LLC Membership Disputes: Can a Member of an LLC be Expelled?
By Lauren Johnson*
The short answer is “Yes.” But there are certain circumstances, under Florida’s Revised Limited Liability Company Act (the “Revised Act”), that must apply before expulsion may occur.
As of January 1, 2015, LLCs in the State of Florida are subject to the Revised Act, set forth in Chapter 605, Florida Statutes. The Revised Act is a “default statute,” meaning that its rights and duties generally apply to all Florida LLCs – not just those created after the effective date.
LLC operating agreements often do not provide a procedure for the members of an LLC to expel an unruly member that is materially harming the LLC. For this reason, among the changes to LLC law under the revised Act, there are new avenues to expel a member in limited circumstances.
Expulsion of a member may occur in three different ways, as set forth below:
1. Certain conditions in the LLC operating agreement trigger expulsion
Expulsion under the operating agreement is fairly simple. If the operating agreement provides circumstances under which an LLC member may be expelled, and those circumstances occur, the member is dissociated from the LLC. See ‘ 605.0602(4), Fla. Stat.
2. Other members of the LLC unanimously consent to the member’s expulsion, provided certain conditions are met
If the operating agreement does not provide a method for a member’s expulsion, the remaining members of the LLC can unanimously vote to expel the member. However, expulsion by unanimous consent is only available to the members if: (1) it is unlawful to carry on the LLC’s activities with that person as a member; (2) the member’s entire transferable interest in the LLC has been transferred, unless it was a transfer for security purposes or pursuant to a charging order; or (3) the member is an entity that has been dissolved. See § 605.0602(5), Fla. Stat.
Although Florida appellate courts have yet to address this second avenue for expulsion, the Fourth District Court of Appeal decided a case in 2015 that may have come out differently if the claims had accrued after the Revised Act became effective. In Froonjian v. Ultimate Combatant, LLC, 169 So. 3d 151 (Fla. 4th DCA 2015), the Fourth District held that the majority members of an LLC had the authority to expel a minority member from the LLC where the LLC did not have an operating agreement in place. Because the LLC had no operating agreement, the Fourth District found that the decision of a majority-in-interest of the members was controlling (under the former Florida LLC Act). Id. at 155. However, if the minority member’s expulsion had occurred in 2015 or later, the court may have reached a different conclusion.
3. The member is expelled by judicial order because of wrongful conduct
A judge can order a member’s expulsion from the LLC upon application by the LLC or a member in a direct action. Expulsion by judicial order is proper when the member has: (1) engaged in wrongful conduct that adversely and materially affects the LLC’s activities and affairs; (2) willfully or persistently committed a material breach of the LLC’s operating agreement or breached the fiduciary duties of loyalty or care; or (3) engaged in conduct relating to the LLC’s activities and affairs making it not reasonably practicable to allow the member to continue as a member. See § 605.0602(6), Fla. Stat.
All this is great to know, but what does it really mean for LLCs attempting to expel a member? Notably, the use of the word “dissociation” and “expulsion” in the Revised Act can be somewhat misleading because a dissociated member still has certain rights and obligations. After a member is expelled, the remaining members of the LLC cannot simply redistribute the expelled member’s interests to themselves.
“Dissociation” and “expulsion” are not defined in the Revised Act, but there is a section on “Effect of Dissociation.” When a member is dissociated, he or she no longer has a right to participate in the management or the conduct of the LLC’s activities and affairs. And while a dissociated member further will also no longer have any fiduciary obligations to the LLC, it does not relieve a member of liability to the LLC or to the other members for any debt, obligation, or other liability incurred by the member before dissociation.
The dissociated member also will continue to hold any transferable interest it has in the LLC as a “transferee” only, meaning the dissociated member retains the right to receive distributions from an LLC, but only at the time it would have otherwise received them. This may present a problem for LLCs if, for example, a dissociated member continues to receive economic benefits from the LLC while also competing with the LLC.
The Revised Act provides new ways for members of an LLC to expel a member under limited circumstances. However, because these expulsion provisions in the Revised Act only trigger when the operating agreement does not address the issue, LLCs should be proactive in drafting operating agreements with clear procedures for member expulsion, inclusive of buyout provisions or other remedies to avoid the “transferee” continuing to receive economic benefits after expulsion from the LLC.
*Lauren Johnson (Ljohnson@mccaberabin.com) is an associate at McCabe Rabin, P.A. practicing business and securities litigation.