Do You Want to Divorce Your Fellow LLC Member?
Discretion, we are told, is frequently the better part of valor, and nowhere is that cliché more apropos than in confronting the prospect of divorcing business partners. The expense and contention of that separation can test both the limits of our patience and the depths of our determination, all of which serves as a deterrent to proceeding with a professional divorce even where the circumstances warrant it. But California’s Revised Uniform Limited Liability Company Act may allow you to separate from fellow LLC members while limiting the expense and avoiding needless conflict, through a process called “disassociation.”
Operating Agreement Event: A member may become dissociated upon the occurrence of an event set forth in the LLC’s operating agreement. (Cal. Corp. Code, § 17706.02(b).)
Unanimous Consent: A member may also be expelled by the unanimous consent of the other members where it is unlawful to carry on the LLC’s activities with the person as a member, the member’s interest has been transferred, or the member is a corporation which has been deemed dissolved, had its charter revoked or had its right to conduct business suspended. (Cal. Corp. Code, § 17706.02(c).)
Court Order: The LLC may seek a court order expelling the member where the member:
Engaged in wrongful conduct that adversely effected (or will adversely affect) the LLC’s activities; (Cal. Corp. Code, § 17706.02(e).)
Willfully committed a material breach of the LLC’s operating agreement or their fiduciary duties under Cal. Corp. Code, § 17704.09; or
Engaged in conduct that makes it “not unreasonably practicable” to carry on the LLC’s activities with that member. (Cal. Corp. Code, § 17706.02(e).)
Effect of Dissociation: Upon dissociation, the person’s right to vote and participate in management of the LLC terminates, and where the LLC is member-managed, the person’s fiduciary duties cease after dissociation (but not pre-dissociation).
One Cautionary Note: Dissociation does not trigger a statutory buyout, right of redemption or forfeiture of the dissociated member’s interest. The person continues to have a right to any distributions the LLC may make and their share of proceeds should the LLC be sold.
***
This article is made available for educational purposes and to provide general information on current legal topics, not to provide specific legal advice. The publication of this article does not create any attorney-client relationship and should not be used as a substitute for competent legal advice from a licensed professional attorney.