Can an LLC Expel a Member Without Cause in Minnesota?

When Can a Minnesota LLC Expel a Member Without Cause?

A Minnesota LLC can expel a member without cause when its operating agreement provides for expulsion and does not require a reason. Under Minn. Stat. § 322C.0602, clause (3), a member is dissociated when “the person is expelled as a member pursuant to the operating agreement.” The clause’s own vote, notice, and timing terms then control.

The operating agreement has that power because chapter 322C lets it govern “relations among the members as members and between the members and the limited liability company” under Minn. Stat. § 322C.0110, subd. 1. Under Minn. Stat. § 322C.0111, subd. 2, “A person that becomes a member of a limited liability company is deemed to assent to the operating agreement.” A co-owner who became a member under a no-cause expulsion clause is deemed to have agreed to it.

Two related clauses work the same way. Section 322C.0602, clause (2) also dissociates a member when “an event stated in the operating agreement as causing the person’s dissociation occurs,” such as the end of employment or a failed capital call, if the agreement says so.

Before relying on a clause, I suggest gathering every version of the agreement, because the statutory definition reaches more than the signed document. Under Minn. Stat. § 322C.0102, subd. 17, the operating agreement is the agreement “whether oral, in a record, implied, or in any combination thereof, of all the members of a limited liability company.” If the agreement conditions its own amendment, such as on a signed writing, Minn. Stat. § 322C.0112, subd. 1 provides, “An amendment is ineffective if its adoption does not include the required approval or satisfy the specified condition.” For the provisions a well-built agreement carries, see what a Minnesota operating agreement should include.

What Does the Statute Allow When the Operating Agreement Is Silent?

When the operating agreement says nothing about expulsion, the statute gives the other members a vote only in four listed circumstances, and that vote must be unanimous. Misconduct is not on that list. Expelling a member for misconduct requires a court order on the company’s application.

Under Minn. Stat. § 322C.0110, subd. 2, “To the extent the operating agreement does not otherwise provide for a matter described in subdivision 1, this chapter governs the matter.” For expulsion, Minn. Stat. § 322C.0602, clause (4) provides that a member is dissociated when “the person is expelled as a member by the unanimous consent of the other members if” one of these is true:

1. “it is unlawful to carry on the company’s activities with the person as a member”;
2. “there has been a transfer of all of the person’s transferable interest in the company,” other than a transfer for security purposes or an unforeclosed charging order;
3. the member is a corporation that has filed a certificate of dissolution, had its charter revoked, or had its right to conduct business suspended, and has not reversed that within the statutory period after the company’s notice; or
4. the member is an LLC or partnership that has dissolved and is winding up.

Under section 322C.0602, clause (5), “on application by the company, the person is expelled as a member by judicial order because the person” meets one of three grounds. The first is that the person “has engaged, or is engaging, in wrongful conduct that has adversely and materially affected, or will adversely and materially affect, the company’s activities.” The second is that the person “has willfully or persistently committed, or is willfully and persistently committing, a material breach of the operating agreement or the person’s duties or obligations under section 322C.0409.” The third ground is conduct that makes it not reasonably practicable to carry on the activities with that person as a member. On who may act for the company, in a member-managed LLC Minn. Stat. § 322C.0407, subd. 2 provides, “An act outside the ordinary course of the activities of the company may be undertaken only with the consent of all members,” and in a manager-managed LLC, subdivision 3 requires “the consent of all members” to “undertake any other act outside the ordinary course of the company’s activities.”

I once reviewed a letter in which an LLC’s other members told a co-owner they had grounds to expel under Minnesota’s LLC statute, citing withdrawals from the company’s bank account, while asking the co-owner to name a price to leave. The statute’s unanimous-consent list contains no misconduct ground. Unless the operating agreement supplies its own expulsion power, withdrawal accusations fit only the judicial-order clause, which takes a lawsuit and proof. I have also been asked whether expulsion is available at all in a two-member LLC with no written operating agreement, and the statutory routes in this section are where that analysis begins.

How Do You Add a No-Cause Expulsion Clause to an Existing Operating Agreement?

Unless your operating agreement sets its own amendment rule, adding an expulsion clause requires the consent of all members, including the member you want out. Chapter 322C lets the agreement govern “the means and conditions for amending the operating agreement” under Minn. Stat. § 322C.0110, subd. 1, so read the amendment section first.

If the agreement is silent, the default is unanimity in every management structure. In a member-managed LLC, Minn. Stat. § 322C.0407, subd. 2 states, “The operating agreement may be amended only with the consent of all members.” Subdivision 3 (manager-managed) and subdivision 4 (board-managed) also require the consent of all members to “amend the operating agreement.”

Two practical points follow. First, an agreement that lets a majority amend it may let a majority add an expulsion clause, but the members casting that vote still owe the good-faith obligation discussed in the next section. Second, an older company’s documents may hold the answer under a different name. Under Minn. Stat. § 322C.1204, subd. 3, “the language in the articles of organization, and any bylaws, operating agreement, or member control agreement of a limited liability company formed before August 1, 2015, that becomes subject to this chapter will operate as if that language were in the operating agreement of the limited liability company when it becomes subject to this chapter.” For those older companies, the same subdivision provides that “sections 322B.383, subdivisions 1, clause (1), 2, and 3, and 322B.386 continue to apply to the limited liability company as if those provisions had not been repealed,” subject to the operating agreement. Under Minn. Stat. § 322B.383, subd. 1 (2016), subject to a member control agreement and unless the articles provide otherwise, a member may “dissent from, and obtain payment for the fair value of the member’s membership interests” when an amendment of the articles of organization “materially and adversely affects the rights or preferences of the membership interests of the dissenting member” because it “establishes or changes the conditions for or consequences of expulsion.” Minn. Stat. § 322B.386, subd. 2 (2016) requires that “the notice of the meeting must inform each member of the right to dissent and must include a copy of section 322B.383 and this section and a brief description of the procedure to be followed under these sections.”

The mechanics of the vote matter too. Under Minn. Stat. § 322C.0407, subd. 5, “Any member may demand a meeting of the members to take action requiring consent of members under this chapter upon not less than 20 days’ notice to each member in a record of the date and time of the meeting.” The same subdivision allows action without a meeting by written consent of the members holding the required voting power.

What Limits Apply Even When the Agreement Allows Expulsion Without Cause?

The members who vote to expel must exercise that right in good faith, and the operating agreement cannot remove that obligation. A clause that needs no reason still has to be used honestly, fairly, and reasonably in light of the agreement.

Under Minn. Stat. § 322C.0409, subd. 4, “A member in a limited liability company shall discharge the member’s duties and exercise any rights under this chapter or under the operating agreement consistently with the contractual obligation of good faith and fair dealing, including acting in a manner, in light of the operating agreement, that is honest, fair, and reasonable.” A vote to expel is the exercise of a right under the operating agreement. Under Minn. Stat. § 322C.0110, subd. 3, the agreement may not, “subject to subdivisions 4 to 7, eliminate the contractual obligation of good faith and fair dealing under section 322C.0409, subdivision 4.”

The agreement can shape the obligation instead. Under section 322C.0110, subd. 4, “If not manifestly unreasonable,” the agreement may “prescribe the standards by which to measure the performance of the contractual obligation of good faith and fair dealing under section 322C.0409, subdivision 4.” Under subdivision 8, “The court shall decide any claim under subdivision 4 that a term of an operating agreement is manifestly unreasonable,” and the court “shall make its determination as of the time the challenged term became part of the operating agreement and by considering only circumstances existing at that time.”

Fiduciary duties depend on how the company is managed:

• Member-managed: under section 322C.0409, subd. 1, “A member of a member-managed limited liability company owes to the company and, subject to section 322C.0901, subdivision 2, the other members the fiduciary duties of loyalty and care stated in subdivisions 2 and 3.”
• Manager-managed: under subdivision 7, “A member does not have any fiduciary duty to the company or to any other member solely by reason of being a member,” but “Subdivision 4 applies to the members and managers.” Board-managed companies follow the same pattern under subdivision 8.

The agreement may modify these duties within the statute’s limits, but under section 322C.0110, subd. 3 it may not “eliminate the duty of loyalty, the duty of care, or any other fiduciary duty,” subject to subdivisions 4 to 7.

What Happens to the Expelled Member’s Ownership Interest?

The expelled member loses the management role but keeps the economic interest as a transferee. Under the default rule, the company owes no payment because of the expulsion, yet the former member continues to share in any distributions the company later decides to make.

Under Minn. Stat. § 322C.0603, subd. 1, “the person’s right to participate as a member in the management and conduct of the company’s activities terminates,” and “any transferable interest owned by the person immediately before dissociation in the person’s capacity as a member is owned by the person solely as a transferee.” Under Minn. Stat. § 322C.0502, subd. 2, “A transferee has the right to receive, in accordance with the transfer, distributions to which the transferor would otherwise be entitled.”

The money rules come from Minn. Stat. § 322C.0404:

• No payout on expulsion: subdivision 2 states, “A person’s dissociation does not entitle the person to a distribution.”
• Distributions are discretionary: also under subdivision 2, “A person has a right to a distribution before the dissolution and winding up of a limited liability company only if the company decides to make an interim distribution.”
• The former member shares equally by default: subdivision 1 requires that “any distributions made by a limited liability company before its dissolution and winding up must be in equal shares among members and dissociated members,” subject to the older-company rule in section 322C.1204, subdivision 3.

A no-cause expulsion without a price clause can leave you with a former co-owner who no longer votes but still shares in every distribution, in equal shares where the default rule above applies. The operating agreement can change that. Under Minn. Stat. § 322C.0112, subd. 2, “The obligations of a limited liability company and its members to a person in the person’s capacity as a transferee or dissociated member are governed by the operating agreement.” That subdivision also provides that “an amendment to the operating agreement made after a person becomes a transferee or dissociated member is effective with regard to any debt, obligation, or other liability of the limited liability company or its members to the person in the person’s capacity as a transferee or dissociated member.”

Expulsion also does not clear the former member’s slate. Under section 322C.0603, subd. 2, dissociation “does not of itself discharge the person from any debt, obligation, or other liability to the company or the other members that the person incurred while a member.” I suggest a buy-sell agreement that sets the price and terms on expulsion, because it fixes the numbers before anyone is leaving.

How Can an Expelled Member Challenge the Expulsion?

An expelled member may respond with a lawsuit claiming the expulsion breached the operating agreement or the good-faith obligation, an application for dissolution or a fair-value buyout based on oppressive conduct, or a demand for the company’s records. The statute gives the records demand to a dissociated member by name, while the lawsuit and the oppression application each belong to “a member,” a person that “has not dissociated under section 322C.0602.”

A direct action. Under Minn. Stat. § 322C.0901, subd. 1, “Subject to subdivision 2, a member may maintain a direct action against another member, a manager, a governor, or the limited liability company to enforce the member’s rights and otherwise protect the member’s interests, including rights and interests under the operating agreement or this chapter or arising independently of the membership relationship.” Under subdivision 2, the member “must plead and prove an actual or threatened injury that is not solely the result of an injury suffered or threatened to be suffered by the limited liability company.” The statute defines a member as a person that “has not dissociated under section 322C.0602,” in section 322C.0102, subd. 15. Because section 322C.0602, clause (3) reaches an expulsion “pursuant to the operating agreement,” I suggest following the clause’s own vote and notice steps exactly, since a departure from them is the first thing this claim will test.

An oppression application. Under Minn. Stat. § 322C.0701, subd. 1, a member may apply for dissolution on the ground that those in control “have acted or are acting in a manner that is oppressive and was, is, or will be directly harmful to the applicant.” Under subdivision 2, “the court may order a remedy other than dissolution, which may include the sale for fair value of all membership interests a member owns in a limited liability company to the limited liability company or one or more of the other members.” Under subdivision 3, the proceeding “must be brought in a court within the county in which the registered office of the limited liability company is located.”

“Oppressive” has a statutory definition in Minn. Stat. § 322C.0102, subd. 18. It requires conduct by those in control that is unfairly prejudicial to the applicant because it frustrated a reasonable, material expectation the other members knew or had reason to know about, and that expectation must not be contrary to the operating agreement applied in good faith. Conduct “is not oppressive solely by reason of a good faith disagreement as to the content, interpretation, or application of the company’s operating agreement.” Timing matters to both sides: the application belongs to “a member,” and subdivision 15 defines a member as a person who “has not dissociated under section 322C.0602.” My research did not identify a Minnesota appellate decision on whether a person already expelled may still apply.

A records demand. Under Minn. Stat. § 322C.0410, subd. 3, a dissociated member who makes a demand in a record may have access to “information to which the person was entitled while a member” if it pertains to the period of membership and the request is made in good faith. Subdivision 3 also applies the requirements of subdivision 2, clause (2) to the former member. The person must seek the information “for a purpose material to the member’s interest as a member,” with a demand “describing with reasonable particularity the information sought and the purpose for seeking the information.” In addition, “the information sought is directly connected to the member’s purpose.” The company must answer it in a record within ten days, so I suggest keeping the expulsion file in order; more on these requests is in owners’ information rights. For how these fights look from the departing owner’s chair, see the member’s side of a forced exit, and for the broader set of co-owner disputes, see my practice page.

When Does Removing a Co-Owner From Management Work Better Than Expulsion?

When the real problem is how a co-owner runs the business, removing that person from management can solve it without the cost of an expulsion. To the extent the operating agreement does not otherwise provide, a majority in a manager-managed or board-managed Minnesota LLC can remove a manager or governor without cause, and the person stays a member.

Under Minn. Stat. § 322C.0407, subd. 3, “A manager may be removed at any time by the consent of a majority of the members without notice or cause.” The same subdivision provides, “If a person that is both a manager and a member ceases to be a manager, that cessation does not by itself dissociate the person as a member.” In a board-managed company, under subdivision 4, “A governor may be removed at any time, without cause and without advance notice, by a majority of the voting power of all of the members.” The co-owner keeps the economic interest, and you avoid a fight over whether the expulsion was valid.

A member-managed company has no such step. Under subdivision 2, “Each member has equal rights in the management and conduct of the company’s activities.” Converting to manager management means amending the operating agreement, which by default takes the consent of all members, as explained above. For the limits on manager authority once you make that change, see removing an LLC manager.

Removal from management carries its own risk. The oppression definition in Minn. Stat. § 322C.0102, subd. 18 reaches conduct affecting a member as a manager or governor, or as “an employee of a limited liability company with 35 or fewer members.” Stripping a role the co-owner reasonably expected to keep can feed an oppression claim if every element of the definition is met.

What Should a No-Cause Expulsion Clause Include?

A no-cause expulsion clause should answer each default rule above, because any gap falls back to the statute. That means stating who votes and at what threshold, the notice and effective date, the price and payment terms for the expelled member’s interest, and what happens to that person’s roles and future distributions.

I suggest a clause that covers these points, each tied to the rule it replaces:

1. The vote. Name the approval required, such as a supermajority of the other members, so the statute’s unanimous-consent default does not apply.
2. Notice and timing. State how notice is given, when the expulsion takes effect, and whether the member may be heard first. Chapter 322C requires none of these for an agreement-based expulsion, so the agreement is the only source.
3. The price. Set a valuation method, a payment schedule, and security terms. Without them, Minn. Stat. § 322C.0404, subd. 2 means no payment is owed, which leaves the former member in place as a transferee. A price the company itself pays is limited by Minn. Stat. § 322C.0405, subd. 1: the company “may not make a distribution if after the distribution” it could not pay its debts as they become due in the ordinary course or would fail the statute’s balance-sheet test. Under subdivision 3, “Except as otherwise provided in subdivision 6,” “a distribution by purchase, redemption, or other acquisition of a transferable interest in the company” is measured “as of the date money or other property is transferred or debt incurred by the company.” For a payment schedule, subdivision 6 adds, “If indebtedness is issued as a distribution, each payment of principal or interest on the indebtedness is treated as a distribution, the effect of which is measured on the date the payment is made.” Well-drafted redemption provisions carry the same mechanics.
4. Distributions after expulsion. Address whether the former member shares in distributions until paid, since the default equal-shares rule includes dissociated members.
5. The good-faith standard. Under Minn. Stat. § 322C.0110, subd. 4, the agreement may prescribe the standards for measuring good faith, if not manifestly unreasonable. A stated standard gives the members voting to expel a test to meet.
6. Roles and records. Provide that the expelled member’s manager, governor, officer, and employment roles end on expulsion, and address confidentiality for any records the company must still provide.

I suggest adopting the clause while every member is still signing on, before a dispute starts. Under Minn. Stat. § 322C.0110, subd. 8, a court tests a good-faith standard by considering only the circumstances existing when it became part of the agreement, so the calm-conditions version is the one a court reviews.

Planning an Expulsion in a Minnesota LLC

Whether you can expel a co-owner without cause turns on the signed operating agreement, every amendment, any older member control agreement, and, for an LLC formed before August 1, 2015, the language in its articles of organization. If the agreement grants the power, the good-faith obligation and the clause’s own steps still govern the vote. If it does not, the statute offers a unanimous vote on narrow grounds or a lawsuit on misconduct grounds. Removal from management or a negotiated buyout can reach the same business goal without an expulsion fight.

If you are weighing an expulsion, email me at [email protected] with a short description of the situation. I can review your operating agreement and tell you which of these routes it supports.