Archives for April 2018

The majority partner, or the member with a majority of the membership interests in a joint venture organized as a limited liability company (LLC), is not necessarily the controlling “shareholder” and does not necessarily owe fiduciary duties to the minority interest holder just by virtue of her ownership of a majority interest in the LLC.  In North Carolina, joint venture partners who organize their venture as an LLC have the freedom of contract to write their own bargains, and to provide for the mechanisms for sharing controls and management decisions, including appropriate protections of minority interest holders, in the operating agreement they write when they organize the company.

Recent decisions of the North Carolina Business Court affirm these principles (see note 1), and the Court concluded in one case that a minority member could not claim that the majority member owed a fiduciary duty, or even that ownership of a majority interest creates a presumption of control. The Court made clear that “the fact of control . . . creates the fiduciary obligation.” Because LLCs are fundamentally different from corporations, the rules concerning majority shareholders of corporations are also different in the context of the LLC operating agreement and the freedom that minority owners have to contract for minority protections and to impose checks and limitations on the majority owners. This is a freedom not available to shareholders of a closely held corporation.

The operating agreement can provide for the appointment of managers and other “company officials.” Under the LLC statutes, managers and “company officials” exercise control and accordingly owe fiduciary duties to the LLC. In North Carolina, the LLC statutes require that the managers and other appointed “company officials” (for example, a president or vice president) must discharge their duties “(i) in good faith, (ii) with the care an ordinary prudent person in a like position would exercise under similar circumstances, and (iii) subject to the operating agreement, in a manner the manager [or company official] believes to be in the best interests of the LLC.” (Note 2.)

1. Strategic Management Decisions, LLC v. Sales Performance International, LLC, 2017 NCBC 68; Timbercreek Land & Timber Co. v. Robbins, 2017 NCBC 64.
2. North Carolina General Statutes, Sections 57D-3-21(b), and 57D-3-23. A “company official” is defined as “[a]ny person exercising any management authority over the limited liability company whether the person is a manager or referred to as a manager, director, or officer or given any other title.” North Carolina General Statutes, Section 57D-1-03(5).

Ellinger Carr lawyers assist clients who are creating new companies and joint ventures, including advising, negotiating and thoughtful drafting of the LLC operating agreements. Careful writing and thinking about a lot of “what if?” questions will enable the new partners to navigate and streamline their business decision-making and to minimize the risks of later disputes over controls, and whether one of the partners is or is not acting in good faith.

Ellinger Carr is a business law and commercial real estate law firm based in Raleigh, North Carolina. Ellinger Carr lawyers are experienced and knowledgeable counselors, transaction leaders, and business problem solvers, admitted to practice in North Carolina, South Carolina, Florida, Louisiana, Virginia and New York.

For assistance in commercial real estate, corporate law and business development matters, please call 919-785-9998 or email Susan Ellinger at sellinger@ellingercarr.com, Steven Carr at scarr@ellingercarr.com, Heather McDowell at hmcdowell@ellingercarr.com, and Sarah Goodin at sgoodin@ellingercarr.com.