In the last year or so, I have seen several business owners who are not very happy that New Jersey LLC members now have the same protection from minority oppression that is enjoyed by minority shareholders of corporations. To “protect” against such lawsuits, apparently several attorneys around the state are advising clients to add to Operating Agreements a clause that waives this protection. Unfortunately for these business owners, who will find out the hard way, those protections simply cannot be waived so easily.
Think about the arguments against a waiver of minority protections. If the goal of the legislature was to protect minority owners from improper behavior on the part of the majority owners, why would they have allowed these protections to be waived? The minority owner often has no more leverage at the start of the business relationship than he does at the time trouble arises. Investors would be faced with waiving rights designed specifically to protect them in the event that the majority abuses their authority, or not joining the LLC in the first place. This clearly is not what the legislature intended by passage of the statute protecting minority owners, and courts are extremely unlikely to allow for such a waiver.
The impact of these clauses is potentially harmful if you mistakenly believe they provide protection. I have seen at least one group of shareholders who clearly believed that they could act almost with impunity, as long as they did not breach their collective fiduciary duty. And they clearly believed that even if they went so far as to breach that duty, the minority shareholder they were essentially abusing could only sue for actual damages that he could prove. When they learned that they really should not have undertaken several of the acts they had already done, and that it was extremely unlikely that a New Jersey court would uphold that waiver of rights, they were not too happy to hear the news, and not too happy with the attorney who drafted that clause.
Of course, this does not mean that there are no clauses that can protect majority owners from such suits. Making it clear in the Operating Agreement that if one of the owner’s employment with the company ceases, then he or she may be compelled to sell (at the company’s option), might offer protection that would not only be enforceable, but may cover many of the potential issues that you fear may arise. Hiring an attorney experienced in this area of law will help ensure that your Operating Agreement contains enforceable clauses that actually protect you, rather than clauses that sound good on paper, but provide little real world protection.
If you have any questions about this post, or other related matter, please email me at firstname.lastname@example.org.