The Revised Limited Liability Company Act Creates a Statutory Remedy for Oppression of Minority Members

By David White, Esq.
dwhite@pashmanstein.com

The Revised Uniform Limited Liability Company Act (“RULLCA”), enacted on September 19, 2012, creates a statutory remedy for oppression of minority members in New Jersey limited liability companies. P.L. 2012, c. 50. The remedy parallels the relief provided to shareholders in close corporations under the Oppressed Shareholder Act (the “OSA”), N.J.S.A. 14A:12-7(1)(c),  with two slight textual differences requiring harm from oppression and an enhanced standard for an award of attorneys’ fees.

The Limited Liability Act (the “LLCA”) was silent on minority oppression.  N.J.S.A. 42:2B-1 et seq. Under the LLCA, any member of an LLC could resign and have his interest bought out.  N.J.S.A. 42:2B-24.  The LLCA provides that the resigning member’s interest is to be valued at “fair value less all applicable valuation discounts…” N.J.S.A. 42:2B-39.  The standard of valuation for an oppressed shareholder’s interest under the OSA, in contrast, is fair value without discounts.  Balsamedes v. Protameen Chems., Inc., 160 N.J. 352, 368 (1999); but see, Denike v. Cupo, 394  N.J. Super. 357 (App. Div. 2007) (disassociated member’s interests in an LLC valued without marketability or minority discounts).

As a result, courts addressing oppression of LLC members previously fashioned remedies by analogy to the OSA.  See, eg. Denike v. Cupo, 394 N.J. 357.  Without an explicit statutory remedy, however, some courts were reluctant to craft minority-oppression relief in LLCs. See, Hopkins v. Duckett, 2012 N.J. Super. Unpub. LEXIS 93, at *33.

RULLCA provides that Courts may grant various forms of relief where the managers or those in control of the company “have acted or are acting in a manner that is oppressive and was, is, or will be directly harmful to the applicant.” 2012 Bill text N.J.A.B. 1543, Art. 7, Section. 48(5) (b) (Dissolution and Winding Up).  Oppression provides grounds for ordering the sale of a member’s interests to the company or another member, as well as  dissolution of the company or appointment of a custodian or provisional managers. Id. at Article 7, Section 48 (b)

The Oppressed Shareholder Act, N.J.S.A. 14A:12-7(1) (c) provides:

The Superior Court, in an action brought under this section, may appoint a custodian, appoint a provisional director, order a sale of the corporation’s stock as provided below, or enter a judgment dissolving the corporation, upon proof that [,in] the case of a corporation having 25 or less shareholders, the directors or those in control have acted fraudulently or illegally, mismanaged the corporation, or abused their authority as officers or directors or have acted oppressively or unfairly toward one or more minority shareholders in their capacities as shareholders, directors, officers, or employees.

The definitions of oppression in RULLCA and OSA differ slightly.  Under the OSA, oppression is a per se violation that exists, even without damages.  RULLCA, however, requires a showing of direct harm, in addition to oppressive conduct by the controlling members.

The two acts also differ with respect to awarding counsel fees.  Under the OSA, a court may award attorneys’ fees in its discretion where the award “would be fair and equitable to all parties under all the circumstances of the case.” Id.  Awarding attorney’s fees under RULLCA remains discretionary but also requires a finding that the losing party acted “vexaciously, or otherwise in not good faith.” RULLCA  Art. 7,,Section 48(c).

RULLCA takes effect six months after enactment but does not generally apply to existing LLCs until eighteen months after its effective date. RULLCA , Art.11, Sections 96 and 91.

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