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Business Law Update: Business Owners: Bill Would Restrict Non-Competition Agreements with Employees.

2017-05-09 08.08.30On June 14, 2017, House Bill 4755 was introduced in the Michigan House of Representatives.

If passed it would limit the enforceability of a non-competition agreement signed between an employer and an employee.

In my opinion – in some pretty significant ways.

I have spent several articles discussing the legal consequences/enforceability issues of non-competes.

It appears the Legislature is wrestling with the question posed by Nick Manes of MIBiz in an article a few years back: “Are noncompetes a barrier to growth?

You can check out the text of the bill here

The Bill was referred to the committee on commerce and trade.

The Bill has a few key components to it:

1. Require Employers to follow a Specific Procedure prior to enforcing a non-compete.

The Bill would only permit Employers to enforce a non-competition agreement if the Employer followed a procedure intended to notify the Employee of the requirement of signing a non-compete as a condition of employment.

(A) INFORMED THE PROSPECTIVE EMPLOYEE IN WRITING OF THE REQUIREMENT AT OR BEFORE THE TIME OF THE INITIAL OFFER OF EMPLOYMENT.

(B) Disclose the Terms of the Non-Compete in writing; and

(C) Post the Text of the Law at the Worksite in a CONSPICUOUS LOCATION

2. Non-Compete unenforceable if the Employee is a “low wage” worker.

Defined generally as $15.00/hr or $31,000 annually.

 

3. Voids Certain Provisions in a Non-Compete – shifts the burden to Employer.

The Bill also has some teeth in it for Employees, including:

  1. Prohibits an Employer from including a clause that states a different state’s laws control the Agreement – this would be an obvious attempt to circumvent the prohibition of non-compete against “low wage” workers;
  2. Gives the Attorney General power to prosecute a violation of the Act;
  3. Automatically places the Burden on the Employer to prove that the Non-Compete was reasonable, as to “scope, duration, time limit.”
    1. Moreover, if a Court limits the non-compete in any respect, the employee is entitled to recover attorney fees.

 

Wow. This bill has a lot of bite to it. My first thoughts – if this Bill does come out of the Trade and Commerce Committee, I can’t imagine it will look the same as its current version.

I understand the legislature’s interest in protecting “low wage workers” from unreasonable restrictions. Check out my prior post on the subject of Jimmy John’s non-competes.

However, in my opinion the restrictions as written places an enormous burden on the employer to narrowly tailor the non-compete, to a judge’s definition of “reasonableness”.

 

 

 

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

Twitter: @JeshuaTLauka

http://www.dwlawpc.com

Business Law Update: Michigan Supreme Court’s May 15, 2017 Decision on Minority Oppression

 

There are relatively few court opinions covering the Michigan Limited Liability Company Act. There have been even less on the issue of minority oppression claims.

It has been almost 3 years since the Michigan Supreme Court issued its Opinion in the  Madugula v Taub  case on Michigan’s shareholder/member oppression statutes.

The Madugula clarified that a claimant is not entitled to a jury a trial undmoney-73341_640er the Act; and breach of a Shareholder/Operating Agreement can be evidence of “oppressive” conduct.

On May 15, 2017 the Michigan Supreme Court issued its Opinion in Frank, et al v. Linkner, et al.

In summary, the Supreme Court held:

  • that MCL 450.4515(1)(e) provides alternative statutes of limitations, one based on the time of discovery of the cause of action and the other based on the time of accrual of the cause of action; and
  • That a cause of action for LLC member oppression accrues at the time an LLC manager has substantially interfered with the interests of a member as a member, even if that member has not yet incurred a calculable financial injury. See Frank, id. page 1.

 

The facts of Frank are admittedly, interesting (and unfortunate if you are the Plaintiffs):

Facts:

  • Defendant ePrize was founded by defendant Joshua Linkner in 1999 as a Michigan LLC specializing in online sweepstakes and interactive promotions.
  • Plaintiffs are former employees of ePrize who acquired ownership units in ePrize.
  • Plaintiffs allege Linkner orally promised them that their interests in ePrize would never be diluted or subordinated.
  • In 2005, plaintiffs’ shares in ePrize were converted into shares in ePrize Holdings, LLC.
  • In 2007, ePrize ran into financial difficulties and required an infusion of cash.
  • To remedy this problem, ePrize obtained $28 million in loans in the form of “B Notes” from various defendantmembers of ePrize and other investors;
  • plaintiffs were not invited to participate in these investments.
  • In 2009, ePrize remained struggling to meet its loan obligations and therefore issued new “Series C Units.”
  • These units were offered to various investors, including those who had obtained B Notes.
  • In exchange for the Series C Units, investors were required, amo
    ng other things, to make capital contributions, guarantee a portion of a $14.5 million loan from Charter One Bank, and convert their B Notes into “Series B Units.”
  • On August 20, 2012, ePrize sold substantially all of its assets and, pursuant to the Operating Agreement, distributed nearly $100 million in net proceeds to the holders of Series C and Series B Units.
  • Plaintiffs received nothing for their common shares.

Procedural History

Plaintiffs sued on April 19, 2013 alleging among other claims, minority oppression under MCL 450.4515. The trial court dismissed the claims, indicating that they were “untimely” under the 3 year statute of limitation period. The Court of Appeals reversed. This matter then went to the Supreme Court.

 

 

In General – Michigan Minority Oppression Statute

Michigan law provides a cause of action against the shareholders/members who are in control of a company and oppressing minority owners:

Minority Shareholder Oppression, MCL 450.1489 (Minority Member Oppression, MCL 450.4515)

“A shareholder may bring an action…to establish that the acts of the directors or those in control of the corporation are:
illegal;
fraudulent;
or willfully unfair and oppressive to the corporation or to the shareholder.” 
“If the shareholder establishes grounds for relief, the circuit court may make an order or grant relief as it considers appropriate, including, without limitation,
an order providing for any of the following:
(a) The dissolution and liquidation of the assets and business of the corporation.
(b) The cancellation or alteration of a provision contained in the articles of incorporation, an amendment of the articles of incorporation, or the bylaws of the corporation.
(c) The cancellation, alteration, or injunction against a resolution or other act of the corporation…
Therefore, if a court finds that those in control of the business committed misconduct against a minority owner amounting to “oppression”, the Court has broad discretion to create the type of relief it deems is best.
Back to the Supreme Court’s Decision in Frank…
a. Statute of Limitations
The Supreme Court agreed with the Court of Appeals that:
“MCL 450.4515(1)(e) contains two alternative statutes of limitations:”
1. (2 years) predicated upon discovery of the cause of action and
2. the other (3 years) predicated upon accrual of the cause of action. Id. at pg 6.
The Supreme Court clarified that under the statute “A plaintiff has two years from the time he or she ‘discovers or reasonably should have discovered the cause of action” to bring a claim [under the minority oppression statute]”. Id pg 13. “…a plaintiff cannot bring a claim three years after accrual of the cause of action, even if he or she did not discover and reasonably would not have discovered the cause of action during that period.”
b. when does an oppression claim accrue?
The Plaintiffs/minority members argued that their claims “did not accrue until they first incurred a calculable financial injury after ePrize sold substantially all of its assets in 2012.” Id. pg 16. They reasoned that no monetary damages occurred until the company was liquidated. Id.
The Supreme Court, however reasoned that the “plaintiffs’ argument conflates monetary damages with ‘harm'”.  The Court held that:
the actionable harm for a member-oppression claim under MCL 450.1515 consists of actions taken by the managers that “substantially interfere with the interests of the member as a member,” and monetary damages constitute just one of many potential remedies for the harm.
Therefore, the Court held that :the Court of Appeals erred by focusing on the availability of monetary damages, rather than on when plaintiffs incurred ‘harm’.” The Court reversed the Court of Appeals on this issue. Id. 17.
“Once a plaintiff proves that a manager engaged in an action or series of actions that substantially interfered with his or her interest as a member, the “harm” has been incurred, and therefore the claim has accrued.” Id.
Application 
In application, the Supreme Court therefore found that the alleged harm occurred when the minority members’ interest were subordinated (in 2009) by amendment of the operating agreement and not when the sale occurred (in 2012). Id. at 20.
So, unless plaintiffs can show fraudulent concealment, Plaintiffs’ claims for monetary damages are barred.

 

Take away for Business owners/Investors/Entrepreneurs:

 

1. Get an attorney involved before the business relationship begins and clearly document the business relationship, especially your shareholder/operating agreement. That will contain the exit strategy and relevant buy-out language. Further, any conduct the parties agree to in their shareholder/operating agreement will not be deemed “oppressive”. However, a breach of the agreement, may deemed interference with your rights sufficient to constitute “oppression” however, this is based on a highly fact-intensive analysis.

2. If you believe you are being frozen out of control/profits in a business – do not wait. The Michigan Supreme Court has held that your claim accrues when the harm occurs. Learn from the Frank Decision.  Michigan law gives you broad remedies, including the minority shareholder/member oppression statutes.

Questions?

Comments?

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

Business Law Update: Unfair Competition may not be Preempted by Michigan’s Uniform Trade Secrets Act

April 21, 2017 Leave a comment

Greetings on this cloudy Friday in downtown Grand Rapids, Michigan.

 Business owner: I’m going to give you a scenario.

Let’s say your business wants to engage the services of another business to sell its products.

Q: When a business wants to engage the services of another business that will necessarily involve the business divulging confidential infoIMG_1513rmation what do you do?

A: Enter into a Non-Disclosure/Confidentiality Agreement.

Another question:

Q: What happens when the business that received the confidential information goes on to develop a product eerily similar to your product after learning about your confidential information?

A: Potentially, a lawsuit.

Yesterday I read a new published decision from the Michigan Court of Appeals,

Planet Bingo LLC v VKGS, LLC

In the words of the Court of Appeals:

the relevant procedural history is complex“.

Therefore, I won’t delve into the history. Suffice it to say, the parties filed lawsuits based upon the same claims in several different courts across the country.

“This case arises out of Video King’s use of a software program (“EPIC”) that was developed by Planet Bingo’s subsidiary Melange, Video King’s subsequent development of a competing software program (“OMNI”), and plaintiffs’ allegation that Video King wrongfully developed OMNI using confidential information gleaned from EPIC.” Id. pg 1.

The parties entered into a confidentiality agreement.

According to the court –  the parties entered into a contract in 2005 that “had a substantial confidentiality clause:”

Such agreements are necessary to protect in a broad manner all confidential information disclosed to another party in a business agreement.

In a nutshell, Planet Bingo claimed Video King had access to Planet Bingo’s confidential information for its software program EPIC. Thereafter, Video King allegedly used that confidential information to create its own competing software program.

Planet Bingo sued VKGS (Video King) for –

breach of contract (confidentiality agreement),

unfair competition, and

unjust enrichment.

What is unfair competition?

“unfair competition” may encompass any conduct that is fraudulent or deceptive and tends to mislead the public.  See Atco Indus. v Sentek Corp., Lexis 1670, page 7 (July 10, 2003).

This court went back and forth among several courts/jurisdictions and eventually, the Trial Court in Ingham County dismissed plaintiffs’ claims. Among other things, the Court said that the Michigan Uniform Trade Secrets Act (MUTSA)  MCL 445.1901 et seq, preempted – or replaced the common law claim of unfair competition.

The Court of Appeals reversed.

According to the Court:

MUTSA generally “displaces conflicting tort, restitutionary, and other law of this state providing civil remedies for misappropriation of a trade secret,” Id. pg 6.

“It has been recognized from common law, on the other hand, that unfair competition encompasses more than just misappropriation. See In re MCI Telecom Corp Complaint, 240 Mich App 292, 312; 612 NW2d 826 (2000) (“[T]he common-law doctrine of unfair competition was ordinarily limited to acts of fraud, bad-faith misrepresentation, misappropriation, or product confusion.”) (Emphasis added). Id. pg 7.

“Thus, MUTSA does not preempt all common-law unfair competition claims, only those that are based on misappropriation of “trade secrets” as defined by MUTSA.” Id.

“The pertinent question, then, is whether plaintiffs’ unfair competition claim was based on misappropriation alone or also on fraud, bad-faith misrepresentation, or product confusion.” Id.

Conclusion:

We can glean from the Planet Bingo Case that a claim of unfair competition can be brought when based on:

  • Fraud
  • Bad-faith misrepresentation; or
  • product confusion.

If a claim for unfair competition is brought solely related to misappropriation of Trade Secrets, then the MUTSA is the controlling statute.

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

www.dwlawpc.com

twitter: @JeshuaTLauka

Business Law Update: When are Non-Competes Enforceable?

March 20, 2017 2 comments

Welcome to Spring! I took this photo from my office, the first day of Spring. It is fitting that the ice rink in Rosa Parks’ circle is melting.

With spring comes new opportunities – including employees leaving their jobs.

What happens if the employee signed a non-competition agreement during the course of employment? Are non-competes enforceable?IMG_1456

 – it depends.

 

A few years back I posted on an article written by Above the Law titled – Jimmy John’s Serves Up Sandwiches And Oppressive Non-Compete Agreements.

See the link from the “Above the Law Blog”

In Michigan, Non-Competes are enforceable to protect legitimate busines
s interests.

MCL 445.774a provides:

“1) An employer may obtain from an employee an agreement or covenant which protects an employer’s reasonable competitive business interests…”
Further the Agreement must be reasonable:
  • “as to its duration,
  • geographical area, and
  • the type of employment or line of business.”

In November I posted an article about a possible change to Michigan covenants not-to compete statute, you can see that article here – no new movement on th
at HB. It appears that it got stuck in committee and left to die…

Of note, a bill was proposed earlier this month that would require employers to offer Paid Sick Leave

At any rate, going back to the topic at hand…

The question posed by the Above the Law article is a good one – ok, Jim
my Johns, you have a non-compete agreement, that may be valid…so,

to what end?

What is the point? What type of legitimate business interest is Jimmy Johns trying to protect here?

Going back to the initial topic of this post – when can a business enforce a non-compete?

One Answer:

When a business has a legitimate interest to protect.

 

A recent Michigan Court of Appeals on the topic of Non-Competition Agreements provides some illustration on this point.

BHB Investment Holdings v Ogg

I won’t delve into the details, but the first paragraph of the Opinion is telling:

“Steven Ogg took a job with Aqua Tots Canton after being terminated by its competitor, Goldfish Swim School of Farmington Hills. Ogg’s actions breached a noncompetition agreement he signed with the Goldfish franchisee, BHB Investment Holdings. BHB sought to preliminarily enjoin Ogg from working with Aqua Tots, but presented no evidence of irreparable harm. BHB later failed to establish that the agreement protected a legitimate business interest to support the issuance of a permanent injuncti
on. Nor did BHB substantiate that it suffered any damages as a result of the breach.”

 

Is restricting a former employee from swim instruction a legitimate business interest?

The Court on page 3 recognized a number of factors in the analysis in denying enforcing the non-compete, including:

  1. the position was a low-level position;
  2. employee had no access to confidential information;
  3. employee didn’t take any information;
  4. employee didn’t solicit customers;
  5. interestingly, the employer didn’t previously enforce the non-compete when other employees left.

One other interesting piece of information – the Court rejected the employer’s allegation that its swimming lessons were proprietary information. The Court’s rationale?

the employer “placed its methods in the public domain because this was a public building and the students parents, as well as any member of the public, could watch the lessons and glean the methods.” pg 8.

Having no proprietary information, the employer “could not establish a legitimate business interest it needed to protect.” Id.

 

Lessons:

  1. Non-competes will not be enforced unless they protect a legitimate business interest.
  2. Non-competes are less likely to be enforceable against low-level positions with no access to proprietary information.
  3. If you are going to seek an injunction in court, it helps to have some evidence that your former employee is unfairly competing.

 

questions? comments?

email: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

Business Law Basics: “For Want of a Comma” The Words You Use Can be Costly.

March 16, 2017 Leave a comment

Disclaimer: The photo below has nothing to do with this post. It is simply my way of recognizing that I am sick of winter and looking forward to the 15 hour drive to Florida in a few weeks…

 

Today I read an article posted by the ABAJournal that illustrates the profound impact on word and grammar usage in contracts and legislation.

Oxford comma issue benefits drivers in overtime case  

2016-01-09 12.56.14

Photo I took of Clearwater Beach, FL

“FOR WANT OF A COMMA”

As the ABA Journal reports:

Ambiguity caused by lack of a comma in a law on overtime pay has benefited Maine dairy delivery drivers.”

“The Boston-based 1st U.S. Circuit Court of Appeals pointed out the issue in the first sentence of its March 13 decision (PDF). ‘For want of a comma, we have this case,” the court said in an opinion by Judge David Barron.

Because the statute was ambiguous, it should be interpreted in favor of the dairy workers who distribute milk but do not pack it, the appeals court found.

 

A SINGLE WORD CAN BE LEGALLY SIGNIFICANT TO SHIFT RISK

Last year I wrote about how the words used in a contract dispute significantly impacted the rights and obligations in a business dispute, based upon the Michigan Supreme Court’s interpretation.

The Michigan Supreme Court made a distinction between the inclusion of the word “in” in a Title Company’s Closing Protection Letter in a prior case, and the “exclusion” of the word “in” in that instant case. In the Court’s determination:

“Although the distinction is slight—the only difference is the word “in”—the distinction is legally significant.”

Words Matter.

E-mail: Jeshua@dwlawpc.com

Twitter: @JeshuaTLauka

www.dwlawpc.com

Business Law Update: A discussion on Business Shareholder Oppression.

March 10, 2017 Leave a comment

There are relatively few court opinions covering the Michigan Limited Liability Company Act. There have been even less on the issue of minority oppression claims. So I was excited to see a recent Court of Appeals decision on that subject. Check out t2017-02-04-08-16-38-2he February 9, 2017 unpublished decision of Wisner v SB Indiana, LLC, et al

The Wisner case involves two separate parties who claimed an owner/manager, Hardy, violated their rights as members and froze them out of the company.

The first question to ask is, “freeze out from what*?”

                         Control – Decision-making

                         Disclosures of Company Business

                         Profits in the Company

                         Employment in the Company.

What should a business owner/operator do to protect himself/herself?

Well, you have two readily apparent choices – address the issue before the business is formed, or address it once the problem arises.

     1. Addressing the problems before the business starts.

The easiest way is this option: Get an Attorney involved at the onset of the business relationship.

Many of these business disputes in closely held companies could be resolved if, before going into business, the parties openly communicated their expectations, concerns, and clearly articulated in the formation documents (articles of incorporation/organization, Bylaws, shareholder agreement, Operating Agreement) a way out of the business relationship.

This could be the most cost-effective way to ensure to resolve business disputes – address them before they happen – with open communication, and clearly and concisely drafted (and executed!) documents.

       2. Addressing the problems once they occur: Shareholder/Member Oppression Lawsuit.

Michigan law provides a cause of action against the shareholders/member
s who are in control of a company and oppressing minority owners:

Minority Shareholder Oppression, MCL 450.1489 (Minority Member Oppression, MCL 450.4404)

“A shareholder may bring an action…to establish that the acts of the directors or those in control of the corporation are:
illegal;
fraudulent;
or willfully unfair and oppressive to the corporation or to the shareholder.” (*in my experience this has been the most often the scenario where these cases arise – from the “freezing out” the minority owners from the business)
“If the shareholder establishes grounds for relief, the circuit court may make an order or grant relief as it considers appropriate, including, without limitation,
an order providing for any of the following:
(a) The dissolution and liquidation of the assets and business of the corporation.
(b) The cancellation or alteration of a provision contained in the articles of incorporation, an amendment of the articles of incorporation, or the bylaws of the corporation.
(c) The cancellation, alteration, or injunction against a resolution or other act of the corporation.
(d) The direction or prohibition of an act of the corporation or of shareholders, directors, officers, or other persons party to the action.
(e) The purchase at fair value of the shares of a shareholder, either by the corporation or by the officers, directors, or other shareholders responsible for the wrongful acts.”

Although this Statute applies to closely held corporations, there is also a virtually similar Michigan statute that applies to LLCs.

Therefore, if a court finds that those in control of the business committed misconduct against a minority owner amounting to “oppression”, the Court has broad discretion to create the type of relief it deems is best.
Back to the Wisner Case:
Without getting into the details of the case, there are two points the Court made relating to oppression claims.
a. Is failing to communicate with the minority members oppression?
The Wisner Court looked at the claims made by the minority member – that the manager “cut him off from communication.” The court found that, although Defendant substantially interfered with the minority member’s ability to com
municate…this did not constitute unfair and oppressive conduct.  The court found that “it does not appear that his rights as a member of the LLC provided by MCL 450.4102(q), including any right to receive a distribution, or vote were substantially interfered with by Defendant’s conduct.”
b.  If the Operating Agreement allows activity – that activity cannot be “oppressive”
The court also noted that at the formation of the company the parties had executed an operating agreement to govern their relationship.
The court noted that the oppression statute “had no application if the conduct at issue was authorized by an operating agreement. So to the extent that any of Mr.
Hardy’s actions were authorized by the agreements, then he cannot be found to be willfully unfairly oppressing these members.” Id. Pg 4.
“Likewise the case law has indicated that even a breach of those operating agreements would not be enough to find that he was willfully unfair and oppressive in his conduct.”

Lesson:

Sometimes filing a law suit for Minority Oppression is warranted due to the egregious misconduct of those in control of the company.  However, to constitute “oppression” giving a minority owner relief, such conduct will need to be proven with sufficient facts.

The obvious take away points are two-fold:

1. Get an attorney involved before the business relationship begins and clearly document the
business relationship, especially an exit strategy
. Any conduct the parties agree to in their shareholder/operating agreement cannot be “oppressive”.

2. If you are being frozen out of control in a business – Michigan law gives you broad remedies, including the minority shareholder/member oppression statutes.

Questions?

Comments?

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

Business Case Law Update: Set up Your business agreement with the End in Mind.

February 17, 2017 1 comment

It is a beautiful Friday afternoon in downtown Grand Rapids – which is why I took a picture of Rosa Parks Circle. You can see the zamboni is out on the rink. I can’t imagine the ice will last, since the weather is supposed to get in the upper 50s this weekend…

img_1417

 

I often tell my clients that lawyers see the worst case scenarios.  Yes, in business, you can usually rely on your relationships to go as they should – (you send an invoice for services and typically you will get paid).

Lawyers see the relationships that go wrong.

We often have clients come to us to protect against disasters, yes, but also to guide our clients after  a disaster has happened.

For instance – when a dispute has erupted between business partners. Someone wants out of the business.

It is much easier to protect a client on the front end. That is particularly why when setting up business partnerships – whether through an LLC, corporation, or some other joint venture, it is crucial to have “the end in mind.”

How do the partners exit their relationship?

A recent court case provides lessons to business owners exiting such relationships.

Since the most common business entity formed in my practice is a limited liability company, I am always looking to read the latest court decisions that come out on LLCs.

There are relatively few court opinions covering the Michigan Limited Liability Company Act, which is why I was excited to read the August 18, 2016 unpublished decision of Joby Clark v Butoku Karate School, LLC – and it just so happened that the facts of this case are somewhat interesting.

The facts of this case seem to be somewhat publicized – at least in Macomb County.

The relevant facts:

  1. Butoku Karate School, LLC, a limited liability company in which Clark and John Wasilina were the only members.
  2. Plaintiff and Wasilina formed the company in 2002 for the purpose of operating a karate school, and together operated the school until plaintiff left the company in January 2011
  3. Rumors that Plaintiff was involved in an inappropriate and illegal relationship with a minor surfaced,
  4. On January 5, 2011, plaintiff and Wasilina together went to the bank and withdrew $100,000 from the company’s account,
  5. Plaintiff and Wasilina each received $50,000 of the proceeds of the account.
  6. On January 12, 2011, Wasilina met with plaintiff and requested that plaintiff sign two documents. The first document was entitled “Notice of Dissolution
  7. The second document was entitled “The Consent of the Members” – which, among other things, extinguished Clark’s membership interest in the Company.
  8. Both plaintiff and Wasilina signed the documents on January 12, 2011.
  9. Thereafter, Plaintiff argued “we agreed my withdrawal was temporary.”
  10. Plaintiff sued alleging three counts arising from the dissolution of the business relationship, fraud, failure to distribute, and conversion.

LAW:

IF YOU DO NOT WANT THE DEFAULT RULES UNDER THE MICHIGAN LIMITED LIABILITY COMPANY ACT TO CONTROL YOUR RELATIONSHIP IN THE LLC THEN YOU MUST “CONTRACT OUT” OF THOSE RULES.

I’ve previously written about why an operating agreement matters. A business relationship agreement should be drafted with the end in mind: how do the parties get out of the business relationship?

It is a relatively simple concept:

If you, as an owner in an LLC, do not want to leave your relationship with the other members of the LLC completely subject to the default rules under Michigan law – get your agreement in writing.

In the Butoku Karate case, the Court of Appeals cited the Michigan Limited Liability Company Act regarding the rights of a Member to withdraw from an LLC:

“MCL 450.4509 provides: (1) A member may withdraw from a limited liability company only as provided in an operating agreement….”

MCL 450.4305 provides: Until the effective date of withdrawal, a withdrawing member shall share in any distribution made in accordance with section 304. An operating agreement may provide for an additional distribution to a withdrawing member. If a provision in an operating agreement permits withdrawal but is silent on an additional withdrawal distribution, a member withdrawing in accordance with the operating agreement is entitled to receive as a distribution, within a reasonable time after withdrawal, the fair value of the member’s interest in the limited liability company as of the date of withdrawal based upon the member’s share of distributions as determined under section 303.”

As the Court noted:

“Pursuant to MCL 450.4509, a member’s withdrawal from a limited liability company is governed by that company’s operating agreement. Only if an operating agreement is silent on the subject of additional distribution to a withdrawing member is distribution to a withdrawing member governed by §305”

In this case, the Parties Operating Agreement was clear.

Further, the Parties signed a Consent Resolution concerning the Plaintiff’s withdrawal – that agreement was also clear.

The Court found that “the clear language of the Consent of the Members states that plaintiff relinquished any potential right to additional payment that he may have had previously.”

A few take aways:

If you are going into business with a business partner there are a few things you want to remember:

  1. Execute an Operating Agreement (all parties need to sign it); and
  2. Make sure that you have thought through how a member may withdraw – in what instances and under what conditions?
  3. Any revision to that relationship must be signed in writing.
  4. A Court will uphold an agreement signed by all LLC members (absent a clear showing of fraud or other exigent circumstances)

 

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka