It is pretty common to think that limited liability company members have similar rights as shareholders in a corporation.
But they don’t, (although in some respects the rights afforded to LLC members may be better). The Business Court made that pretty clear last week in Fiske v. Kieffer, 2016 NCBC 22.
The Defendant held a minority (40%) interest in an LLC. He asserted in a counterclaim that all the other members of the LLC members (the Plaintiffs) had acted together to breach their fiduciary duty to him. The Plaintiffs collectively controlled the remaining 60% of the LLC and sat in the majority position.
The claimed breach of fiduciary duty involved the making of a $100,000 capital call by the majority. The Defendant said that the capital call was unnecessary and was improperly aimed at diluting his interest in the LLC and forcing him into selling that interest.
If the LLC had been a corporation, the Court might have found the existence of a fiduciary duty. The NC Court of Appeals held in Norman v. Nash Johnson & Sons’ Farms, Inc., 140 N.C. App. 390, 407, 537 S.E.2d 248, 260 (2000) that "a fiduciary duty could arise where multiple minority shareholders in a corporation acted in concert to control the corporation." Op. ¶16.
But LLCs are different statutory creatures, especially since in an Operating Agreement, the parties to that agreement can alter the statutory default rules. Order ¶16. Delaware’s version of the Uniform Revised Limited Liability Company Act says that a member’s fiduciary duty can be "expanded or restricted or eliminated" via an Operating Agreement. 6 Del. C. § 18-1101(c).
The North Carolina version of the "uniform" Revised Act doesn’t contain that language, but it says that "[i]t is the policy of this Chapter to give the maximum effect to the principle of freedom of contract and the enforceability of operating agreements." N.C. Gen.. Stat. § 57D-10-01(c). The only boundaries which the NC Act places on the freedom of contract in Operating Agreements is that those agreements may not be "unconscionable" and that they must be governed by the "implied contractual covenant of good faith and fair dealing." N.C.G.S. § 57D-2-30.
The LLC’s Operating Agreement in the Fiske case required a super-majority vote (75% of the members) for a number of significant actions. Judge McGuire held that this provided adequate protection to the Defendant of his interest and that he did not have a claim for breach of fiduciary duty. Op. ¶¶17 & 18. The Defendant could, for example, block a sale of the LLC by refusing to approve the sale, notwithstanding his minority status. The Defendant also had the right, under the terms of the Operating Agreement, to make a claim for breach of contract against the Defendant for making the capital call in violation of the Agreement. Op. ¶21.
This isn’t the first time that the NC Business Court has looked at the different rights of LLC members as compared to corporate shareholders. Judge Gale did that three years ago, in Blythe v. Bell, 2013 NCBC 18 ¶¶18-22. That Opinion stressed the availability of a derivative action to LLC members with fewer procedural obstacles than those that face a shareholder of a corporation filing a derivative action. For example, no pre-litigation demand is necessary before filing of a complaint, and an LLC member doesn’t have to show that she "fairly represents the interests of the corporation." The statute governing corporate derivative actions, on the other hand, requires both (in G.S. §§ 55-7-42 and 55-7-41).
So if you are an LLC member holding a minority interest, are you better protected from the misdoings of the majority than a shareholder with a similar interest? It probably depends on the terms of the Operating Agreement.