Published in the Union Leader (2/14/2021)
Q: Four business associates and I created a New Hampshire Limited Liability Company (“LLC”). In recent months, one of the members of the LLC has been unreasonably demanding, erratic, and hostile towards his fellow members, our employees, and the vendors the LLC relies on. The situation is worsening, and we fear that this member will irreversibly harm the business if we do not take action. Our operating agreement does not provide a procedure to remove this member from the LLC. Do we have any options?
A: Yes, you might carefully consider an application for judicial removal of this LLC member. New Hampshire LLCs are governed by RSA Ch. 304-C. In certain limited circumstances, RSA 304-C:104 permits members of an LLC to apply to the Superior Court for judicial removal of an LLC member, even when the LLC’s operating agreement does not contain a specific removal provision.
Judicial removal first requires notice to the misbehaving member within a “reasonable time.” Such notice must specifically describe the conduct justifying removal.
Removal is justified where:
1. The member has breached a duty to the LLC; the breach caused “material injury;” and the breach has not been remedied within a “reasonable time;”
2. The member has engaged in conduct that has caused “material injury” to the LLC; and the member has failed to remedy the injury within a “reasonable time;”
3. The member will breach a duty to the LLC and the breach is certain or reasonably likely to cause “material injury” to the LLC;
4. The member will engage in conduct that is certain or reasonably likely to cause “material injury” to the LLC; or
5. The member has engaged, or is engaging, in conduct relating to the LLC’s activities that make it “not reasonably practicable” to carry on the activities of the LLC with the person as a member.
RSA 304-C:104, II (a)–(d).
Although removing a disruptive LLC member could save your business, the filing of an application for judicial removal is a consequential event, fraught with significant legal pitfalls. What constitutes “material injury” or conduct that makes the carrying on of the LLC’s activities “not reasonably practicable” is fact specific and legally unsettled, requiring sophisticated legal analysis by a qualified attorney. Moreover, once a removal application is filed, RSA 304-C:104, III authorizes the Superior Court to implement broad equitable relief, including ordering the redemption or cross purchase of any membership rights of the LLC based upon its own evaluation of the case. Thus, once an application is submitted, members lose significant control over the outcome of the dispute, and potentially the composition of the LLC itself. Legal consultation is therefore critical before any LLC or its members consider judicial removal under the statute.
Graham Steadman can be reached at [email protected].
Know the Law is a bi-weekly column sponsored by McLane Middleton, Professional Association. Questions and ideas for future columns should be emailed to [email protected]. Know the Law provides general legal information, not legal advice. We recommend that you consult a lawyer for guidance specific to your particular situation.