Minority Owner Rights in MN LLC's are Changing!

Minority Owner Rights in Minnesota LLC’s are Changing!

Minority Owner Rights in Minnesota LLC’s are Changing!

This past summer, Minnesota enacted a new law governing the formation, operation and structure of limited liability companies (LLC). As of August 1, 2015, all new LLCs formed in Minnesota are governed under Minnesota Statutes Section 322C, which is substantially different from 322B (the prior LLC law). Other articles and authors have covered many aspects of Minnesota’s new LLC law. One major change that is often overlooked and may impact both minority members and those who are in control of the Company, however, is the pending expiration of statutory dissenter’s rights.

Under Minnesota’s prior LLC law, in the event of certain company actions, an LLC member may dissent and obtain payment for the fair value of the member’s membership interest in the LLC. The new law, however, contains no provision for dissenter’s rights (a/k/a appraisal rights). The lack of dissenter’s rights essentially depletes LLC minority-members of significant leverage in objecting to a proposed course of action.

Further, although the previous law (322B.386) contained statutorily defined procedures for asserting dissenter’s rights in order to ensure that those who control an LLC act fairly with regard to minority members, these dissenter’s rights will also expire on January 1, 2018.

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Some key items to know before your Dissenters’ Rights expire?

1. Fair Value Defined. “Fair value of the membership interests” means the value of the membership interests of a limited liability company immediately before the effective date of the proposed sale or action from which the minority member is dissenting.

2. Notice of Dissent. If the company holds a meeting of members, a member who is entitled to dissent and who wishes to exercise dissenter’s rights must (i) file with the company (before the vote on the proposed action) a written notice of intent to demand the fair value of the membership interests owned by the member; and (ii) not vote their membership interests in favor of the proposed action.

3. 30 Days to Demand Payment. In order to receive the fair value of the membership interests, a dissenting member must demand payment within 30 days after the notice of dissent.

4. Payment. After the action, or after the company receives demand for payment, whichever is later, the company shall remit to each dissenting member who has complied with the Notice of Dissent and Procedure, the amount the company estimates to be the fair value of the membership interests, plus interest, accompanied by: (i) the LLC’s closing balance sheet and income statement, and (ii) an estimate by the LLC of the fair value of the membership interests and a brief description of the method used to reach the estimate.

5. Supplemental Payment. If a dissenter believes that the amount paid by the LLC is less than the fair value of the membership interests plus interest, then the dissenter may (i) give written notice to the LLC of the dissenter’s own estimate of the fair value of its membership interest, and (ii) demand payment of the difference. Otherwise, a dissenter is entitled only to the amount originally remitted by the LLC.

6. Petition and Determination. If the LLC receives a demand for supplemental payment, it shall, within 60 days after receiving the demand, either (i) pay the dissenter the amount demanded, or (ii) file in court a petition requesting that the court determine the fair value of the membership interests, plus interest.

Upon filing a petition in the county in which the LLC’s registered office is located, the court may appoint appraisers to receive evidence and recommend the amount of the fair value of the membership interests. The court shall determine the fair value of the membership interests, taking into account any and all factors the court finds relevant and computed by any method or combination of methods that the court sees fit to use, whether or not utilized by the LLC or a dissenter.

7. Costs, Fees and Expenses. The court shall assess appraisal costs and expenses against the LLC, except that the court may assess part or all of those costs and expenses against a dissenter whose action in demanding additional payment is found to be arbitrary, vexatious, or not in good faith.

The prior statutory rights of dissenting members will be eliminated on January 1, 2018, with the expiration of 322B. LLC members should consider whether they wish to retain dissenter’s rights in converting to the new law, and if desired, should expressly include such rights in the LLC’s operating agreement.

Feel free to contact Joe Levitt or any of the attorneys at Davis Law Office PLLC with questions regarding legal issues facing your company, or the company in which you own a minority interest or have minority owners. Joe can be reached via email by clicking here or by phone by clicking here.

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