Kicking a Member Out of an LLC – Dissociation Under the New Jersey LLC Statute
Years ago, oppressed minority shareholders in New Jersey corporations had more protection than oppressed members of a New Jersey LLC. When the statute was revised in 2014, that changed, and LLC members now have similar remedies available to them. But there is one little-known section of the New Jersey LLC statute that makes it a more powerful tool for the majority owners than the corporate statute – the ability to “dissociate” a member.
This means that, under the right circumstances, the court can in effect partially remove an LLC member by turning his membership into a non-voting economic interest, who would then have no say whatsoever in the company’s governance. It could also lead to a judicial sale of the former member’s now economic interest. Such a remedy does not exist with corporations, where one would instead have to show that the minority shareholder is the “oppressor,” which almost never happens.
That does not mean that achieving dissociation is easy – it isn’t. But in a recent case I just handled in arbitration, my team proved that it can be done.
Admittedly, the case we were handling had egregious facts. An LLC manager and single largest member had total control and used the LLC to keep himself in power. He did so by granting himself additional membership interests, giving himself a million-dollar bogus loan, changing the corporate domicile (to Belize) to defeat jurisdiction in the arbitration, and violating various orders of both the arbitrator and a court. Since the test for dissociation involves, among other things, an analysis of whether the member is actually harming his or her company, the arbitrator found that we satisfied the test. But this analysis goes both ways.
But this analysis must be applied both by the company, as well as the individual LLC members. I have met with more than one minority LLC member who had no idea that the majority could use such a tool against them and warned them to stop undertaking acts that could lead to their expulsion from the LLC. The bottom line is, whether you are in the minority or the majority, you should know the full panoply of rights available to both you and the other side, so you can make fully informed decisions to either avoid or prepare for business divorce litigation.