What are my rights as a minority member of an LLC?

March 9th, 2020 by


Waves-Crashing-2-300x174The governance of Limited Liability Companies (LLCs) in Wisconsin is governed by Chapter 183 of the Wisconsin statutes. Those statutes set out the default rules regarding management and membership in an LLC. In an LLC, the owners are called members and have a membership percentage, rather than shareholders with shares of stock like a corporation. While any of these items can be modified by an operating agreement for an LLC (the written agreement between the members), the basic rights of a minority member (less than 50% ownership) are as follows:

  1. A vote equal to your percentage interest, pursuant to Wis. Stat. 183.0404. If the LLC is member managed, 51% vote is needed to decide any matter connected with the business of an LLC.
  2. Allocation of profits and losses commensurate with your contribution to the LLC pursuant to Wis. Stat. 183.0503.  If not otherwise set forth in an operating agreement, the determination of the value of the contribution from each LLC member is to be determined pursuant to Wis. Stat. 183.0501 by unanimous consent of the members.
  3. Access to the books and records of the LLC pursuant to Wis. Stat. 183.0405.

While there may be disputes about any number of things within a company, and of course, an operating agreement may modify these rights, these basic rights of a member of an LLC hold up whether you are a 1% member or 99% member.

The more vexing question is what can you do about it if you are being denied your rights. That forces us to delve into a very fact specific analysis of who suffered the harm, the individual member, or the corporation itself. This determines whether you as the member have a direct cause of action on your own behalf, or only a derivative cause of action on behalf of the Company. It was recently summarized by the Wisconsin Supreme Court in Park Bank v. Westburg, 348 Wis. 2d 409, 424–26.

In a shareholder derivative action, the [claims] belong to the corporation, not to the complaining individual.7 Einhorn v. Culea, 2000 WI 65, ¶ 16, 235 Wis.2d 646, 612 N.W.2d 78. Generally, a derivative claim is one that “a corporation could bring because the corporation’s assets are affected.” Borne v. Gonstead Advanced Techniques, Inc., 2003 WI App 135, ¶ 15, 266 Wis.2d 253, 667 N.W.2d 709.
In Rose v. Schantz, 56 Wis.2d 222, 201 N.W.2d 593 (1972), this court set forth the general framework to evaluate whether a claim is direct, derivative, or both. Under Rose, the “[r]ights of action accruing to a corporation belong to the corporation, and an action at law or in equity, cannot be maintained” by the complaining individual in a direct action. Id. at 229, 201 N.W.2d 593 (quoting Marshfield Clinic v. Doege, 269 Wis. 519, 526, 69 N.W.2d 558 (1955)). The focus of the inquiry is “[w]hose right is sought to be enforced” by the individual’s direct action. Id.
The Rose court determined that where the injury to the corporation is the primary injury and any injury to a shareholder is secondary, the shareholder may not bring a direct action, and is instead limited to commencing a derivative action:
That such primary and direct injury to a corporation may have a subsequent impact on the value of the stockholders’ shares is clear, but that is not enough to create a right to bring a direct, rather than derivativeaction. Where the injury to the corporation is the primary injury, and any injury to stockholders secondary, it is the derivative action alone that can be brought and maintained. That is the general rule, and, if it were to be abandoned, there would be no reason left for the concept of derivative actions for the redress of wrongs to a corporation.
Id. at 229–30, 201 N.W.2d 593. Thus, where an individual’s injury results from the corporation’s injury, the resulting *426 claim is derivative and the individual lacks standing to raise it in a direct action. See also Notz v. Everett Smith Group, Ltd., 2009 WI 30, ¶ 20, 316 Wis.2d 640, 764 N.W.2d 904.
If you are a member of an LLC and believe you are being denied these basic rights of membership, you should contact counsel to see what can be done as it is really a two prong test, was their a breach and do you have standing to bring that claim or does it need to be brought as a derivative claim.