The California Revised Uniform Limited Liability Company Act (RULLCA) came about in 2014 to make the process of judicially expelling a member of a limited liability company (LLC) an official process. Before RULLCA, board members and company controllers could experience significant difficulty in removing a member of the LLC, even if that member had violated contracts and operating agreements.
Under RULLCA, three reasons are given for using judicial expulsion of an LLC member:
- Wrongful conduct: The LLC member being targeted by judicial expulsion is known to have committed wrongful conduct that has or will likely impact the profits or reputation of the LLC.
- Willful breach: The LLC member has intentionally breached important business contracts or operating agreements, or has done so inadvertently many times, indicating a general disinterest in the health of the LLC.
- Unreasonably practicable: The LLC member frequently carries out any activity or activities that no longer make it reasonable to keep that person as an important member of the LLC board.
An example of wrongful conduct would be if an LLC member is convicted of a serious crime and there is reason to believe his or her involvement in the company would hurt its reputation. An example of willful breach would be if an LLC member admits to ignoring company or executive policies for his or her own gain. Lastly, an example of unreasonably practicable would be if an LLC never participates in business meetings, or is “perpetually” on vacation.
Why Judicial Expulsion Would Be Necessary
RULLCA introduced judicial expulsion of LLC members, but why would this be so important that a new act would have to be created? Without judicial expulsion, how to deal with an LLC member that dug in his or her heels and refused to leave a company was a tiresome, if not impossible, process. In other situations, board members might vote 50-50 on whether or not to remove someone from the LLC. What should happen in that situation?
Judicial expulsion introduces the ability to take the matter before a trial court for hearing and resolution. Effectively, it provides a conclusion that cannot be contested without incurring legal penalties.
To learn more about LLC formation, judicial expulsion, and other complex business law concepts, you can contact the Napolitano Law Office and our Santa Clara County business attorney. We can also manage legal projects for individuals, such as estate planning or drafting demand letters. Call (650) 399-9545 today.