It’s been many years since our last pop quiz for all you business divorce aficionados. Time for another. See how many you get right before you read the answers:
Can majority members of an LLC consummate a cash-out merger of a minority member without prior notice by written consent in lieu of meeting? __ Yes __ No
Can a cashed-out LLC minority member subsequently challenge the merger on grounds of fraud, breach of fiduciary duty, or other unlawfulness? __ Yes __ No
Can the estate of a deceased LLC member bring an action for judicial dissolution? __ Yes __ No
Are there circumstances when non-managing members of an LLC owe fiduciary duties to the other members and the company? __ Yes __ No
Is there a common-law cause of action for judicial dissolution of LLCs? __ Yes __ No
In a dissolution proceeding between deadlocked 50/50 shareholders under BCL § 1104, can the court order a closed auction buyout sale between the two shareholders? __ Yes __ No
Do New York courts have jurisdiction over judicial dissolution proceedings involving foreign business corporations based on a New York forum selection clause in the shareholders agreement? __ Yes __ No
Let’s see how you did.
LLC Cash-Out Merger. The answers to Question #’s 1 and 2 are “Yes” and “No,” respectively. So long as the operating agreement doesn’t vary the default rule in LLC Law 407(a) authorizing member action by written consent of the majority members, the majority can avoid holding a member meeting on 20-days notice to vote on any merger as otherwise required by LLC Law 1002(c). When written consent is effectuated, the cash-out merger is fait accompli by the time the targeted minority member first learns of it. Once consummated, and unlike remedies available to the cashed-out shareholder of a corporation, the cashed-out member’s exclusive remedy is to dissent from the merger and demand a fair value appraisal. So long as the merger is procedurally proper under the LLC Law and the operating agreement, the former member cannot challenge the merger’s validity or seek its rescission on grounds of fraud, fiduciary breach, or other unlawfulness. For a deeper dive, check out my post entitled Groundbreaking Appellate Ruling Boosts LLC Cash-Out Mergers.
Estate’s Standing to Seek LLC Dissolution. Until recently, the more likely answer to Question #3 concerning the standing of a deceased LLC member’s estate to seek judicial dissolution under LLCL 702 — which confers standing on “members” only — would have been “No” based on analogous precedent in which courts have denied an estate’s standing to assert derivative claims — another remedy only available to members. The pendulum appears to have swung to the “Yes” side thanks to the Appellate Division, Second Department’s decision earlier this year in Andris v 1376 Forest Realty, LLC in which it reversed the lower court’s order and reinstated an estate’s claim for judicial dissolution, citing LLC Law 608’s provision authorizing the deceased member’s executor to “exercise all of the [deceased] member’s rights for the purpose of settling his or her estate.” You can read here Peter Sluka’s analysis of the Andris decision.
Duties of Non-Managing Members. In manager-managed LLCs, the law is fairly clear that the non-managing members owe no fiduciary duties, as I wrote about almost a decade ago in a post about the Kalikow case. While falling short of settled law status, a different rule may apply when a non-managing member is nonetheless alleged to have exercised managerial responsibilities unofficially, hence the answer to Question #4 is a qualified “Yes.” In a post earlier this year, Frank McRoberts discussed the Doeblin v MacArthur case in which the Manhattan Commercial Division stated the rule that a fiduciary duty is imposed upon the non-managing member who shares management duties or takes control of management duties where management duties are not shared, but ultimately found that the complaint in that case failed adequately to allege that the defendant non-managing member shared management or assumed any managerial duties.
Common-Law Dissolution of LLCs. Some of you understandingly but, alas, incorrectly, may assume that courts recognize a claim for common-law dissolution of LLCs based on the many decades of court precedent recognizing such claims for closely held corporations. The answer to Question #5 is “No” as established in the Pachter v Winiarsky case Frank McRoberts and I blogged about here, here, and here. In Pachter, taking its cue from the Appellate Division, Second Department’s observation in the 1565 Ocean Avenue case that LLC Law 702 is the “sole basis” for judicial dissolution of LLCs, the Brooklyn Commercial Division rejected common-law claims for “equitable” dissolution based on “egregious” conduct by LLC managers. The negation of common-law dissolution contrasts with the courts’ recognition of other non-statutory, equitable remedies made available to LLC members including derivative claims, accounting, and equitable buyout.
Deadlock Dissolution/Closed Auction Sale. Even recent converts to this blog should know the answer Question #6, courtesy of Peter Sluka’s post last month on the Appellate Division, Second Department’s decision in ANO, Inc. v Goldberg. There, consistent with appellate precedent holding that courts have no authority to compel buy-outs between 50/50 shareholders in deadlock dissolution cases brought under BCL 1104, the Second Department reversed the lower court’s order that required two 50/50 shareholders to conduct a closed auction sale at the courthouse compelling them to make sealed bids for the other’s stock interest. Wrote the court, “When the parties cannot reach an agreement amongst themselves with respect to the sale of the corporation’s assets either to one another or to a third party, ‘the only authorized disposition of corporate assets is liquidation at a public sale.’”
Jurisdiction Over Foreign Entity Dissolution. Question #7 earns an unequivocal “No” answer. As we’ve previously highlighted on this blog, New York courts uniformly hold that they lack subject matter jurisdiction over claims for judicial dissolution of foreign business entities. About two years ago, in Durst Buildings Corp. v Edelman Family Co., the Manhattan Commercial Division dismissed for lack of subject matter jurisdiction a dissolution lawsuit brought by the 50% member of a New York-based, Delaware LLC. The petition predicated jurisdiction on a New York forum selection clause in the operating agreement. The respondent, also desirous of litigating the case in New York, did not contest the court’s jurisdiction. The court dismissed the case sua sponte, noting that parties have no power to waive a court’s lack of subject matter jurisdiction. You can read more about the Durst case here.