Involuntary expulsion of troublesome members under Florida's revised LLC Act.

Author:Nowak, Dennis A.
Position::Limited liability companies - Cover story
 
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Far too often, limited liability company (LLC) members fail to consider the all-too-real risks of future deadlock or dissension, and thus fail to craft an operating agreement providing for a reasonable and equitable mechanism for removing an unruly member. Fortunately, Florida's Revised Limited Liability Company Act (revised act (1)) contains several new provisions to facilitate the involuntary dissociation of a troublesome member. First, judicial dissociation, or rather, what the revised act refers to as judicial "expulsion," provides for the involuntary dissociation of a troublesome member upon application by another member or the company to the court. (2) While judicial expulsion is one of the more noteworthy changes to the revised act, a member can also be involuntarily "expelled" by the unanimous consent of the other LLC members (although expulsion by consent does not focus solely on troublesome members). (3)

Thus, whether by judicial fiat or unanimous consent of the other members, Florida LLCs' newly found ability to dissociate an unruly member makes it more attractive for companies to do business in Florida, particularly when an operating agreement fails to address the involuntary dissociation of a member.

Background and Effective Dates

The revised act was enacted in 2013 and took effect January 1, 2014, for new Florida LLCs and January 1, 2015, for all Florida LLCs. The revised act is a thorough overhaul of Florida's Limited Liability Company Act (old act) and is based on the Revised Uniform Limited Liability Company Act of 2006, as amended in 2011 (RULLCA). (4)

Like the old act, the revised act is a "default statute" in that it provides default rules that must be followed when there is no operating agreement; the operating agreement does not address a particular issue; or the operating agreement purports to modify or waive certain statutory rights and provisions that cannot be modified or waived under the revised act. (5) LLC members attuned to the statutory requirements will have comprehensive operating agreements intended to address significant default rules that may be altered and the most common issues that arise among the members, managers, and company. Nevertheless, an LLC's operating agreement may not address every default rule or issue that arises, such as the necessity of dissociating an unruly member and the mechanisms by which to do so.

Involuntary Dissociation Under the Revised Act (6)

Involuntary dissociation, or dissociation by expulsion, can occur under one of two circumstances. First, the operating agreement can prescribe a method by which a member may be involuntarily expelled. (7) However, absent a method for expulsion in the operating agreement, the members may unanimously vote to expel a member. (8) Expulsion by unanimous consent is only available if the LLC cannot lawfully carry on its activities with the expelled member; the expelled member has transferred his or her entire transferrable interest in the LLC; or the expelled member is a corporation or other entity that is dissolved. (9) Thus, expulsion by unanimous consent under the revised act arguably only applies to unruly members to the extent the lawful activities of the LLC can no longer be carried on.

Judicial expulsion, on the other hand, permits members of an LLC, with no contractual means of extricating themselves from a deadlock or other impasse, to apply to the court to dissociate a member who engages in "wrongful conduct" that "adversely and materially" affects the LLC's business or "willfully or persistently" commits a "material breach of the operating agreement" or for material violations of the member's duties under the revised act. (10) The revised act also authorizes dissociation by the court when a member engages in conduct "which makes it not reasonably practicable to carry on the activities and affairs with the person as a member." (11) Judicial expulsion, therefore, is particularly helpful when unforeseen conflicts arise after an LLC is formed and the operating agreement fails to include a method by which to resolve those conflicts....

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