The Appellate Division of the Superior Court of New Jersey recently held that a member of a limited liability company could have his interest involuntarily repurchased even if this remedy was not permitted by the Operating Agreement and even if he is paid nothing for the interest.
In All Saints University of Medicine Aruba v. Yusuf, Superior Court of New Jersey Appellate Division Docket No. A-2425-13T1, the Chancery Division found the majority member of a New Jersey limited liability company to have breached his fiduciary duties by creating a financial deadlock, failing to meet the needs of the company, failing to make capital contributions desperately needed by the operating company and other misconduct.
Although the case was remanded back and forth between the Chancery Division and the Appellate Division several times, in a decision dated September 21, 2015, the Appellate Division held that the majority member's membership interest could be involuntarily redeemed for no payment if the value of his interest was worthless. The Appellate Division concluded that the bad behavior of the majority member could justify the forfeiture of his ownership interest.
This decision divested the member of his ability to maintain his interest in the hope that value will be created over time with changed circumstances or by the other members. It also allows members to be divested of the benefit of future tax losses.
The Appellate Division relied upon Walensky v. Jonathan Royce International, Inc., 264 N.J. Super. 276, 279 (App. Div.), certif. denied, 134 N.J. 480 (1983), which held that under the Oppressed Minority Shareholder Statute, the Chancery Division was free to fashion a remedy to ameliorate a wrong based upon the long held equitable maxim that "equity will not suffer a wrong without a remedy."
By expanding this principle to allow minority members to involuntarily repurchase the interest of the majority member, even though the Operating Agreement does not permit such as remedy, the Chancery Division has now been provided with the ultimate weapon to resolve disputes between members of closely held companies.
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