Obtaining Fair Value For Dissociated, Oppressed Or Redeemed Minority LLC Members In Florida
by Charles Jimerson, Jimerson Birr
We are often asked by clients in corporate disputes how they can maximize value when they are a minority interest holder of a Limited Liability Company when the LLC operating agreement authorizes the Board, at its discretion, to repurchase a member’s interest at book value. In short, there are primarily two approaches to reach a fair value determination of the minority’s membership interest: (1) request equitable relief on the basis of a fiduciary breach claim, or (2) request equitable relief from minority oppression.
Obtaining fair value when fiduciary duties have been violated:
The Florida Revised Limited Liability Company Act mandates that managers and managing members owe a duty of loyalty and a duty of care to the LLC and all of its members. Fla. Stat. §605.04091(1). Furthermore, managers must discharge duties and exercise all rights consistent with the obligation of good faith and fair dealing. Fla. Stat. §605.04091(4). Members may enter into an operating agreement to specify reasonable limitations on managerial duties, but the agreement cannot eliminate the duties of loyalty, care, or good faith and fair dealing. Fla. Stat. §605.0105(3)(e)-(f). A member may maintain a cause of action for a manager’s breach of fiduciary duty by establishing (1) the existence of a fiduciary duty, (2) its breach, and (3) damages proximately caused by the breach. Gracey v. Eaker, 837 So.2d 348, 353 (Fla. 2002). Given the existence of statutory fiduciary duties, the member must next plead sufficient facts to establish a breach. This is a bit challenging under Florida law considering the dearth of case law interpreting limited liability companies. Therefore, Florida courts are regularly relegated to applying persuasive, but not binding, precedent.
In some cases, the exercise of powers authorized by the operating agreement—such as discretionary redemption—can support a breach of fiduciary duty claim if improperly motivated. Bushi v. Sage Health Care, PLLC, 203 P.3d 694 (Idaho 2009) (holding that although expulsion was in technical compliance with terms of the operating agreement, compliance would not bar a claim for breach of fiduciary duty if actions were improperly motivated); Anderson v. Wilder, 2003 WL 22768666 (Tenn. Ct. App. Nov. 21, 2003) (holding expulsion of minority members to force acquisition of interest at a unit price of $150.00 in order to sell them to a third party at $250.00 per unit raised an issue of material fact as to breach of fiduciary duty). If the specific facts of the case support a breach, the courts have wide discretion in fashioning a remedy—namely, a repurchase of the non-breaching member’s interest at fair value. Pedro v. Pedro, 489 N.W.2d 798 (Minn. Ct. App. 1992).
In Pedro, management of a closely-held corporation forced a minority member to sell back his shares for refusing to abandon inquiries into accounting irregularities. The court decided that where the fair value of the shares was greater than the purchase price for the buyout calculation in the shareholder agreement, the difference was the measure of the damages resulting from the majority’s breach of fiduciary duties. Id. at 802. However, while courts have broad equitable powers to fashion relief, they often consider the reasonable expectations of the parties, and a buyout agreement is presumed to reflect those expectations. See Brandt v. Somerville, 692 N.W.2d 144 (N.D. 2005) (affirming that misappropriation of corporate opportunities constituted an “unfairly prejudicial” fiduciary breach, but the severity of breach was distinguished from the egregious conduct in Pedro, and the court limited recovery to the stock’s book value pursuant to the shareholder agreement).
Some courts may adhere to the fixed repurchase price in the operating agreement yet fashion a remedy equivalent to a fair value repurchase by including an award for damages (compensatory and punitive) to the book value. Morrison v. Mahaska Bottling Co., 39 F.3d 839 (8th Cir. 1994). In Morrison, the stock redemption agreement required a repurchase of shares at a price determined from book value. Id. at 846. The court held that multiple breaches of fiduciary duties—depleting assets for personal use, making loans below market rates, and overcompensating officers—artificially lowered the book value of each share. Id. The court concluded that the “true” book value was properly recalculated to include the jury’s damage awards for breach of fiduciary duty and punitive damages. Id.
Although a claimant must generally prove damages proximately caused by the breach, Florida courts may award punitive damages irrespective of compensatory damages with an express finding of breach of fiduciary duties. Mortellite v. American Tower L.P., 819 So.2d 928 (Fla. 2d DCA 2002). “[A]n express finding of a breach of [fiduciary] duty should be the critical factor in an award for punitive damages . . . ‘even in the absence of financial loss for which compensatory damage would be appropriate.’” Ault v. Lohr, 538 So.2d 454, 456 (Fla. 1989) (quoting Lassiter v. Int’l Union of Operating Eng’rs, 349 So.2d 622, 626 (Fla. 1976)).
Therefore, in cases where the operating agreement authorizes discretionary redemption of a member’s interest for no reason at all, a dissociated or redeemed member can possibly maintain a claim for breach of fiduciary duty under the right set of facts. Any sense that an operating agreement empowers the Board to take unlawful action immune from fiduciary discretion is misguided. All LLC management is statutorily bound by fiduciary duties to the LLC and all of its members. If the facts establish that management breached a fiduciary duty through a forced buyout (or any other action), a court may award damages equal to the difference between fair value and the fixed buyout price (book value) in the operation agreement. In the alternative, the court may adhere to the redemption language in the operating agreement but recalculate the net book value to include an award for compensatory and punitive damages.
A minority member may be entitled to fair value for his interest upon a finding of oppressive conduct:
There is a paucity of precedent interpreting Chapter 605 of the Florida Statutes, which creates the basic framework for LLCs as legal entities. However, Florida courts do not hesitate to rely on non-controlling case law, especially that from Delaware, as persuasive authority. See, e.g., Batur v. Signature Properties of Northwest Florida, Inc., 903 So.2d 985 (Fla. 1st DCA 2005) (noting in dicta that courts “rely with confidence upon Delaware law to construe Florida corporate law.”). Furthermore, decisions on minority oppression in closely-held corporations may prove persuasive considering the similarities of those entities with the structure of LLCs. There is no use of the word “oppressive” in Chapter 605, and the lack of guidance from Florida on minority oppression leads to an analysis of non-controlling analogues.
Judicial interpretation of oppressive conduct can be divided into two broad approaches: (1) relating oppressive conduct to violations of fiduciary duties as previously discussed, and (2) defining oppression as a breach of the reasonable expectations of the minority member. In determining the minority member’s reasonable expectations, the court may look to specific expectations (central to the decision to participate in the venture and reasonable under the circumstances) and general expectations (right to participate in earnings, voice dissention, and inspect corporate records). See Argo Data Resource Corp. v. Shagrihaya, 380 S.W.3d 249 (Tex. App. 2012).
A common equitable remedy for minority oppression is dissolution, but many courts have held that a buyout for fair value is more appropriate. See Patton v. Nicholas, 279 S.W.2d 848 (Tex. 1955) (explaining that dissolution is an extreme remedy and that courts have equitable powers to fashion more appropriate remedies); see also Masinter v. Webco Co., 262 S.E.2d 433 (W.Va. App. 1980); Hayes v. Olmstead & Associates Inc., 21 P.3d 178 (Or. App. 2001). Courts can also order a buyout at fair value instead of book value specified in the operating agreement. See, e.g., Cardiac Perfusion Serv’s Inc. v. Hughes, 380 S.W.3d 198 (Tex. App. 2012). In Cardiac, the court found that oppressive conduct decreased the book value of the shares, and the appropriate remedy was a forced buyout at fair value. Id at 204.
When the reasonable expectations of the minority have been thwarted through the actions of the majority—irrespective of any wrongfulness or improper motivations—a claim for fair value from unlawful oppression may lie. However, the common counter-argument is that most operating agreements reflect the reasonable expectations of the parties in respect to discretionary redemption. Depending on the specific actions of the Board, and the reasonable expectations of the minority—that is, expectations that may have changed throughout the course of the relationship based on actions of the parties—a court may find management’s actions to be oppressive and order a forced buyout at fair value.
Whether you are an oppressed minority interest holder, a company seeking to redeem an interest holder’s units, or any party seeking interpretation of rights under an LLC operating agreement, you should contact qualified and experienced legal counsel before taking actions which may affect your rights.