Dingeman Dancer

Fiduciary Duties Owed by Minority Members of a Limited Liability Company

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Author: Dane Carey

This article is intended to address one narrow issue: Whether a minority member of a Michigan limited liability company owes a fiduciary duty to the company and its other members. And more specifically, the discussion below examines this question as it pertains to minority members of a manager-managed LLC.

For individuals in charge of a business, the existence and scope of fiduciary duty depends on the type of entity. In Michigan, these duties are based in common law, but have been largely codified by statute. The fiduciary duties owed in the context of LLCs are codified in the Michigan Limited Liability Company Act (“LLCA”).

Limited Liability Companies

A limited liability company is a form of hybrid business entity that offers all of its members limited liability as if they were shareholders of a corporation but treats the entity and its members as a partnership for tax purposes. In Michigan, an LLC may be organized as either member-managed (i.e., managed by its members) or manager-managed (i.e., managed by managers).[1] These two alternative management structures are set forth in MCL 450.4401, which provides in pertinent part:

Unless the articles of organization state that the business of the limited liability company is to be managed by 1 or more managers, the business of the limited liability company shall be managed by the members, subject to any provision in an operating agreement restricting or enlarging the management rights and duties of any member or group of members.

The LLCA expressly imposes fiduciary obligations on managers of an LLC under MCL 450.4404(1), which states:

A manager shall discharge the duties of manager in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances, and in a manner the manager reasonably believes to be in the best interests of the limited liability company.

Although there is no similar provision applicable to members of an LLC, the LLCA does makes these same statutory duties applicable to members of a member-managed LLC. Indeed, MCL 450.4401 provides in pertinent part:

If management is vested in the members, both of the following apply:

(a) The members are considered managers for purposes of applying this act, including section 406 regarding the agency authority of managers, unless the context clearly requires otherwise.

(b) The members have, and are subject to, all duties and liabilities of managers and to all limitations on liability and indemnification rights of managers.

Accordingly, in a member-managed LLC, the members of the company are subject to the same duties that attach to managers in a manager-managed LLC.[2] In other words, the LLCA treats members of a member-managed LLC the same as it treats managers of manager-managed LLC.

As expressly stated in the statute, however, the fiduciary duties set forth in MCL 450.4404 only apply to members if management is vested in the members (i.e., in a member-managed LLC). This is significant because the LLCA does not contain any provision that establishes fiduciary duties for members of a manager-managed LLC. Thus, in enacting the LLCA, the Legislature expressly imposed fiduciary duties on managers of a manager-managed LLC and members of a member-managed LLC, but did not to impose fiduciary duties on members of a manager-managed LLC.

As such, the statutory default would seem to be that members of a manager-managed LLC do not owe each other or the LLC any duties.[3] And frankly, this makes perfect sense. In a manager-managed LLC, the managers are in charge. In a member-managed LLC, the members are in charge. Only those in charge of the company owe fiduciary duties. The Legislature’s apparent decision to treat members of a manager-managed LLC differently under the LLCA than members of a member-managed LLC would seem to be dispositive on the question at hand.

To be sure, as Michigan courts have repeatedly explained: “Courts cannot assume that the Legislature inadvertently omitted from one statute the language that it placed in another statute, and then, on the basis of that assumption, apply what is not there.”[4] “The Legislature is presumed to be aware of existing law; therefore, we do not assume that the Legislature inadvertently omitted from one statute the language that it placed in another statute.”[5] “Nothing will be read into a clear statute that is not within the manifest intention of the Legislature as derived from the language of the statute itself.”[6] “The omission of a provision in one part of a statute that is included in another part should be construed as intentional.”[7]

In implementing the LLCA, the Legislature specifically elected to impose fiduciary duties on managers of a manager-managed LLC and members of a member-managed LLC, but not members of a manager-managed LLC. Based on the guiding principles of statutory interpretation described above, this would appear to mean that members of a manager-managed LLC do not owe a fiduciary duty. If the legislators had intended for members of manager-managed LLC to also be subject to fiduciary duties, the law says they would have incorporated such a provision into the LLCA. Courts may not read such an obligation into the otherwise clear language of the statute. As such, given the plain language of the LLCA, a member of a manager-managed LLC likely does not owe a fiduciary duty to the company or its other members under Michigan law.

To date, there is no Michigan case law that addresses this specific question. As such, the only other potential useful source of insight is the related law corresponding to other types of business entities in Michigan.

Partnership and Corporation Law

A limited liability company is a legal entity that has the attributes of both a partnership and a corporation. Whether the relations among members of a limited liability company resemble a partnership more than a corporation, or vice-versa, is left largely to the discretion of the individual organizers. For example, as noted above, the members have the ability to decide between the two options for management of the Company. If a manager-manager LLC is chosen, the company will be more like a corporation. In a member-managed LLC, the relationship between the members is more like that of partners because similar to a partnership, the members all owe fiduciary duties to each other and the company.

Under partnership law, it is well-settled that partners owe a fiduciary duty to one another. Thus, to the extent that a particular LLC more closely resembles the features of a partnership structure, one could argue that we should look to partnership law as a basis for imposing a fiduciary duty on minority members of an LLC. But because this particular article is largely concerned with the fiduciary duty owed by a member of a manager-managed LLC, that logic does not seem persuasive. Furthermore, in situations where the law is still developing around treatment of LLCs, Michigan courts tend to look to corporation law (and not partnership law) for guidance and direction.[8]

In looking to corporation law, there is some authority that might provide a basis for imposing fiduciary status on non-manager members in certain well-defined situations. Managers of an LLC that has adopted the centralized form of management in its articles of organization function the same as directors and officers of a corporation. Thus, it stands to reason that Michigan courts could conceivably look to the duties and standards of conduct of directors and officers in determining what duties and standards member-managers of an LLC might be expected to follow.[9]

Pursuant to Michigan common law and under the Michigan Business Corporations Act (“BCA”), only majority shareholders owe a fiduciary duty to the corporation and its minority shareholders.[10] In contrast to partnership law, however, minority shareholders of a corporation generally owe no fiduciary duty to fellow shareholders.[11] The one exception to this general rule is that non-director/officer shareholders with actual control over a corporation’s actions owe common law fiduciary duties.[12]

The actual control exception in Michigan corporation law provides that controlling shareholders of a corporation owe a fiduciary duty to the corporation and its minority shareholders.”[13] “A shareholder is a controlling shareholder if it owns a majority of the stock or has exercised actual domination and control in directing the corporation’s business affairs. Majority shareholders are those shareholders who own at least fifty-percent of the outstanding stock of a corporation.”[14] For a shareholder owning less than fifty-percent of the stock to be deemed controlling, that shareholder must have the power to direct and implement corporate decisions.[15]

In the corporation context, “courts have taken a literal view of whether someone is ‘in control’ of the company.”[16] Indeed, as explained in a Michigan Bar Journal article:

The key factor in many of these cases is actual “control.” The Saginaw County Business Court has explained that “[t]o be subject to a charge of ‘oppression,’ MCL 450.4515 reasonably requires that one possess the ability to oppress, and this ability comes from being ‘in control.’ The key is ‘control.’” For example, the Kent County Business Court held that shareholder oppression did not occur because the plaintiffs and defendants each collectively owned 50 percent of the company. Because the ownership interests were exactly equal, the defendants were not “in control.” Likewise, if a party provides advice to the company’s decision-making body but does not have final decision-making authority, the court may find that the defendant is not truly “in control.” Further, a member vested with the power to unilaterally remove a manager may not sustain a claim for oppression against that manager, as he or she may remove the manager at any time.[17]

Under the body of case law dealing with the question of whether someone is “in control” of the company, Michigan courts have adhered to the following basic principles: 

“Those in control” dominate corporate affairs, typically through a majority shareholding interest, officer or director positions, or both. They have the power to direct and implement corporate decisions, such as officer and employee compensation levels; engage in self-interested transactions or pursue corporate opportunities; pay distributions to shareholders; and oversee financial reporting of the company. These decisions financially impact not only the corporation, but also the non-controlling shareholders.[18]

By definition, absent managerial power, “[a] minority interest owner cannot direct the business operations.”[19] Thus, in order to establish that such a minority shareholder is a controlling shareholder, the facts must show that “through personal or other relationships the directors are beholden to the controlling person.”[20]

In sum, to be a controlling shareholder—or member, in the case of an LLC—one must have either actual voting control or the ability to influence and direct those in position to control.[21] Under the dearth of Michigan corporation law addressing the factors necessary to establish “control” by a minority shareholder, all of the cases involve situations where a group of minority shareholders with a combined ownership interest of over 50% work in concert to control corporate policy.[22]

Given the fact that courts have applied common principles of corporation law to the LLC setting, one could argue that this same doctrine should apply to members of a manager-managed LLC. To date, however, the Michigan Supreme Court and Court of Appeals have not extended this “actual control” exception to the LLC context.[23] This is may be a product of the Legislature’s decision to not impose a fiduciary duty within the express language of the LLCA.

Furthermore, in drafting the LLCA, the Legislature provided a statutory avenue for an aggrieved member of an LLC to seek redress for wrongful acts of “member oppression” by a controlling member. Under MCL 450.4515(1), members of an LLC are able to bring an action against “the managers or members in control of the limited liability company.” Any claims arising out of alleged “control” of the company by a member can be based on this provision. Once again, if the Legislature had intended to provide a similar cause of action for breach of fiduciary duties by a controlling member, the law presumes that it would have done so. Because lawmakers elected not to do so in the LLCA, principles of statutory interpretation ostensibly require a finding that none exists.[24]

Other Jurisdictions

Given the lack of case law in Michigan dealing with the question of whether a minority member of an LLC owes fiduciary duties, it seems appropriate to survey whether any other states have answered the question.

Delaware jurisprudence is quite clear on this issue: “Delaware law imposes no default fiduciary duties on non-managing, non-controlling members of limited liability companies.”[25] Specifically, “Delaware common law does not impose fiduciary and other related duties to members of LLCs who are neither managers nor controlling members.”[26] At least one Delaware chancellor has reasoned that, if members wish to have fiduciary duties owed to them by non-managing, non-controlling members, they should create those duties through contract.[27]

In addition to Delaware, all other jurisdictions that have weighed in on this particular issue—namely, Georgia, Kentucky, Utah, and Washington D.C.—have found that fiduciary duties in the manager-managed LLC context are exclusively limited to managers and majority members.[28] That is, minority members do not owe fiduciary duties. Like Delaware, New York also imposes on non-managing members only those duties that are created by contract.[29]

Conclusion

Under the express language of the LLCA, managers of a manager-managed LLC and members of a member-managed LLC owe fiduciary duties, but members of a manager-managed LLC do not. Under principles of statutory interpretation, the Legislature’s decision to treat members of a member-managed LLC differently than members of a manager-managed LLC is most likely conclusive as to the question at bar.

While there may be some authority in corporation law that would support imposition of fiduciary duties upon members of a manager-managed LLC, this would conceivably only extend to majority members—not minority members. This is consistent with the approaches taken in other jurisdictions.

For now, when forming a manager-managed LLC in Michigan, individuals would be wise to specifically spell out the respective duties of all members. If the parties want non-managing, minority members to have fiduciary status, they can make sure that is the case by expressly providing for it in the operating agreement for the company.

Footnotes

[1] MCL 450.4401. 

[2] See MCL 450.4401(a) and (b).

[3] Brooks, K. and Killips, J., Minority Members of a Michigan Limited Liability Company: Fiduciaries or Not?, Mich. Bar Journal 24, January 2017 (“The current Michigan Limited Liability Company Act is silent about whether minority members owe each other or the LLC any duties. Therefore, this is the statutory default.”).

[4] Farrington v Total Petroleum, Inc, 442 Mich 201, 210 (1993).

[5] AFSCME v Detroit, 267 Mich App 255, 269 (2005).

[6] Tew v Hillsdale Tool & Mfg Co, 268 Mich App 399, 408 (2005).

[7] Estes v Idea Engineering & Fabrications, Inc, 250 Mich App 270, 279 (2002).

[8] See, e.g., BSA Mull, No. 310989, at *10 (applying Michigan shareholder oppression law to assist the court in understanding the LLCA’s definition of “willfully unfair and oppressive conduct.” See also Mantese, G. and Williamson, I., Fiduciary Duty in Business Litigation, Mich. Bar Journal 32, August 2014.

[9] The type of management the LLC has adopted may determine which duties, by analogy to other business forms, apply to LLC managers. In the case of LLCs that have adopted centralized management and given management responsibility to specific managers who may or may not be members (i.e., manager-managed LLCs), it may be determined that the managerial duties mirror those of a corporation’s officers and directors. In an LLC with decentralized management (i.e., member-managed LLC), the managers’ duties may more appropriately follow the duties of general partners in a partnership.

[10] Salvador v Connor, 87 Mich App 664, 675 (1979).

[11] Priddy v Edelman, 883 F2d 438, 445 (6th Cir 1989).

[12] Estes v Idea Engineering & Fabrications, Inc, 250 Mich App 270, 281 (2002) (holding that those in control of a closely held corporation have “a higher standard of fiduciary responsibility, a standard more akin to partnership law”).

[13] Miner v Bell Isle Ice Company, 93 Mich 97, 114 (1892).

[14] Kearney v Jandernoa, 957 F Supp 116, 118 (WD Mich 1997) (internal citations and quotation marks omitted). See also Miner v Bell Isle Ice Company, 93 Mich 97, 114 (1892) (explaining that when majority combinations of shareholders exert control, “they become, for all practical purposes, the corporation itself, and assume the trust relation occupied by the corporation towards its stockholders”); Priddy v Edelman, 679 F Supp 1425 (ED Mich 1988).

[15] Kearney, 957 F Supp at 118.

[16] Mantese, G. and Toering, D., Michigan Business Courts and Oppression, Mich. Bar Journal 18, 20, January 2017.

[17] Id. at 20.

[18] Mantese, G., Rossman, M., Williamson, I., Shareholder and Corporate Oppression Actions, Mich. Bar Journal 25, February 2012.

[19] Id. at 29, n 45.

[20] Kearney, 979 F Supp at 579.

[21] Mantese, G. and Toering, D., Michigan Business Courts and Oppression, Mich. Bar Journal 20, January 2017.

[22] See Mazur v Kammer, No 275298, 2008 WL 1989659, at *5 (Mich Ct App May 8, 2008); Lozowski v Benedict, unpublished opinion per curiam of the Court of Appeals, February 7, 2006 (Docket No 257219); Lozowski v Benedict, No 257219, 2006 WL 287406, at *3 (Mich Ct App Feb 7, 2006). 

[23] Mantese, G. and Williamson, I., Fiduciary Duty in Business Litigation, Mich. Bar Journal 30, August 2014.

[24] Farrington v Total Petroleum, Inc, 442 Mich 201, 210 (1993).

[25] Imbert v LCM Interest Holding LLC, unpublished opinion of the Delaware Court of Chancery, issued May 7, 2013 (Docket No. 7845-ML), at *7, citing Kuroda v SPJS Holdings, LLC, unpublished opinion of the Delaware Court of Chancery, issued March 16, 2010 (Docket No. 4030-CC), at *8.

[26] In re S Canaan, 427 BR at 102–03. See also Kuroda v SPJS Holdings, LLC, No 4030–CC, 2010 WL 925853, at *7, n 28 (Del Ch March 16, 2010); Kelly v. Blum, No 4516–VCP, 2010 WL 629850, at *1 (Del Ch Feb. 24, 2010) (explaining that only majority and controlling members owe fiduciary duties).

[27] Kuroda, No 4030–CC at *8.

[28] Georgia: The Georgia Limited Liability Company Act, OCGA §§ 14–11–100–1109, establishes that where a limited liability company vests its management in a manager, a member of the limited liability company who is not a manager owes no duties to the company or other members:

Except as otherwise provided in the articles of organization or a written operating agreement, a person who is a member of a limited liability company in which management is vested in one or more managers, and who is not a manager, shall have no duties to the limited liability company or to the other members solely by reason of acting in his or her capacity as a member.

Kentucky: Under Kentucky law, fiduciary duties are generally concomitant with the responsibility for management of the LLC.” Xcell Energy & Coal Co, LLC v Energy Inv Grp, LLC, 2014 WL 2964076, at *6 (Del Ch June 30, 2014). A Kentucky LLC can be managed either by its members or by a manager. KRS § 275.025(1)(d). If an LLC is member-managed, then the members have fiduciary duties. Conversely, if the LLC is manager-managed, then the manager owes fiduciary duties, but the members do not. Xcell, 2014 WL 2964076, at *6 (“Unless provided otherwise in the LLC’s operating agreement, if a Kentucky LLC is managed by its managers, then, by Kentucky statute, its members do not manage the LLC and thus do not owe fiduciary duties to the LLC.”). See also Patmon v Hobbs, 280 SW3d 589, 591 (Ky Ct App 2009) (“[O]ne entrusted with active corporate management, such as officer or director or manager-member, occupies fiduciary relationship.”); Thomas E. Rutledge, Shareholders Are Not Fiduciaries: A Positive and Normative Analysis of Kentucky Law, 51 U Louisville L Rev 535, 547 (2013) (“By statute, the members in a manager-managed limited liability company do not govern the LLC and do not owe fiduciary duties.”).

Utah: Utah Code Ann § 48–2c–807(3) (“Unless otherwise provided in a company's articles of organization or operating agreement, a member of a manager-managed company who is not also a manager owes no fiduciary duties to the company or to the other members solely by reason of acting in the capacity of a member.”).

Washington D.C.: DC Code §§ 29-1001-29-1075.

[29] Kalikow v Shalik, 986 NYS2d 762, 768 (2014).

 

 

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