Business Law: Under the New Jersey Limited Liability Company Act, N.J.S.A. 42:2B-1 et seq., the involuntary dismissal of a member of an LLC is permitted where “the member engaged in conduct relating to the limited liability company business which makes it not reasonably practical to carry on the business with the member as a member of the limited liability company.” N.J.S.A. 42:2B-24b(3)(c). Notably, this provision is separate and apart from the provision providing for involuntary removal of a member where he engages in illegal, fraudulent or otherwise wrongful conduct which negatively impacts the company’s business. Accordingly, it would appear that under New Jersey law, a member may be forced out of an LLC by the other members for engaging in conduct that is not unlawful or even wrongful. A plain reading of the statute suggests that the members of an LLC may remove one of its members for committing any act which, in their view, makes it “not reasonably practical” to carry on the business.
In practice, this could pose a serious threat to the members of any LLC having multiple members. Arguably, and depending on the subjective interpretation of this provision, a member could be removed from the company against his will for even a basic difference in opinion as to how the company should be run. On the other hand, where the members of an LLC are concerned about not having an adequate remedy for potential personal or business-related conflicts among them, this provision of the LLC Act could prove extremely useful. Essentially, those members sharing the majority opinion in how the business should be run could utilize this provision to ensure that a dissenting member will not stand in the way of their common objectives, even if ultimately the majority’s approach proves to have been wrong.
So, how should the members of an LLC deal with this issue? As in all things relating to LLC’s, this highlights the need for strong and well-negotiated operating agreements. That is because the statute’s rules governing involuntary dismissal of a member of an LLC would only apply where either (a) there is no operating agreement or (b) there is an operating agreement, but it is silent on that point. Accordingly, in forming and establishing the ownership structure of an LLC, the members should carefully negotiate and execute an operating agreement that specifically defines the terms governing involuntary dismissal. By doing so, the members may effectively protect their respective interests in the LLC and avoid future confusion or disagreement as to when it becomes “not reasonably practical” to carry on the business. Or, even if the members do agree to such a provision, they can do so understanding its implications.
© 2008 Nissenbaum Law Group, LLC