Guidance for boardroom disputes in the courtroom
September 30, 2021 – ArticleWhether a company's business is good or bad, disputes arise in the boardroom between business owners. Unfortunately, these boardroom disputes sometimes end up in the courtroom. Until now, when that happened, certainty was lacking regarding the available remedies and how they are carried out, particularly when the internal dispute arises in the increasingly popular form of business entity known as a limited liability company. A recent appellate court opinion that is now certified for publication resolves some open questions about how membership interests in LLCs are valued under California law when a dissenting member is bought out.
In California, like many jurisdictions, a dissenting shareholder of a closely held corporation may initiate an involuntary dissolution of the corporation if the shareholder suspects fraud, abuse of authority by the directors or majority shareholders, or another enumerated basis for dissolution. In that event, the corporation or the holders of 50% or more of the voting power of the corporation have a choice: to allow the dissolution, defend against the alleged basis for the dissolution, or avoid dissolution by purchasing for cash the shares of the unhappy shareholder at their "fair value." Unless the parties agree on what that fair value is, the court appoints three disinterested appraisers to ascertain it. This procedure, known as "statutory buyout" has been codified in California Corporations Code Section 2000 for many decades.
With the popularization of a new form of business entity, the LLC, California adopted the Revised Uniform Limited Liability Company Act, effective in 2014, that includes a similar statutory buyout provision for LLCs. Section 17707.03 of the California Corporations Code allows a dissatisfied member of an LLC to seek its involuntary dissolution. Like a corporate dissolution, this statute offers a choice to either allow the dissolution, defend against the alleged basis for the dissolution, or avoid dissolution by purchasing the dissenting member's interest. However, unlike Section 2000 that directs the purchasing parties to tender the "fair value" of the dissenting shareholder's shares, the purchasing LLC members must pay "fair market value" for the dissenting member's interest. (Another difference between Section 2000 and Section 17707.03 is who may exercise that choice. Under Section 17707.03(c)(1) the other members may initiate the buyout process. Under Section 2000 only the company or a holder of 50% of the voting interests may do so.)
Is "fair market value" different from "fair value?"
Read the full article here to learn more about how a recent appellate court opinion resolves some open questions about how membership interests in LLCs are valued under California law when a dissenting member is bought out.