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Minority Oppression and the LLC: Manere v. Collins, the Uniform Act, and Comment 701

For many decades, the law of closely-held businesses was the law of closely-held corporations.[1]  For entrepreneurs and attorneys, the corporate liability shield was the key desideratum, and before the advent of limited liability companies the corporation was essentially the only game in town.[2]  Unfortunately, for many decades the liability shield came with a potentially dangerous price for minority owners.[3]  The traditional corporate norms of majority rule, coupled with the minority shareholders’ inability to exit the enterprise, empowered majority shareholders to “oppress” minority shareholders or defeat such shareholders’ “reasonable expectations.”[4]  The “lock-in” phenomenon compounds the minority’s vulnerability; it is typically impossible for a minority shareholder to exit the enterprise except on terms dictated by the majority.

Today, in almost all U.S. jurisdictions special rules protect minority shareholders from outright expropriation;[5] in accord with these rules controlling shareholders must avoid abusing their co-owners.  Corporate law recognizes what was many years ago described as an “incorporated partnership”[6] – i.e., “an intimate business venture [in which] stockholders … occupy a position similar to that of joint adventurers and partners”[7] and, concomitantly, have important duties inter se.  The two most prominent terms of art – often used interchangeably – are “oppression” and “reasonable expectations.” 

However, today the closely-held corporation is no longer the only game in town.  Far from it – in every U.S. jurisdiction, formations of limited liability companies far exceed new incorporations,[8] and for some jurisdictions a better verb choice than “exceed” might be “dwarf.”[9] Every year, the percentage of closely held businesses formed as limited liability companies rises as the percentage for corporations falls.[10]

As with corporations, the overwhelming majority of limited liability companies are closely held. As a result, disputes about power abuses within closely-held businesses increasingly occur in the context of LLCs rather than corporations; and the terms “oppression” and “reasonable expectations” increasingly appear in cases involving limited liability companies.

This development is natural.  Although LLC and corporate law differ in some fundamental ways,[11] the dangers of oppression arise from a combination of business considerations and human nature.  “Choice of entity” has little impact on these factors nor on the way in which they combine.[12]

Thus, as was foreseeable,[13] “oppression” and “reasonable expectations” have migrated into the world of LLCs.  However, it has not been a simple matter to determine what these terms of art mean in the LLC context.  Even in the now-mature case law on closely-held corporations, jurisdictions vary in defining “oppression” and determining what shareholder expectations are “reasonable.”  A fortiori the LLC case law is also varied.

No single LLC case can control this determination, but a recent decision from the Connecticut Court of Appeals provides much useful guidance.  The case, Manere v. Collins, involved a dispute between the two members of a Connecticut limited liability company that operated a cafe.[14]  The minority member sought a court order dissolving the LLC.  He invoked Conn. Gen. Stat. § 34-267(a)(5)(B) of the Connecticut Uniform Limited Liability Act, which comes essentially verbatim from the Revised Uniform Limited Liability Company Act (2006, Last Amended 2013).[15]  The Connecticut version states:

On application by a member, the entry by the Superior Court for the judicial district where the principal office of the limited liability company is located, of an order dissolving the company on the grounds that the managers or those members in control of the company: … have acted or are acting in a manner that is oppressive and was, is, or will be directly harmful to the applicant ….[16]

Although “oppressive” is obviously a key term in this provision, the Connecticut statute, like its uniform progenitor, “does not define ‘oppression.’”[17]  Moreover, until Manere, neither the court of appeals nor the Connecticut Supreme Court had “had the opportunity to define oppression as that term has been utilized in § 34-267 since its inception.”[18]

Manere provided the court of appeals its first opportunity on the subject, and the court provided an analysis that is instructive in several ways.  Most categorically, for the 21 jurisdictions that have adopted the Revised Uniform Limited Liability Act,[19] the decision is precedential.  As a uniform act, “CULLCA” [the court’s acronym] by its terms “requires considering the need to promote uniformity with other states regarding LLC law when applying and construing its provisions.”[20] And in Manere, the court does just that.  In particular, the court delineates the pivotal yet undefined concept of oppression by quoting and relying on the uniform act’s official comments.[21]

Additionally, Manere will be useful beyond the realm of uniform enactments.  Given the quality of the court’s analysis, the decision is likely to be persuasive even where not formally precedential.  For example, in addition to holding that corporate precedent is relevant to the LLC context and vice versa,[22] the court “walks the walk” by using corporate cases to make specific points about oppression in LLCs. For instance, the Manere court stated that, “in assessing a minority member’s reasonable expectations, courts have noted the relevance of the operating agreements of LLCs (or other written and oral agreements).” Then, for authority, the opinion directs the reader solely to a corporate case.[23]

More broadly, i.e., whatever the jurisdiction, Manere’s greatest impact will come from the decision’s core analysis.  That analysis:

  • identifies and distinguishes the two main approaches close corporation law has taken in defining oppression, i.e.:
    • the fair dealings standard, which assesses alleged majoritarian misconduct against norms of business conduct stated in general terms – for example:
      • burdensome, harsh and wrongful;
      • evidencing a lack of probity and fair dealing in the affairs of a company to the prejudice of some of its members;
      • a visible departure from the standards of fair dealing, and a violation of fair play on which every shareholder who entrusts his money to a company is entitled to rely;[24] and
    • the reasonable expectations standard, which examines alleged majoritarian misconduct from the perspective of the complaining member:
      • occasioning a fact-intensive inquiry into the particulars of the case; and
      • assessing those facts under the objective standard of reasonableness; and
    • adopts the reasonable expectations standard:
      • relying on the official comments to the uniform act; and
      • stating that the court views the “guidance [in the official commentary] as a tacit adoption of the ‘reasonable expectations’ standard for oppression claims under the RULLCA [Revised Uniform Limited Liability Company Act].”[25]

The court quotes the guidance at length:

[A] court considering a claim of oppression by an LLC member should consider, with regard to each reasonable expectation invoked by the plaintiff, whether the expectation:

(i) contradicts any term of the operating agreement or any reasonable implication of any term of that agreement;

(ii) was central to the plaintiff’s decision to become a member of the limited liability company or for a substantial time has been centrally important in the member’s continuing membership;

(iii) was known to other members, who expressly or impliedly acquiesced in it;

(iv) is consistent with the reasonable expectations of all the members, including expectations pertaining to the plaintiff’s conduct; and

(v) is otherwise reasonable under the circumstances.[26]

These factors recognize and respect the contract-based nature of the limited liability company.  The first factor is simply the contract – i.e., the operating agreement.  The third and fourth factors reflect that norms within a contract-based organization must be shared to be enforceable.[27]  This approach is especially important in the oppression context, because “reasonable expectations” can bring relief even as to conduct that the operating agreement does not forbid.[28] 

Having adopted the commentary’s five factors, Manere then takes a further step (albeit one based on the commentary). Noting that the “ULLCA factors…indicate…that the reasonableness of a member’s expectation at the inception of an LLC may prove unreasonable over time and under particular circumstances.”[29] Manere adds a sixth factor – namely, how a plaintiff’s misconduct should figure into a “reasonable expectations” analysis.

This situation can be quite complicated, especially in one of the classic oppression scenarios – i.e., when the majority terminates a minority owner from a full-time, paid position within the enterprise and thereby cuts off the member’s only significant source of remuneration.[30]  According to Manere, even assuming minority misconduct justified the termination (i.e., any expectation of employment was no longer reasonable), some other reasonable expectation may remain.  Indeed, in Manere, while it was “the plaintiff’s own misconduct which prompted the complained of acts he has alleged as oppressive,”[31] nonetheless:

That misconduct does not obviate the need for the court to consider whether he continued to have reasonable expectations as a minority member. See Gimpel v. Bolstein, supra, 125 Misc. 2d at 53, 477 N.Y.S.2d 1014 (although minority shareholder embezzled company funds, “it does not necessarily follow that the majority shareholders may treat him as shabbily as they please”). While the plaintiff cannot establish oppression based on his termination of employment—or based on his being prevented from unfettered access to the cafe or [the LLC] bank accounts—we emphasize that the plaintiff cannot be marginalized to the extent that he would be precluded from realizing what reasonable expectation he still maintains as a minority member.[32]

This proposition seems logical in theory and with regard to nonfinancial expectations can often be achieved – e.g., appropriate access to company information, opportunity to have one’s views at least considered in good faith before major company decisions.[33]  When money is involved, however, there may be no middle ground.  The company may be cash poor, and the money formerly paid for member’s work may be needed to pay a replacement.

For that situation, the ULLCA commentary attempts no answer, and Manere provides guidance only in terms of a dispute in litigation:

[A] court should take into account not only the reasonable expectations of the oppressed minority [member], but also the expectations and interests of others associated with the company. To do so necessarily requires a balancing of factors to make an equitable determination, and, therefore, is left to the sound discretion of the trial court.[34]

What does this approach mean for litigators seeking to avoid litigation?  Or for transactional lawyers seeking to predetermine the outcome?  For the answer to these questions, one must look beyond Manere or the Uniform Law Commission’s official comments.  A future column will do so.

[1] A.B. Harvard (1972); J.D. Yale (1979).  This article reflects joint research and multiple exchanges of views with Professor Douglas K. Moll.  Any errors, however, are solely the author’s responsibility.

[2] Eventually full-shield limited liability [general] partnerships and limited liability limited partnerships became available as well. Daniel S. Kleinberger, “Sorting through the soup: How do LLCs, LLPs and LLLPs fit within the regulations and legal doctrines?” Business Law Today, Vol. 13, No. 2 (November/December 2003), pp. 14-19.  However, limited liability companies far outnumber both LLPs and LLLPs as vehicles for closely held businesses.  For example, for 2020 the Office of the Minnesota Secretary of State reported the formation of 47,464 limited liability companies, 192 limited partnerships, and 470 limited liability partnerships. https://www.sos.state.mn.us/business-liens/business-liens-data/new-business-filings-2020/?searchTerm=filings, last visited 4/2/21.  (The dataset does not distinguish between limited partnerships and limited liability limited partnerships.)  For 2019, the Delaware Division of Corporations reported the formation of 165,910 new LLCs and 13,513 new “LP/LLPs”.  Annual Report (2019); https://corp.delaware.gov/stats/, last visited 4/2/21. 

[3] The shield also posed tax issues for minority and majority owners alike. See Carter G. Bishop and Daniel S. Kleinberger, Limited Liability Companies, (WG&L 1994; RIA Supp. 2021-1) (“Bishop & Kleinberger”), ¶1.01[2]. (The Need for Limited Liability Companies: The Tax-Shield Conundrum).

[4] See, e.g., Minority Oppression & the Limited Liability Company: Learning (or Not) from Close Corporation History, 40 Wake Forest L. Rev. 883, 896–907 (2005).

[5] Delaware is the most notable exception.  See Nixon v. Blackwell, 626 A.2d 1366 (Del. 1993).  Delaware’s corporate statute does have an opt-in close corporation subchapter, 8 Del. Code subch. XIV, but anecdotal evidence suggests that the subchapter is invoked infrequently. A statistical review would likely confirm the suggestion. (For example, a learned and experienced Delaware attorney, referring to information available from the Delaware Division of Corporations, recently told that author that – in  November, 2020 – only 15 of 3973 new Delaware incorporations were for closed corporations.)

[6] See, e.g., George D. Hornstein, Stockholders’ Agreements in the Closely Held Corporation, 59 YALE LJ. 1040, 1040 (1950) (stating that “stock-holders [in a closely held corporation] … generally prefer certain of the attributes of partnership” and that “[i]n effect, they want an ‘incorporated partnership’”).

[7] Helms v. Duckworth, 249 F.2d 482, 486 (D.C. Cir. 1957)

[8] Again using Minnesota and Delaware for examples:  Minnesota new filings statistics for 2020: 47,464 newly formed LLCs; 5,345 newly incorporated corporations.  https://www.sos.state.mn.us/business-liens/business-liens-data/new-business-filings-2020/?searchTerm=filings, last visited 4/2/21.  New Delaware filings statistics for 2019:165,910 newly formed LLCs; 45,405 newly incorporated corporations.  Annual Report (2019); https://corp.delaware.gov/stats/, last visited 4/2/21.

[9] See note 8, statistics for Minnesota. The ratio of new LLCs (47,464) to new corporations (5,345) is almost 9 to 1 (8.88 [rounded] to 1).

[10] In Minnesota, the ratio of new LLCs to new corporations went from slightly over 7 to 1 in 2018, https://www.sos.state.mn.us/business-liens/business-liens-data/new-business-filings-2018/?searchTerm=filings, last visited 4/2/21, to slightly under 9 to 1 in 2020.  See note 8. In Delaware, in contrast, the change was slight.  The ratio of new LLCs to new corporations went from 3.47 [rounded] to 1 in 2017, to 3.65 [rounded] to 1 in 2019.

Annual Report (2019); https://corp.delaware.gov/stats/, last visited 4/2/21.

[11] See, e.g., Daniel S. Kleinberger & Douglas K. Moll, The Limited Effect of Maximum Effect, Business Law Today (August 13, 2020).

[12] See, e.g., Manere v. Collins, 241 A.3d 133, 153, n.20 (Conn. App 2020)

(stating that “a minority shareholder of a close corporation and a minority member of an LLC share many traits which make them vulnerable to oppression”).

[13] See, e.g., Bishop & Kleinberger, ¶ 10.09 Special Fiduciary Duties in Closely Held Limited Liability Companies; Douglas K. Moll, Minority Oppression & the Limited Liability Company: Learning (or Not) from Close Corporation History, 40 Wake Forest L. Rev. 883 (2005).

[14] Manere v. Collins, 241 A.3d 133 (Conn. App. 2020).

[15] Connecticut adopted the uniform act in 2016. Connecticut Public Act No. 16-97 (2016).

[16] Id. at 150 (quoting Conn. Gen. Stat. § 34-267 (a)(5)(B)).

[17] Id. at 150.  The court added that “[t]he term ‘oppression’…does not appear in any [other] section” of the Connecticut LLC act.

[18] Id.

[19] https://www.uniformlaws.org/committees/community-home?CommunityKey=bbea059c-6853-4f45-b69b-7ca2e49cf740, last visited 3-22-21

[20] Id. at 151 (quoting Office of Legislative Research, Bill Analysis, Substitute House Bill No. 5259, An Act Concerning Adoption of the Connecticut Uniform Limited Liability Company Act (April 28, 2016); citing the identical language in Conn. Gen. Stat. § 34-283).

[21] Id. at 152 (“Because the legislature substantially adopted the major provisions of the RULLCA, we may look to the commentaries of that uniform act for further guidance in ascertaining the legislature’s intent.”).  Of course, even within the realm of uniform enactments, a comment is not by itself precedential, See, e.g., Simmons v. Clemco Indus., 368 So. 2d 509, 514 (Ala. 1979) (stating that, “[t]hough the official comments are a valuable aid in construction, official comments have not been enacted by the legislature and are not necessarily representative of legislative intent”).  However, with that realm a court’s adoption of a comment is as much precedential as any other holding of the court.

[22] Manere v. Collins, 241 A.3d 133, 153 n. 20 (2020) (“Given that a minority shareholder of a close corporation and a minority member of an LLC share many traits which make them vulnerable to oppression, and mindful of the commentary’s guidance, we believe that the governing principles of close corporation law are instructive for our interpretation of the term ‘oppression’ as it appears in the CULLCA. For purposes of convenience, we use the terms “LLC” and ‘close corporation’ interchangeably.”).

[23] Id. at 156 (citing solely Gunderson v. Alliance of Computer Professionals, Inc., 628 N.W.2d [173], 185 [2001]); For practitioners unfamiliar with the oppression construct, Manere provides another benefit – i.e., a cogent introduction made by succinctly canvassing the relevant corporate case law.

[24] Manere v. Collins, 241 A.3d 133, 153 (2020) (cleaned up).

[25] Marene at 154 (quoting “Rev. Unif. Limited Liability Company Act of 2006 (2013) § 701, comment, 6C U.L.A. 135”).

[26] Id.

[27] Evidence of shared norms can be found in conduct as well as words.  Acquiescence may occur “expressly or impliedly.” Id. 

[28] When the majoritarian misconduct seems authorized by the operating agreement, an oppression claim might still work, but the implied contractual covenant of good faith and fair dealing is the more targeted weapon.  The uniform act’s official commentary discusses the applied covenant in depth.  ULLCA (2013) § 701, cmt.  See also Daniel S. Kleinberger, “Delineating the Implied Covenant and Providing for ‘Good Faith,’” BUSINESS LAW TODAY (May 2017); “In the World of Alternative Entities – What Does ‘Good Faith’ Mean?” BUSINESS LAW TODAY (March 2017).

[29] Manere at 157.

[30] In the close corporation context, the cases refer to expectations of employment.  Manere does so as well, noting that “employment by an LLC is typically the main source of income to members in an LLC.” Id. However, the word “employment” jars any LLC lawyer familiar with K-1 forms, guaranteed payments, and other nuances of income tax law. 

[31] Manere at 161.

[32] Id.  This passage is another example of the interchangeability of corporate and LLC precedent, discussed in the text above, at nn. 22-23. The court’s sole authority is Gimpel v. Bolstein, a case involving a close corporation.

[33] Each of these examples presupposes appropriate behavior by minority owner (e.g., safeguarding confidential information, not being abusive to individual providing information or taking note of the minority owner’s views), and the second example presupposes practicability (e.g., that timing and other circumstances make consultation possible).

[34] Id. at n. 27

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