Much digital ink has been spilled on this blog (here, here, here, and here) and elsewhere (Tom Rutledge’s terrific article can be read here) concerning the ability of LLC controllers to adopt or amend an operating agreement without the consent of all members.

In New York, Shapiro v Ettenson kicked things off, holding that the majority members of an LLC validly adopted a post-formation operating agreement without the minority member’s consent. The agreement in that case eliminated the minority member’s salary, authorized dilution of a member interest for failing to make mandatory capital contributions (the majority members issued a capital call promptly after the amendment), and member expulsion (the majority members expelled the minority member soon after the court upheld the LLC agreement).

Next came Ho v Yen where the court denied interim injunctive relief to a minority member who challenged the majority members’ adoption of a post-formation LLC agreement that authorized member expulsion and buy-out at book value (the majority members expelled the minority member within days after the amendment).

The appellate panel in Shapiro rested its holding on LLC Law § 402 (c) (3) which speaks to the majority’s right not only to adopt an operating agreement but also to amend it subject, of course, to any contrary provision in the operating agreement and certain statutory carve-outs in LLC Law § 417 (b). But since the vast majority of operating agreements that I’ve seen expressly require the consent of all members to amend, I figured I’d have a long wait before seeing a case that tests the limits of the non-unanimous amendment power.

My wait wasn’t nearly as long as I expected. Last month, in Yu v Guard Hill Estates, LLC, 2018 NY Slip Op 32466(U) [Sup Ct NY County Sept 28, 2018], Manhattan Commercial Division Justice Saliann Scarpulla denied a motion to dismiss a minority LLC member’s claims against the majority members for breaching their fiduciary duty by adopting, without the minority member’s consent, amendments authorizing mandatory capital calls and foreclosing upon the interest of a member who fails to contribute. What makes the case even more interesting is that the pre-existing operating agreement signed by all the members included a provision generally authorizing amendment by vote of members holding 51% of the member interests.  Continue Reading Does This Decision Put the Brakes on Non-Unanimous Amendments to Operating Agreements?

Good faithIf, as appears likely, the drafters of the LLC membership interest repurchase provisions at issue in Saleeby v Remco Maintenance, LLC, 2016 NY Slip Op 31447(U) [Sup Ct NY County July 25, 2016], thought they were helping the company avoid the possibility of litigation over the value assigned to the outgoing member’s interest, as it turns out they were sorely mistaken.

Poorly drafted or not, the LLC’s managers also likely did themselves and the company no favor by assigning a zero-dollar value to the membership interest of the terminated member in the Saleeby case, and by muddling the timing of the company’s exercise of its repurchase option.

Here, in a nutshell, is what happened in Saleeby as described in Manhattan Commercial Division Justice Anil C. Singh’s decision: In 2005, the defendant company Remco Maintenance, a New York based Delaware LLC, hired plaintiff Saleeby as its President and CEO. Saleeby’s employment agreement granted him a 7.5% Class B membership interest which fully vested by the time he was terminated without cause in February 2012. Over the next two years, Saleeby and the company attempted without success to negotiate their dispute over his termination, severance, vacation pay, and rights to unemployment insurance. In 2014, the company informed Saleeby that in 2013 it had exercised its option under the LLC Agreement to repurchase his membership units at a “fair market value” of zero dollars. Saleeby subsequently filed suit against the LLC for breach of contract and conversion. Continue Reading Good Faith Trumps Sole Discretion in LLC Agreement’s Repurchase Provision

Pity the poor books-and-records proceeding. Misunderstood. Neglected. Widely viewed among New York practitioners as an ineffective use of time and resources. Jealous cousin to its wildly popular Delaware counterpart.

That perception could start to change thanks to a decision last week by a Manhattan appellate panel in a shareholder books-and-records proceeding. Although the court’s ruling involves a public company, its liberalizing influence is bound to effect books-and-records proceedings involving closely-held business entities as well.

There are two sources of a shareholder’s right to gain access to corporate information: statute and common law. The New York statute, Business Corporation Law § 624, is nothing if not miserly. Under § 624 (b) and (e), a shareholder has the right upon written demand to examine minutes of shareholder meetings, the shareholder list, and the most recent annual and interim financial statements. That’s it. Not very useful if the shareholder wants detailed knowledge of the corporation’s decision-making, communications and financial transactions.

Then there’s the common-law right to inspect a corporation’s books and records, which is broader than the statutory right and can extend to all of the relevant corporation books and records. While it can be argued that the burden of pleading and proof differs depending upon whether the right to inspect is sought under the statute or common law, in either event, if the shareholder presents in good faith and shows a “proper purpose” for seeking the corporate records, the corporation resisting inspection must show the shareholder’s purpose is improper or is otherwise proceeding in bad faith. Continue Reading A Boost for Books-and-Records Proceedings

[This is the second of a two-part series on the basis for imposition of fiduciary duties on LLC managers. Part One (read here) reviewed a recent Delaware Chancery Court decision in which Chancellor Leo Strine, Jr. formulated that court’s most comprehensive statement to date on the subject. Part Two compares New York’s framework for holding LLC managers responsible as fiduciaries.]

While not without its critics (read here Widener Law Professor Ann Conaway’s commentary), the core of Chancellor Strine’s opinion last month in Auriga Capital v. Gatz presents an elegantly straightforward analysis of fiduciary duties of Delaware LLC managers. Simply stated, the Delaware LLC Act expressly in §18-1104 and impliedly in §18-1101 incorporates traditional default duties of loyalty and care to which LLC managers must adhere except to the extent such duties are modified or eliminated in the members’ LLC agreement.

Chancellor Strine’s use of a statutory launching pad to explore fiduciary duties of Delaware LLC managers invites a similar approach to the question of New York LLC manager fiduciary duties. Starting with the statute also makes sense given the LLC’s relatively recent birth as an entirely new, hybrid species of business entity whose DNA comes entirely from its legislative parentage, without any common-law ancestry.

Before looking at the New York statutory scheme, which I’ll follow with a brief look at New York case law, permit me to offer the following caveat. I’ve yet to come across judicial opinion or other legal scholarship that offers, à la Auriga, a comprehensive analysis of New York statutory and case law analyzing and defining the fiduciary duties of LLC managers. Such examination of this complex question is far beyond the scope of this post which merely attempts to identify the pieces of the puzzle, not to solve it.

Continue Reading What Does Chancellor Strine’s Auriga Capital Decision Teach Us About Fiduciary Duties of New York LLC Managers? (Part Two)