When are conflict-of-interest transactions permitted under the revised LLC act?

Section 605.04092, Florida Statutes, as revised, governs conflict of interest transactions involving LLC managers or members. The key is that if a transaction is deemed “fair to the LLC,” it is not subject to a claim for damages or equitable remedies. The fairness requirement still applies regardless of whether the LLC’s disinterested members or managers approve the transaction.

Proving Fairness

To prove a member or manager’s transaction is unfair to the LLC, the claimant has the burden of proof. The transaction may be deemed unfair if one of the following conditions did not occur:

  • In a manager-managed LLC, the interest in the transaction was disclosed or known by managers who voted on it, and the transaction was approved by a majority of disinterested managers even if these managers constituted less than a quorum, as long as the decision was not approved by just one manager;
  • In a member-managed LLC or a manager-managed LLC in which the managers failed to d as stated above, the material facts of the transaction and interest was disclosed or known by members who voted upon the transaction, and the transaction was approved by a majority of disinterested managers even if these managers constituted less than a quorum, as long as the decision was not approved by just one manager.

If neither of the above conditions is satisfied, the burden of proof will shift to the party defending the validity of the transaction to affirmatively prove the transaction was fair.

A transaction is “fair to the limited liability company” if the transaction, as a whole, is beneficial to the LLC and its members. When consider whether the transaction is beneficial, consideration is given to whether the transaction is:

  • fair in terms of the member’s or manager’s dealing with the LLC in connection with that transaction, and
  • comparable to what might have been obtained in an arm’s-length transaction.
What is a Manager or Member’s Indirect Material Financial Interest in a Transaction?

Another way to prove a transaction is unfair to an LLC is to show that a member or manager has an “indirect material financial interest” in the transaction. The revised LLC statute clarifies that an “indirect material financial interest” means whether a transaction is “fair to the limited liability company,” and when a member or manager is “indirectly a party” to a transaction.

A person is indirectly a party if that person has a material financial interest in, or is a director, officer, member, manager, or partner of a person, other than the LLC, who is a party to the transaction. Likewise, a member or manager also has an “indirect material financial interest” if a spouse or other family member has a material financial interest in the transaction, or if the transaction is with an entity that has a material financial interest in the transaction and is controlled by the member or manager.

Please Note:  McCabe Rabin, P.A. provides these FAQ’s for informational purposes only, and you should not interpret this information as legal advice.  If you want advice as to how the law might apply to the specific facts and circumstances of your case, please click here to contact one of our attorneys.