Minority Oppression and the LLC: Manere v. Collins, the Uniform Act, and Comment 701

Abstract

For many decades, the law of closely-held businesses was the law of closely-held corporations. For entrepreneurs and attorneys, the corporate liability shield was the key desideratum, and before the advent of limited liability companies the corporation was essentially the only game in town. Unfortunately, for many decades the liability shield came with a potentially dangerous price for minority owners. The traditional corporate norms of majority rule, coupled with the minority shareholders’ inability to exit the enterprise, empowered majority shareholders to “oppress” minority shareholders or defeat such shareholders’ “reasonable expectations.” The “lock-in” phenomenon compounds the minority’s vulnerability; it is typically impossible for a minority shareholder to exit the enterprise except on terms dictated by the majority.

Today the closely-held corporation is no longer the only game in town. Far from it – in every U.S. jurisdiction, formations of limited liability companies far exceed new incorporations, and for some jurisdictions a better verb choice than “exceed” might be “dwarf.” Every year, the percentage of closely held businesses formed as limited liability companies rises as the percentage for corporations falls.

As with corporations, the overwhelming majority of limited liability companies are closely held. As a result, disputes about power abuses within closely-held businesses increasingly occur in the context of LLCs rather than corporations; and the terms “oppression” and “reasonable expectations” increasingly appear in cases involving limited liability companies.

Keywords: LLCs, Limited Liabilty Corporations, Close-Corporations, Minority, Oppression, Manere

JEL Classification: K22