LLC enabling legislation swept the country in the late 1980s through the mid 1990s. By the turn of the century we saw a trickle of litigation working its way through the courts involving disputes among LLC co-owners. A decade later, as the popularity of LLCs blossomed, the trickle became a steady stream. Fast forward to the present, when LLCs have thoroughly upstaged the closely held business corporation as the entity of choice, the stream has become a river.
Within what has become a vast body of case law over the last two decades stemming from LLC internal disputes, I see two fields of member conflict that not only quantitatively occupy large swaths of that body, but also qualitatively distinguish LLC litigation from its counterpart litigation involving disputes among shareholders of close corporations.
One is judicial dissolution. Although the Revised Uniform LLC Act adopted in many states has partially reduced the dissimilarity between grounds for judicial dissolution and available remedies compared to prevailing forms of corporate dissolution statutes, there remains in New York and many other states an unbridgeable, substantive gap between the dissolution standards and remedies in the two statutory schemes. As New York’s leading appellate decision on LLC dissolution opined ten years ago, “since the Legislature, in determining the criteria for dissolution of various business entities in New York, did not cross-reference such grounds from one type of entity to another, it would be inappropriate for this Court to import dissolution grounds from the Business Corporation Law or Partnership Law to the LLCL.”
The other is the validity and effect of membership interest transfers and other dispositions of membership interests. There are few if any statutory default rules constraining lifetime or post-mortem transfer of shares–with all their attendant voting, economic, and other rights–by a shareholder of a close corporation. Any constraints that do exist will be found in the shareholders’ agreement or by-laws and, even then, case precedent holds that any such limitations may not cross mandatory rules in the business corporation law and may not otherwise impose “unreasonable” restraints on alienation. Continue Reading Turmoil Follows Involuntary Transfers of LLC Membership Interests