3.3 Dispute Resolution

• Library: Limited Liability Companies in Virginia (Virginia CLE) (2017 Ed.)

3.3 DISPUTE RESOLUTION

3.301 Dissension and Deadlock Among Members.

A. In General. As in any business, dissension and deadlock among members of an LLC usually result in disastrous consequences. Existing statutory and case law is ineffective in preventing or resolving these types of conflicts. Thus, pre-organization planning is important to prevent or provide mechanisms to address future conflict situations. The operating agreement allows the members of an LLC to address future management problems or feuds among members. The following are common alternatives that may be used to deal with dissension and deadlock.

B. Buy-Out Arrangements. Dissension or deadlock often occurs in a small organization in the following situations: (i) when a member transfers all or part of his or her interest to a third party without the consent of the other owners; (ii) when a member ceases to work for the entity due to termination of employment, retirement, or disability; or (iii) when a member dies or transfers his or her interest to an uninterested heir. The problems associated with dissension resulting from these events are typically handled through a buy-sell arrangement or similar transfer restriction agreement.

The Virginia LLC Act imposes certain transfer restrictions. The consent needed for an assignee of a membership interest to become a member of the LLC is different for manager-managed LLCs and member-managed LLCs. In a member-managed LLC, unless otherwise provided in the articles of organization or operating agreement, the assignee of a membership interest in an LLC is prohibited from becoming a member without the consent of a majority in interest of the remaining members (other than the assignor member). ⁸⁸ In a manager-managed LLC, unless otherwise provided in the articles of organization or operating agreement, the assignee of a membership interest in an LLC is prohibited from becoming a member without the consent of a majority of the member-managers (other than the assignor member) of a manager-managed LLC of which one or more members is a manager. ⁸⁹ Without this consent, an assignee is entitled to receive the share of profits and losses and distributions that the assignor would have been entitled to receive

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but is not entitled to participate in the management and affairs of the LLC or to exercise any rights of a member. ⁹⁰

Notwithstanding this statutory restriction on transfer, it is often desirable to have traditional buy-sell provisions or transfer restrictions in the operating agreement or in a separate agreement. These provisions can be similar to cross-purchase or stock redemption agreements that are common in closely held companies.

C. Arbitration. Arbitration has become a widely used technique for resolving disputes in a small business. Some of the advantages of arbitration include: (i) it is generally quicker and less expensive than the judicial process; (ii) the award can be tailor-made to resolve a dispute, while in the judicial process it is generally a winner-take-all result; and (iii) it uses a private setting designed to promote an amicable solution and to ensure privacy. Some of the disadvantages are (i) there is generally no right of appeal; (ii) the agreement to arbitrate may limit some of the expected incidents of trial such as discovery; and (iii) the traditional rules of law and evidence may not be applied, making the outcome more unpredictable.

Under the Virginia Arbitration Act, ⁹¹ an agreement to arbitrate is valid, enforceable, and irrevocable, except upon grounds that exist at law or in equity for the revocation of any contract. ⁹² Submission of any claim or controversy to arbitration pursuant to an agreement to arbitrate is a condition precedent to instituting a suit thereon. Therefore, to avoid subsequent expensive and time-consuming litigation, the arbitration provision should make the arbitration award binding on the parties and require the submission of the arbitration award to a court of competent jurisdiction for entry of a final order confirming the arbitrator's decision.

The arbitration provision should also set forth...