Law in the Marketplace: How to avoid oppression - Concord Monitor
‘Oppression” is the term lawyers use to describe actions by one or more LLC managers or members of a multi-member LLC to unfairly deprive minority members of their LLC rights. Unlike other states, New Hampshire has no statutory LLC oppression as such, but, as discussed below, it has provisions under RSA 304-C:110 that provide equivalent protections.
Multi-member LLCs are not always friendly neighborhoods. There are thousands of reported LLC oppression cases nationwide, and a few in New Hampshire. The key provisions in RSA 304-C, the Revised New Hampshire Limited Liability Company Act (the “New Hampshire LLC Act”) that are intended to protect LLC members against oppression are New Hampshire LLC Act sections 110,III(h) and 110,IV. If you’re a New Hampshire LLC member and either (a) you fear you may be an oppression target, or (b) you want to oppress a co-member, you need to know about these provisions.
■Section 110,III(h) provides, in effect, that the managers and members of New Hampshire multi-member LLCs have a duty to act toward members with “fiduciary good faith.”
■Section 110,IV provides that acting in fiduciary good faith by LLC members means avoiding conduct that the actors know will inflict injury on the LLC or the members.
The types of oppressive conduct covered by the above sections are numerous, but the more common of them include:
■“Squeezing out” a minority member by creating a new LLC of which only the other members are members and transferring the old LLC’s business and assets to the new one, effectively leaving the minority member with nothing;
■Withholding information from a minority member that the member needs in order to make sure that the LLC is providing him or her with required allocations and distributions of LLC income;
■Failing to notify the minority member that the other members will be voting on an LLC matter;
■Issuing interests in the LLC to existing or new members on terms that will unfairly reduce the value of the minority member’s membership.
The definitional terms of Section 110,IV may trouble potential or actual targets of oppression.
These terms provide that in order to obtain protection under Section 110,III(h), oppression targets must prove that their would-be oppressors “know” that their conduct will inflict injury on the target. At least in criminal cases, proving this knowledge may be impossible. However, most or all oppression claims under Section 110, III (h) and under similar provisions in other LLC acts are civil claims. Claimants in civil cases normally need only meet a civil standard of “more probable than not,” not a criminal standard of “beyond a reasonable doubt.”
It is true that Section 110, V provides that LLC members and managers won’t have Section 110,III(h) duties:
■If they disclose to all of an LLC’s members the material facts concerning actions they plan that may harm a member; and
■If a majority of “disinterested” members vote to approve these actions.
Thus, Section 110,V may complicate Section 110(h) claims by oppression targets.
However, Section 110,V won’t protect oppressors as long as individuals who are oppression targets can prove that allegedly “disinterested” members are not, in fact, disinterested. Individuals who are oppression targets may be able to make this proof if, for example, the “disinterested” members are relatives of the oppressor.
Thus, as noted above, New Hampshire LLC Act doesn’t contain an anti-oppression provision as such; but it has the equivalent of such a provision in Sections 110,III(h) and 110,IV.
John Cunningham is a lawyer licensed to practice law in New Hampshire and Massachusetts. He is of counsel to the law firm of McLane Middleton, P.A. Contact him at 856-7172 or [email protected]. His website is llc199a.com. For access to all of his Law in the Marketplace columns, visit concordmonitor.com.
source: https://www.concordmonitor.com/Law-in-the-Marketplace-44020764
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