When the Marriage is Over: Dissociation and Removal of a Member From a Limited Liability Company
Business “partnerships” like marriages, always begin with dreams of a long and 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 small limited liability companies, New Jersey law provides for solution 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 Limit Liability Company Act, N.J.S.A. 42:2C-1 et. seq, (“Act”). Similar to a failed 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 arise. If that is not the case, then disagreements may percolate to a point where “partners” simply can no longer work together. In such instances the Act provides for certain remedies to both the company and its individual members without terminating the business.
The Act provides for the dissociation of a member from the company without having to formally dissolve, terminate, or otherwise end the business. Indeed, a company’s Operating Agreement should expressly provide for triggers on such disassociation of any owner/member. Even with such contractual provisions in an Operating Agreement, the Act sets forth specific events and thresholds for potential dissociation of a member. Included in that litany, and most frequently cited, is that the member sought to be excluded engaged in wrongful conduct adversely affecting the business; 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-46e (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 success of the company.
In such an instance where a “business divorce” is necessary New Jersey law balances the equitable interests between the company as well as the owner who is targeted to be “disassociated” or “removed. Therefore, even if dissociation is court ordered, that member does not necessarily lose their ownership in the company. Rather, the member loses their rights to participate in the “management and conduct in the company’s activities”. See N.J.S.A.42:2C-47a(1). However, the Act does not dictate that the business, or its remaining owners must be forever married to a disassociated member. There are additional provisions to sever a disassociated member from their economic interest in the company. Thus, distinct from dissociation, a “business divorce” can be affected to a full and “clean break” from the malfeasant member. While the Act views that relief as drastic in nature, it expressly empowers the court to fully dismiss the member from the company. In that event, the court also has the discretion to order a sale of that member’s interest in the company at “fair value”, and may compel other members or the company itself to purchase the disassociated member’s interest at fair value. N.J.S.A. 42:2C-47c.
Of course, when disputes surface between business owners legal counsel should be promptly consulted and retained. Experienced legal counsel can assist in assessing the effect and implication of the recalcitrant owner’s troublesome conduct, or their failure to act as required. Counsel can also strategize as to whether the company should proceed with a dissociation action against the rogue member or pursue other courses of action rather than immediate litigation. In the same vein, a member who is being harassed, oppressed or “frozen out” by fellow members of the company should consult with their own legal counsel to assess their rights and protect their ownership interests.
Timothy Lyons, Esq. is a senior partner and Co-Chair of the firm’s Business Litigation Department. and is available for consultation for any issues, disputes or questions regarding the rights and/or obligations of business owners under New Jersey law. Mr. Lyons is the Managing Partner of the firm’s Tinton Falls, New Jersey office and can be reached at 732-978-1919 or email@example.com.