When The Marriage is Over: Disassociation and Expulsion of a Member From a Limited Liability Company
- On April 19, 2017
Business “partnerships,” like marriages, always begin with dreams of a long, happy life together. Unfortunately, they too often end in acrimony, in-fighting and ultimately dissolution. In the business context, specific to closely held entities and smaller limited liability companies, New Jersey law provides for resolution of such disputes without ringing a death knell for the company.
New Jersey’s law governing the management, operation, rights and liabilities of limited liability companies is set forth in the Revised Uniform Limited Liability Company Act, N.J.S.A. 42:2C-1 et seq. (“Act”). Similar to marriage, a business divorce often occurs due to changing circumstances over time. Any well-formed limited liability company will have an operating agreement to assist in navigating the rough seas that may come. If that is not the case then where disagreements arise and “partners” simply can no longer work together, the Act provides for certain remedies to both the company and its individual members without terminating the business.
The Act, at Section 46, provides for the disassociation of a member from the company without having to formally dissolve, terminate or otherwise end the business. Indeed, the company’s operating agreement may expressly provide for provisions which will trigger such disassociation of any owner/member. Even without such contractual provisions in an operating agreement, Section 46 sets forth specific events, thresholds and causes for potential disassociation of a member. Included within that litany, and most frequently cited, is that the member at risk of exclusion has engaged in wrongful conduct adversely affecting the business; or has willfully and materially breached the operating agreement; or, circumstances between the members and the company “make it not reasonably practicable to carry on the activities with the person as a member”. See N.J.S.A. 42:2C-46 e (1) through (3). The purpose behind this provision of the Act is to preserve the corpus and life blood of the business when one or more of its members act illegally, improperly or materially detrimental towards the purpose and future success of the company.
In such an instance of a “corporate divorce” New Jersey law balances the equitable interests between the company, as well as the owner who is targeted to be “disassociated” or “expelled.” Therefore, even if disassociation is court ordered that member does not necessarily lose their ownership and economic stake in the company. Rather, the member loses their right to participate “in the management and conduct of the company’s activities.” See N.J.S.A. 42:2C-47a(1). However, the Act also does not dictate that the business, or its remaining owners, must be forever married to a disassociated member. The Act has additional provisions for relief to sever a disassociated member from their economic interests in the company. Thus, distinct from and beyond disassociation a “business divorce” can be effected to a full and “clean break” from the problematic, troublesome or malfeasant member. While the Act views that form of relief as drastic in nature, it expressly empowers a court to fully dismiss the member from the company. In that event, the Act affords a court discretion to order a sale of that member’s interests in the company at “fair value”, and may further order other members of the company or the company itself to purchase the disassociated member’s interest at fair value. N.J.S.A. 42:2C-47c.
Of course when a dispute surfaces between business owners legal counsel should be promptly consulted. Counsel can assist in assessing the effect and implication of the recalcitrant owner’s troublesome conduct or their failure to act where otherwise required. Counsel can also strategize as to whether the company should proceed with a disassociation and expulsion action against the rogue member.