On the one hand, under LLC Law § 407(a)’s default rule, whenever LLC members “are required or permitted to take any action by vote,” such action may be taken “without a meeting, without prior notice, and without a vote” so long as signed written consents are obtained from members holding the number of votes required to approve the action had there been “a meeting at which all of the members entitled to vote therein were present and voted.” When consents in lieu of meeting are used, § 407(c) requires “prompt notice” thereafter be given to any members who did not execute consents. In other words, any excluded, non-consenting member is presented with a fait accompli.
On the other hand, LLC Law § 1002(c) provides that any proposed agreement of merger or consolidation “shall be submitted” to the members for a vote “at a meeting called on twenty days’ notice or such greater notice as the operating agreement may provide.” In addition, § 1002(e) echoes the meeting requirement by providing that any member entitled to vote on the proposed transaction “may, prior to that time of the meeting at which such merger or consolidation is to be voted on, file . . . written notice of dissent from the proposed merger or consolidation.”
The question is, does § 407(a)’s written consent trump § 1002(c)’s meeting mandate, or the other way around?
A recent decision by Manhattan Commercial Division Justice Shirley Werner Kornreich, in Slayton v Highline Stages, LLC, 2014 NY Slip Op 24333 [Sup Ct, NY County Oct. 30, 2014], holds that the “unambiguous language” of § 407(a) trumps § 1002(c). Justice Kornreich, acknowledging the absence of appellate authority, concludes that:
§ 1002(c) “does not contain any language providing that the required meeting comes with greater attendant rights than any other meeting required by the LLCL. Therefore, § 407(a) necessarily applies to meetings under § 1002(c). Ergo, an LLC may enter into a merger agreement without a meeting if the requisite written consents are procured, as they were in this case.
The petitioner in Slayton was a 13.33% member of Highline Stages, LLC. The company had no operating agreement. According to her petition (read here), in August 2013 the petitioner was given written notice that, pursuant to written consents executed that same day, all the other members adopted a resolution approving the merger of Highline into a new LLC excluding the cashed-out petitioner. Petitioner gave notice of dissent in response to which the company offered $50,000. Petitioner rejected the offer and filed suit.
The petition asserted four claims, the first two of which, for declaratory relief and damages, contended that the merger was invalid and should be rescinded for failure to hold a member vote at a meeting upon 20-days notice under § 1002(c) and (e). The petition alternatively asserted two other claims to recover the fair value of her membership interest and for her counsel fees.
The company moved to dismiss the first two claims, arguing in its memorandum of law (read here) that no meeting was required by virtue of the majority members’ written consents given in compliance with § 407(a). Petitioner’s opposing memorandum (read here) argued that the 20-day advance notice and meeting requirements in § 1002(c) are mandatory, and that by proceeding with the merger by written consents she also was deprived of her dissenter’s right to try to convince her fellow members at a meeting that the merger was not in the company’s best interest.
In her decision granting the company’s dismissal motion, Justice Kornreich drew support for her conclusion, that § 1002(c) was not exempt from § 407(a), from Manhattan Commercial Division Justice Charles Ramos’s 2010 ruling in Stulman v John Dory, LLC, which also involved a freeze-out merger approved by written consents in lieu of meeting, and by McKinney’s Practice Commentary to § 1002, authored by Bruce Rich, in which he wrote that “members should be able to act upon the combination transaction by written consent in accordance with Section 407, subject to the operating agreement not containing restrictions or prohibitions on the consent procedure.”
The dismissal leaves the petitioner with a fair value hearing as her sole remedy. Of course, even if Justice Kornreich had adopted petitioner’s statutory interpretation, the majority members could quickly schedule a member meeting on 20-days notice to effectuate the same freeze-out merger, albeit the new effective date could alter, for better or worse, the fair value of the petitioner’s membership interest.
Lastly, it’s worth noting that the LLC Law’s default rule for member-managed LLCs, found in § 402(b), in general provides for member voting at a meeting in-person or by proxy. There are many management decisions big and small that do not have their own, specific statutory requirement for a meeting, unlike mergers. For example, LLC Law § 414, which authorizes members to remove a manager with or without cause by majority vote, does not specify the need for a meeting. I previously wrote about a Delaware Chancery Court decision in Paul v Delaware Coastal Anesthesia, LLC in which the court upheld the removal of a manager by written consents of the majority members based on the absence of any provision in the LLC agreement expressly negating the Delaware LLC Act’s default rule, analogous to New York’s LLC Law § 407(a), allowing member action by written consent in lieu of meeting. I haven’t come across a New York decision involving similar circumstances, but the result in Slayton seems to point in the same direction as the Chancery Court’s ruling in the Paul case.