First Department Recognizes Cause of Action for Specific Performance of LLC Member Voting Agreement
April 10, 2023
In 1941, two of the three shareholders of Ringling Bros.-Barnum & Bailey Combined Shows, Inc. entered into an agreement stating that they would vote their combined 630 of the outstanding 1000 shares of Ringling Bros. stock together. If they could not agree on a matter put to vote, they each agreed to submit the matter to an arbitrator, then vote according to his recommendation.
Five years later, Ringling Bros.’ shareholders convened to elect directors. One shareholder sought to enforce the 1941 agreement, while the other argued that the agreement was invalid. Ultimately, the Delaware Chancery Court enforced the agreement, holding:
A group of shareholders may, without impropriety, vote their respective shares so as to obtain advantages of concerted action. They may lawfully contract with each other to vote in the future in such a way as they, or a majority of their group, from time to time determine.”
(Ringling Bros.-Barnum & Bailey Combined Shows v Ringling, 53 A2d 441 ). The Voting Agreement was born.
In the years since Ringling Bros., statutes and caselaw have imposed several limitations on shareholders’ ability to enter into enforceable voting agreements. But those limitations apply in the corporate context—few have migrated over to LLC member voting agreements. And as a recent decision from the First Department, Tsai v Lo, 212 AD3d 547 [1st Dept 2023], demonstrates, LLC member voting agreements may have fewer formality requirements than one might expect.
Shareholder Voting Agreements
Rooted in the same contract principles expressed in Ringling Bros., New York’s law generally holds that shareholder voting agreements are contracts capable of judicial enforcement via both damages and specific performance, with several imitations:
Shareholder voting agreements must be in writing. Section 620 of New York’s Business Corporation Law, which governs voting agreements between shareholders of a New York corporation, provides:
An agreement between two or more shareholders, if in writing and signed by the parties thereto, may provide that in exercising any voting rights, the shares held by them shall be voted as therein provided, or as they may agree, or as determined in accordance with a procedure agreed upon by them.”
Courts have strictly interpreted the writing requirement (see Shea v Hambro Am. Inc., 200 AD2d 371, 372 [1st Dept 1994] [“[T]he record reveals that the purported agreement was not in writing, as specifically mandated by New York Business Corporation Law § 620(a).”]; Zacharius v Kensington Pub. Corp., 42 Misc 3d 1208(A) [NY Sup 2014] [enforcing shareholder voting agreement after concluding, based in part on forensic evidence, that the agreement was validly executed] [discussed by Peter Mahler here]).
Shareholder voting agreements cannot deny voting rights altogether. An agreement between shareholders that disqualifies a shareholder from voting his or her shares is invalid (Yu v Linton, 68 AD2d 856, 856 [1st Dept 1979] [“Business Corporation Law 620(a) cannot be construed to provide a means to deny the right to vote.”]).
Courts may examine shareholder voting agreements for proper purpose. Who can forget the voting agreement in the legendary business divorce case concerning the estate and collection of artist Peter Max? There, two of the three shareholders of ALP, a corporation formed for the management of Max’s artwork, entered into a voting agreement that ostensibly gave them sufficient majority to wrest control of ALP from the third shareholder.
New York County Supreme Court Justice Bannon granted a preliminary injunction enjoining the election predetermined by the voting agreement, finding:
Here, the terms of the voting agreement . . . suggest that Adam has sought to trade ALP’s most valuable asset in order to regain his position as President of ALP to oust Libra . . . and resume his alleged improper diversion of corporate assets . . .”
ALP, Inc. et ano. v Moskowitz, et al., Index No. 652326/2019 [Sup Ct NY County, June 14, 2021]. The First Department later affirmed.
Tsai v Lo Welcomes LLC Member Voting Agreements into the Fold
Tsai v Lo concerns a dispute between two 50% factions—May Tsai and Mark Lo—of a real estate joint venture aimed at purchasing and “flipping” the property located at 41-60 Kissena Boulevard in Flushing (the “Property”). They acquired the property through Kissena HTL, LLC, a limited liability company owned 50% by Tsai and her family and 50% by Lo and his family.
In July of 2020, Tsai commenced suit seeking to foreclose on Lo’s ownership interest in Kissena. Tsai alleged that in order to fund Kissena’s purchase of the Property, both her and Lo were required to make significant contributions to Kissena. To allow Lo to make his share of those contributions, Tsai made certain loans to Lo and his wife exceeding $6 million, which loans were secured by Lo’s membership interest in Kissena. When Lo defaulted on the loans, Tsai sought to foreclose on his membership interest.
Lo fired back with a counterclaim for specific performance of an oral agreement he made with Tsai concerning Kissena’s ultimate sale of the Property. He acknowledged that he and Tsai agreed to acquire the Property through Kissena, and that Lo’s contributions to Kissena were funded by loans that Tsai made to him. But Lo alleged that in connection with those loans, Tsai specifically agreed that whenever Lo requested, Kissena would sell the property so that he could repay his loans to Tsai.
Lo further alleged that despite Tsai’s oral agreement that Kissena would sell the Property when he requested, Tsai later refused each and every buyer that Lo brought to the table. Using her 50% ownership of Kissena to block a sale of the Property, Tsai called a default on her loans to Lo and sought to foreclose on his interest in Kissena.
Among other relief, Lo sought specific performance of Tsai’s oral agreement to cause Kissena to sell the Property.
The Trial Court Order
Tsai won dismissal of Lo’s counterclaim at the trial court level. In a decision and order dated March 10, 2022, the court held that the alleged oral agreement to cause Kissena to sell the Property was unenforceable under New York’s Statute of Frauds, which requires that a contract for the sale of real property be in a writing signed by the party to be charged. The trial court further held that the alleged oral agreement was unenforceable as a mere “agreement to agree.”
First Department Reversal
In a decision dated January 24, 2023, the First Department reversed the trial court’s finding that the statute of frauds applied. The First Department held that the oral contract that the Tsai sought to enforce was not a contract for the sale of real property, but rather a voting agreement among the members of Kissena:
Instead, giving defendants’ allegations every favorable inference, defendants sufficiently pled that the oral agreement was effectively an LLC voting agreement under which plaintiff agreed to vote her membership interest in favor of defendants’ sale of their membership interests or a sale of the property.”
(212 AD3d 547, 548).
The Court further held that, “Plaintiff also failed to establish as a matter of law that the alleged contract was an unenforceable agreement to agree”—the terms of the oral agreement were, at least as pled, sufficiently definite and binding.
A Trap for the Unwary LLC Member?
Closely-held business owners often start with a shared vision for the business, but any number of factors can ultimately cause the owners’ visions to diverge. Enforcing oral voting agreements among LLC members arguably invites a blurring of the line between shared vision and an enforceable agreement to vote a certain way on company action. When LLC members discuss their plans for the future of the business, Tsai should be a poignant reminder that they should unequivocally avoid committing, even verbally, to a course of action.
The law concerning oral voting agreements among LLC members is worth watching for continued developments. Will the legislature adopt a writing requirement à la BCL 620? Will caselaw drive a migration of the limitations on corporate voting agreements to LLCs? Until then, LLC members likely can avoid Tsai’s fate by including language in their operating agreements requiring that voting agreements be in writing.