The general rule in the corporate governance of business entities -- including corporations, limited liability companies and partnerships -- is that absent an agreement or statutory requirement to the contrary, majority rule governs. Indeed, majority equity owners often assume that they can do pretty much anything they want with regard to the business entity.
However, this is an erroneous assumption. Over the years, many legal principles have evolved which limit the freedom of the majority to do as they wish.
Among the practical issues that frequently arise in the governance of non-public business entities are the following:
- Under what circumstances can an equity owner who works for the business entity have his or her employment terminated or compensation reduced?
- When can an equity owner be excluded from management decisions or removed from a management position, i.e., board membership or officer position?
- When can the business entity be forced to pay dividends or make distributions?
- What are the restrictions on an equity owner doing business with the entity or receiving disproportionate benefits from it as compared to other equity owners?
- Under what circumstances and upon what terms can an equity owner be forced to relinquish his or her equity?
- Under what circumstances can an equity owner force a buy-out of his or her interest?
- What happens if there is a deadlock or major disagreement on important issues?
All of these questions arise frequently in the context of jointly-owned business entities.
The limits on majority action, and the remedies available to aggrieved minority shareholders, LLC members and partners, vary from state to state, and may also vary by type of entity -- i.e., the rights of a shareholder in a closed corporation may be different from the rights of an LLC member in a limited liability company and those of a partner in a partnership. The law in this area is complex, often imprecise, and constantly evolving.
The purpose of these blog posts will be to provide some guidance to equity owners in privately held business entities as to their rights and obligations relating to the management of these entities and vis-à-vis their fellow equity owners. Ultimately, this may benefit such equity owners in several ways:
- Enable equity owners to plan ahead in the formation of their business entities and assure that the governing documentation reflects the parties’ intent on key issues.
- Educate equity owners as to what actions are and are not permissible, so as to minimize the chances of costly disputes, which may distract from and injure their businesses.
- Provide guidance that may enable the resolution of disputes before they erupt into litigation.
- Empower equity owners by letting them know what their rights are and what remedies are available if those rights are abused.