What is the LLC Buy-Out Standard?

By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold Township, Monmouth County, New Jersey LLC Attorney

The New Jersey Revised Uniform Limited Liability Act (RULLA) contains an express provision granting relief to oppressed minority LLC members.   The current LLC Act authorizes the remedy of a buy-out in lieu of dissolution.  Unlike the corporate statue, which expressly provides that the buy-out be at fair value (assuming there is no contrary direction in a shareholders agreement), the current LLC Act does not specify at what value the buy-out is to be made.

In an Operating Agreement LLC members, like shareholders in a shareholders agreement, can dictate the agreed value standard under which a member claiming oppression is to be bought out.  When the Operating Agreement does not so provide, the implicit default standard should be fair value.

Fair value has been the standard of New Jersey business law.  Since the time the New Jersey Business Corporation Act became effective, fair value has been the standard for payment to shareholders exercising dissenters’ rights.  There is no distinction in the concept of fair value between shareholders exercising dissenters’ rights and those claiming minority oppression.   Fair value represents the intrinsic worth of the holder’s interest in the entity, in other words, the value of the member’s interest in the hands of the holder, or the holder’s proportionate share of the value of 100 percent of the entity.  It is reasonable to assume that an oppressed minority owner, whether in a corporation or an LLC, would continue the investment had the majority not engaged in oppression.  Consequently, the holder must be fairly compensated for the intrinsic value of what is being taken from him or her.

To discuss your NJ LLC matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com.  Please ask us about our video conferencing consultations if you are unable to come to our office.

 

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