Minnesota’s Revised Uniformed Limited Liability Company Act (Minnesota’s Revised LLC Act), which applies to all Minnesota limited liability companies (LLCs) as of Jan. 1, 2018, introduces a new legal concept applicable to Minnesota LLC’s referred to as “dissociation.” While an undefined term, it essentially means the right to legally break up as business owners. After all, people can legally break up with their spouses by filing for a divorce, why can’t business owners legally break up? Now they can.
Dissociation runs both ways – a member can break up with the company and the company and its members, in many desired circumstances, can break up with a member. Either way, the consequences to the dissociated member can be harsh under the Revised Act default rules, and therefore need to be understood by members of Minnesota LLCs.
The Revised Act now details: (1) a member’s power to dissociate; (2) wrongful dissociation by a member; (3) events causing a member to be dissociated; and (4) the effects of a member’s dissociation. Minn. Stat. § 322C.0601-0603. These new statutory provisions are default provisions that can be altered, restricted, replaced or expanded by the terms of an operating agreement. See Minn. Stat. § 322C.0110, subds. 2 and 3. Thus, parties can agree upon break up rules if they so choose. If they do not agree upon break up rules, then the default provisions of the Revised Act control.
A Member Initiates the Break Up
Like at an-will employee, a member of an LLC has the power to “dissociate” at any time, for any reason, rightfully or wrongfully, from the LLC. Minn. Stat. § 322C.0601, subd. 1. To dissociate, a member need only provide notice to the LLC of its express will to withdraw from the LLC. Minn. Stat. § 322C.0602(1).
Circumstances by Which the Company May Break Up With a Member
The Revised Act broadly describes 14 ways in which the LLC can “dissociate” with a member of the LLC in Minn. Stat. § 322C.0602:
- A member provides notice to the company of its express will to withdraw.
- An event stated in the operating agreement as causing the person’s dissociation occurs.
- The person is expelled as a member pursuant to the operating agreement.
- The person is expelled as a member by the unanimous consent of the other members and other conditions detailed in the statute are met (including that it is not reasonably practicable to continue to be business partners).
- The person is expelled as a member by judicial order for reasons detailed in the statute.
- Certain conditions involving death, disability and/or appointment of a guardian or conservator.
- In a member-managed LLC, certain conditions involving the member’s bankruptcy, assignment for the benefit of creditors, and related events.
- In the case of a person that is a trust or is acting as a member by virtue of being a trustee of a trust, the trust’s entire transferable interest in the company is distributed.
- In the case of a person that is an estate or is acting as a member by virtue of being a personal representative of an estate, the estate’s entire transferable interest in the company is distributed.
- In the case of a member that is not an individual, partnership, LLC, corporation, trust, or estate, the termination of the member.
- Certain conditions involving a merger.
- Certain conditions involving conversion.
- Certain conditions involving participation in a domestication.
- The company terminates.
Liability of a Member for Wrongful Break Up
Importantly, a person that wrongfully dissociates as a member of the LLC is liable to the LLC and potentially to the other members of the LLC for “damages caused by the dissociation.” Minn. Stat. § 322C.0601, subd. 3.
Dissociation by a member is wrongful if: (1) it is in breach of an express provision of the operating agreement; or (2) the dissociation occurs before the termination of the LLC and the member withdraws, is expelled by judicial order, is dissociated by becoming a debtor in bankruptcy or is willfully dissolved or terminated if it is not an individual or non-business trust or estate. Minn. Stat. § 322C.0601, subd. 2.
Consequences of the Break Up to a Dissociated Member
The consequences to a dissociated member can be severe, especially under the default provisions of the Revised Act if not amended by the operating agreement.
NO. 1: When a member is dissociated, the member’s right to participate in the management and conduct of the company’s activities terminates. At the same time, if the LLC is a member-managed LLC, the dissociated member’s fiduciary duties end as to matters arising after the person’s dissociation. Minn. Stat. § 322C.0603, subd. 1(1), (2).
NO. 2: Dissociation of a member does not require the LLC to purchase the dissociated member’s interest. Rather, the dissociated member becomes a “transferee” of the membership interest, which means only the right to receive distributions from the LLC in accordance with the operating agreement and/or as the member would have otherwise been entitled to receive. Minn. Stat. § 322C.0102, subd. 28; § 322C.0603, subd. 1(3). If a transferee becomes entitled to receive a distribution, the transferee (i.e., dissociated member), has the status of, and is entitled to all remedies available to, a creditor of the LLC with respect to the distribution. Minn. Stat. § 322C.0403, subd. 4.
NO. 3: A dissociated member, as a transferee, is not entitled to petition the court for dissolution or the other alternative remedies contemplated by Minn. Stat. § 322C.0701, subd. 2.
NO. 4: The member takes on a risk that such member will be liable to the company and/or its members for wrongful dissociation, as discussed above. Minn. Stat. § 322C.0601, subd. 3.
NO. 5: The dissociated member’s right to information from the LLC is limited to information for the time period in which the person was a member. Minn. Stat. § 322C.0401, subd. 3.
NO. 6: The Revised Act allows an LLC and its members to amend an operating agreement after a member is dissociated with regard to “any debt, obligation, or other liability of the limited liability company or its members to the person in the person’s capacity as a transferee or dissociated member.” Minn. Stat. 322C.0112, subd. 2.
NO. 7: The dissociation of a member does not discharge the person from any debt, obligation, or other liability to the company or the other members that the person incurred while a member. Minn. Stat. § 322C.0603, subd. 2.
All members should be aware of the foregoing risks associated with dissociation. Owners of LLCs should also consider agreeing upon break up rules if they want to avoid the consequences of the default dissociation rules under Minnesota’s Revised LLC Act.