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Because members don’t always agree and because minority members can be directly impacted by decisions of the controlling members, most state statutes provide for dissenters’ rights or members’ appraisal rights when the LLC’s majority seeks to undertake a serious event, such as to sell the business. These rights are intended to protect any minority member who does not believe that a proposed fundamental change is in the best interests of the LLC or in his or her best interests. A member exercising his or her dissenters’ or appraisal rights can compel the LLC to purchase his or her shares. The degree of protection that minority members enjoy depends on the state. For example, California is very protective of minority members, whereas Nevada minority members receive comparatively little protection.

Under California law, dissenters’ rights arise whenever:

• A plan of merger is submitted.

• Any exchange of shares between two companies is proposed (if the member has voting rights) .

• The LLC proposes to sell all or most of its assets outside of the ordinary conduct of its business.

• The LLC proposes to take any other action to which the articles or operating agreement attach dissenters’ or appraisal rights.

If an LLC proposes any action to which dissenters’ or appraisal rights apply, the notice to members noting the meeting’s time, date, and place must also indicate that dissenters’ rights are available. Upon receipt of this notice, a member must notify the LLC of his or her election to exercise dissenters’ rights.

If the proposed action is later approved, an LLC must notify all members who indicated their intent to exercise dissenters’ rights. This notice must include a form of demand for payment and a timetable by which the members must submit their demands. In addition, the LLC must include financial information and a statement indicating its estimate of the value of the LLC’s ownership interests and how it arrived at its estimate.

▼ Good to Know

Members who wish to take advantage of dissenters’ rights can’t vote their shares in favor of the proposed LLC action. If they do, the dissenters’ rights are no longer available to them. In addition, both members and the LLC would be wise to come to an agreement concerning the value of shares without resorting to the courts. Legal action in the courts is uncertain and expensive.

The member can accept the LLC’s estimate and submit a demand for payment. If the member does not agree with the estimate, he or she should submit a demand for payment that indicates his or her estimate of value. If the LLC does not agree with the estimate, the parties can petition the local court to determine its value.