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New Case Reaffirms the Difference Between Corporations and LLC’s When It Comes to Rights of Minority Owners

I have written extensively about the difference between the law in New Jersey protecting a minority shareholder in a corporation, and the law protecting a minority member in a limited liability company (LLC).  Most lawyers practicing extensively in this area of law have long argued, and believed, that the statute protecting minority shareholders in a corporation from what is considered “shareholder oppression” does not apply to LLC’s (much as we may want it to).  The New Jersey Appellate Division reaffirmed this principle in a recent, unreported decision, Hopkins v. Duckett.

The importance of this legal distinction cannot be stressed enough.  Actions such as the failure to give dividends to shareholders (in certain circumstances), termination of a shareholder as an employee, and excess payments to themselves by the majority shareholders have all been held to constitute shareholder oppression, often giving rise to the right to be bought out of a NJ corporation.  However, these same acts may not give rise to the right to be bought out of an LLC.  Instead, the rights of a minority member of an LLC may be much more complicated, and the remedy may not include a buyout of the minority member’s interest.

Of course, the rights and obligations under an LLC in New Jersey may also be much simpler, assuming the LLC’s Operating Agreement does not prohibit withdrawal.  If it does not, in NJ, a member may simply withdraw from the LLC and have the statutory right to be paid for his membership interest a much less expensive, procedure than a shareholder oppression lawsuit.  However, the Operating Agreement often bars such withdrawal, and then a very careful analysis of the facts is necessary to determine a minority member’s rights.

A minority member of an LLC may still protect himself, even if the majority members insist on prohibiting withdrawal at the time the Operating Agreement is drafted.  Absolutely nothing prevents the members of an LLC from adopting the rights and remedies set forth in the shareholder oppression statute, thus making them applicable to an LLC by contract.   This could be a fair compromise between simply permitting withdrawal, and providing no relief at all.  What is absolutely critical, though, is to utilize the services of an attorney who is well-versed in this area of law.  Lawsuits brought by minority members against my corporate clients have been thrown out because the attorney on the other side based his entire case on the shareholder oppression statute, when the company at issue was an LLC.  Those clients learned the hard way that this area of law can be complicated and wished they had done more due diligence in hiring their attorney.