Member Rights For Connecticut Limited Liability Company

Generally, there are two sources to determine the rights and duties of members of a Connecticutmembers(1)[1] limited liability company (“LLC”).  The first source is an operating agreement.  The ability to form a limited liability company (“LLC”) as a legal entity in Connecticut derives from legislative enactment.  Title 34 of Connecticut General Statutes covers LLC’s.  Title 34 gives great deference to the members of an LLC in forming an agreement on governance of the LLC.  Statutory deference creates flexibility and is one of the biggest advantages when choosing a LLC as an entity for a business.

The members’ agreements on governance of the LLC are typically documented in a written agreement known as an operating agreement.  These agreements are typically drafting by a business attorney.  The operating agreement for a LLC will typically document the rights and duties of members and managers for LLC’s.  An operating agreement is similar to a partnership agreement.    An operating agreement can be simple or complex depending on the needs of the members.

Operating agreements can alter or change the statutory rights of members or managers.  Members by agreement can define the voting rights of members, the number of votes required to decide matters, and the manner in which managers can be appointed or removed.  Members can also agree upon limitations on ownership interests such as transfer of ownership or withdrawal of members.  Members further can agree upon duties of managers and members.

Unexpected problems sometimes arise when an operating agreement is silent on rights and duties. When an operating agreement is silent, the second source to determine rights and duties of members is Title 34.  You might consider Title 34 to govern by default unless otherwise agreed upon by the members.

Connecticut General Statutes 34-140 to 34-144 covers the rights and duties of members and managers.  If the operating agreement of a Connecticut LLC is silent on the issue, the following is an example of governance rules:

  • If the LLC is governed by managers, the vote of more than one-half the number of managers will decide most matters with the LLC
  • If the LLC is governed by members, the majority vote of the members in interest will decide most matters with the LLC
  • Majority of members in interest can vote and designate a manager
  • Any and all managers may be removed with or without cause by vote of a majority of the members in interest
  • Absent proper consent, every member and manager must account to the LLC and hold as trustee for it any profit or benefit derived by that person from transactions connected with the LLC or through use of confidential or proprietary information of the LLC
  • The vote of two-thirds of the members in interest is sufficient to amend the operating agreement

·         The vote of two-thirds of the members in interest is sufficient to amend the operating agreement

The take away here is to use the operating agreement to document how you want to run the LLC.  Consult an attorney to help draft the operating agreement.   If you fail to do it, the Connecticut legislature will decide how to run the business for you.  This may have unintended consequences.

Business Litigation Roundup

As we head to the new year, here is a round up from some fellow bloggers on contracts, cobra, wage disputes, patents, and oral agreements for limited liability companies. 

The California Business Lawyer Blog offers a very detailed post about contractual relationships  between manufacturers and suppliers.  The focus is on well drafted agreements eliminating the fears and concerns of both sides.

A lot of talk about the AT&T suits in different states for $1 billion dollars for unpaid overtime.  The suits picked up a lot of steam with a recent employee favorable ruling from the federal court in Connecticut allowing the claim to proceed as a class action. Rush on Business covers some tips for businesses to avoid these suits.

Just in time for Christmas, President Obama has extended the COBRA subsidy.  Dan Schwartz’s Connecticut Employment Law Blog covers this topic in detail for employers.

Twin Cities Business Litigation Blog has an interesting post on concerns you might have as a shareholder of corporation that fails to follow corporate formalities.  Gavin Craig gives examples of how a shareholder could be exposed to liability.

Anyone who frequently litigates matters involving limited liability companies will tell you that there is not much case law out there in Connecticut.  It is still a developing area of the common law.  Delaware law is often a good option for law in this area because these issues are more frequently litigated by volume in Delaware.  A good resource is the Delaware Corporate and Commercial Litigation Blog.   Two recent posts concerning oral partnerships and LLC agreements are just an example.

PatentlyO hits on some themes for 2010, including an expected increase in patent prosecution and litigation.    They also have a cool picture of heat miser, a childhood classic.

Jeff Mehalic, author of the West Virginia Business Litigation Blog, writes a detailed follow up post to his coverage of the Connecticut dispute between Charter Oak Lending and CTX Mortgage.  Jeff also comments about a post I wrote on the same case.  The case remains significant as it is an example of what can go wrong when a business grows too fast and no written agreements are in place with employees.

Connecticut Supreme Court Confirms Expulsion Is Available Remedy In Partnership Dispute

In an issue of first impression, the Connecticut Supreme Court confirmed that partnerships can expel a partner rather than dissolve when there is a breakdown of the business of the partnership.  The case is Brennan v. Brennan Associates, et al.  The official opinion will be released on August 18, 2009, but the advanced opinion already was released online. 

The case involves a complicated set of facts and circumstances surrounding the deterioration of a once successful partnership that operated a shopping center in Trumbull.  The breakdown of the partnership began after the death of a partner.

The decedent partner essentially ran the partnership and kept all the books until his death.  The decedent’s will directed that his interest go to his two cousins.  Following the will reading, the partnership broke down over disputes on check writing authority, access to records, the transfer of interest, and an old tax conviction of a surviving partner who was the plaintiff in the case. 

The plaintiff  offered to buy out the decedent’s interest, which as rejected by the estate.  The plaintiff subsequently filed a lawsuit seeking, among other things, to accomplish a buy out of the decedent’s partnership interest and to gain access to the books and records.  The surviving partners wanted to continue the partnership’s business rather than dissolving it.  As such, in addition to other claims by the defendant administrators, they filed a counterclaim application seeking to expel the plaintiff from the partnership under section 34-355 of Connecticut’s Uniform Partnership Act.

The statutory scheme at issue permits a trial court to grant an application for expulsion if a partner engages in conduct that "makes it not reasonably practicable to carry on the business in the partnership with the partner." In this case, after a bench trial, the court issued a ruling granting the application filed by the surviving partners to expel or dissociate the plaintiff partner.  The plaintiff appealed claiming that acrimony and distrust between partners may be proper for a dissolution, but it was not a proper basis for dissociation.

On appeal, the Connecticut Supreme Court  disagreed with the plaintiff and ruled that dissociation was an available remedy given the facts present as an alternative to dissolution.  The supreme court noted that under Connecticut’s Partnership Act,

a partnership now has a choice, either to dissolve the partnership or to seek the dissociation of a partner who has made it not reasonably practicable to carry on the partnership with him.  The new remedy of dissociation permits a financially viable partnership to remain intact without dissolving the partnership and reconstituting it.

In this case, the conduct at issue for the dissociated partner was a past felony tax conviction, a pattern of adversarial conduct toward other partners, and a false accusation of fraud against the others partners.  With these facts present, the supreme court found that a trial court had enough to grant an application for expulsion and dissociation of the partner.  The court stated:  

irreparable deterioration of a relationship between partners is a valid basis to order dissolution, and, therefore, is a valid basis for the alternative remedy of dissociation.

It is worth noting that the court indicated that an old felony conviction standing alone likely would not meet the required standard.   In any event, the case essentially provides that there is no basis for a higher burden for dissociation as opposed to dissolution.

My takeaway from the decision is that it promotes the policy of cooperation amongst partners by confirming expulsion as an option for getting rid of a "problem" partner.  As noted in the decision, prior to the statutory scheme permitting dissociation, partnerships faced with similar problems had to dissolve.  This process could perhaps create too much leverage for a "problem" partner forcing dissolution.  Instead, this decision confirms the statutory availability of dissociation under no higher of a standard than dissolution.  This may be a more preferable remedy for many Connecticut partnership disputes.

The decision also serves as a reminder of how a partnership or  closely held company can breakdown following the death or disability of a partner or key member of the business.  These circumstances highlight the need for specificity in partnership and operating agreements including buy out provisions for death and disability, transfer or assignment of interests, and continuation of operations.   

It is also important to note that the supreme court left open the dissociated partner’s rights to bring a proceeding to compel valuation and purchase of his interest after dissociation.  The court also indicated that the partnership agreement could have included a provision allowing the remaining partners to initiate a valuation proceeding, but it did not in this case.