Litigating under the Revised LLC Act

As of January 1, 2018, every Minnesota LLC is governed by the Revised LLC Act – or at least portions of the Revised Act. That’s important because the Revised Act changes much about how LLCs are governed and managed, which you can read about here and here.

Litigating under the Revised Act is substantially different than under the old Act (chapter 322B), and litigators should be deliberate about how to proceed – particularly where there is an argument that the old Act applies to the dispute. Disputes over LLCs that predate the Revised Act may still be subject to the old Act. Knowing which version of the Act applies to your claim matters because some key changes may make the difference between a winning and losing strategy.

The old Act empowered a court to “grant any equitable relief it considers just and reasonable in the circumstances and award expenses, including attorneys’ fees and disbursements” in an action by a member for a violation of any provision of the entire chapter. In contrast, only successful plaintiffs in a derivative action – that is, a claim brought by an owner on behalf of the company against those in control of the company – may recover attorneys’ fees under the Revised Act. There is no fee-shifting provision for members’ direct claims.

The Revised Act also makes it more difficult to seek judicial intervention for dissolution or a fair-market-value buyout. The old Act empowered members to sue and seek those remedies if the governors or members were deadlocked, if company assets were misapplied or wasted, or if those in control “have acted fraudulently, illegally, or in a manner unfairly prejudicial.” (322B.833 subd.2). It also provided a specific procedure for the member to seek a buyout on motion.

The Revised Act only permits courts to order a fair value buyout if a member establishes those in control of the company have acted in a way that is illegal, fraudulent, or oppressive. It does not provide for specific procedures to be bought out.

Importantly, the Revised Act specifically defines “oppressive conduct” for these purposes. Its definition is much more restrictive than that established by prior Minnesota case law under the old Act. For example, oppressive conduct must frustrate an expectation of a member that was material to that member’s decision to become a member. Before, materiality was not an element.

The Revised Act also did away with dissenters’ rights. Under the old Act, to take certain actions, the board had to notify each member of their right to dissent from the act and obtain a fair value buyout. The Revised Act has no such analog for any company formed on or after August 1, 2015. However, for any LLC formed before August 1, 2015, the dissenters’ rights provisions of the old Act survived.

Of special note is the significant differences in derivative actions. The old Act did not specifically address derivative actions, but Minnesota courts permitted them as equitable actions. Under the prior common law and Minnesota Rules of Civil Procedure, plaintiffs have standing to bring a derivative action if they continuously own equity in the company from the time of the alleged wrongs to the time the suit is commenced. The Revised Act changed that rule. Section 322C.0903 only grants standing to those who are members at the time the action is commenced “and remain[ ] a member while the action continues.”

This is a substantial change. If a derivative plaintiff is bought out or dissociates during the course of a lawsuit, that plaintiff no longer has standing to maintain the suit and the court would lose subject matter jurisdiction.

This is not an exhaustive discussion of the litigation differences between the old Act and the Revised Act. But it does highlight the importance of understanding the impact of the Revised Act on pre-existing law, and of determining which Act should be applied to any given dispute.

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