Many Tennessee Limited Liability Companies (“LLCs”) are set up, for whatever reason, so that their operating agreements do not provide for the buying out or expulsion of a member, whether pursuant to a mandatory buy-sell clause or pursuant to a clause that sets forth conduct which is grounds for expulsion. In fact, quite a few Tennessee LLC’s have members who have never executed an operating agreement.
If there is no mandatory buy-sell provision in an operating agreement for an LLC pursuant to which a member can be forced to sell his or her interest (or to buy out someone else’s), members looking to get rid of another member must look to the provisions of the Tennessee Revised Limited Liability Company Act (the “Act”). The Act, T.C.A. §48-249-503(6), provides the limited circumstances which permit a court to expel involuntarily an LLC member. They are:
- Where the member has engaged in wrongful conduct that has adversely and materially affected the LLC’s business
- Where the member has willfully and persistently committed a material breach of the LLC documents
- Where the member has willfully and persistently committed a material breach of the duties owed by the member to the LLC or to the other members, as set forth in T.C.A. §48-249-403
- Where the member has engaged in conduct relating to the LLC’s business that makes it not reasonably practicable to carry on business with the member
As of this blog, there is no opinion from any Tennessee appellate court which applies, or further explains, the above statute. Some conduct would obviously warrant expulsion under the above statute, e.g. stealing from other members, a criminal conviction for a felony involving dishonest conduct, or repeated and intentional usurpation of opportunities available to the LLC. There is, however, quite a bit of gray area when it comes to what a Tennessee court could determine amounts to circumstances justifying an expulsion under the above statute. The case law from other states which interprets the above statute (which has been adopted uniformly by many other states) is also rather limited.