In the realm of the closely held business entity, there are many reasons for the growing preference and, indeed, the predominance in many states of the limited liability company (LLC) over the corporation. One important reason is the greater flexibility and informality afforded under the LLC laws in regard to the manner of decision-making by the LLC’s members as compared with the corporation’s board of directors.
One of the sharpest such contrasts between the two business forms is the ability to take action without holding a formal meeting of the governing body. Section 708(b) of New York’s Business Corporation Law (BCL) permits corporation directors to take action without a meeting only if “all members of the board or the committee consent in writing to the adoption of a resolution authorizing the action.” Absent such unanimous consent, the board must comply with the formal requirements set forth elsewhere in the BCL and the corporation’s by-laws for the scheduling and holding of a board meeting upon advance notice. Consequently, there are legions of court decisions triggered by fights between controlling and non-controlling shareholder factions over the board’s compliance with the notice and meeting requirements leading up to disputed board decisions.
Compare §407(a) of the New York Limited Liability Law, entitled “Action by Members Without a Meeting.” The statute states that, “except as provided in the operating agreement,” LLC members can take any action:
without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken shall be signed by the members who hold the voting interests having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all of the members entitled to vote therein were present and voted . . ..
In other words, absent contrary provision in the operating agreement, the controlling members of a multi-member LLC, by the simple means of signing written consents, can make management decisions large and small without advance notice to, or input from, the non-controlling members. The only other formal requirement under LLC Law §407(c) is that the non-consenting members afterward be given “prompt notice” of the action taken without a meeting.
I’ve seen many operating agreements that expressly incorporate LLC Law §407’s provisions for action without meetings. I’ve also seen many operating agreements that detail the requirements for scheduling and providing notice of meetings but are completely silent whether the members also can take action without a meeting. Is such silence tantamount to prohibition?
Apparently not, that is, if New York courts follow a recent decision by the Delaware Court of Chancery construing that state’s analogous statute in Paul v. Delaware Coastal Anesthesia, LLC, C.A. No. 7084-VCG (Del Ch May 29, 2012). The case was brought by a 25% member of a four-member Delaware LLC challenging her expulsion under a provision in the operating agreement authorizing member expulsion at any time without cause upon the vote of 75% of the membership interests. The other three members effectuated the expulsion by written consents without a meeting.
The plaintiff argued that her expulsion was invalid because the operating agreement provided a procedure by which meetings of the members may be held, but contained no provision for action by written consent without a meeting. The opposing members relied on §18-302(d) of the Delaware LLC Act which, like the New York statute, authorizes member action without a meeting by written consent of members holding the requisite voting power, “unless otherwise provided in the limited liability company agreement.”
Vice Chancellor Sam Glasscock III’s letter ruling comes down squarely on the defendant members’ side. The plaintiff’s argument, he writes, “begs the question of whether votes must be taken only at such meetings, preempting the statutory default” rule under §18-302(d). “Certainly nothing in the Operating Agreement,” he continues, “specifically disallows votes by written consent.” In other words, because the Operating Agreement does not “otherwise provide,” the statutory default rule authorizing member action without a meeting applies, and the plaintiff’s expulsion therefore was validly effectuated.
The Paul case is a good example of a minority member using claimed defects in voting procedure as a tactical litigation tool, though to what end is not clear. Ultimately, even had the plaintiff prevailed, the other members holding an aggregate 75% interest had the right to expel the plaintiff without cause by vote taken at a formal meeting. The decision mentions in passing the remaining members’ obligation under the operating agreement to purchase an expelled member’s interest; perhaps the litigation had an economic motive to delay the valuation date and/or to recover for lost employment income until such time as the other members “properly” expelled the plaintiff at a formal meeting held upon “due” notice. One thing for sure: Paul illustrates the great risk taken on by LLC members who enter into operating agreements that provide for without-cause expulsion of a member.