II.C.
13
. See discussion infra Part II.C.

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