Members, managers and officers of Minnesota limited liability companies (“LLCs”) will soon be forced to honor members’ unwritten agreements for the first time. In the past, members could control their LLC’s operations only if they reached a signed, written agreement. Due to legislative enactments (Minn. Stat. Ch. 322C), members will no longer have to agree in writing. Instead, agreements can be oral, and they can even be implied from the members’ conduct when no words are exchanged. Unwritten agreements will be binding on all newly-formed LLCs beginning in August 2015, and existing LLCs must start honoring unwritten agreements or be forced to do so when the grandfathering period ends. Either way, both new LLCs and established ones will soon find that they cannot ignore their members’ oral and conduct-based dealings.
This is a troubling prospect for many LLCs. Members, managers and officers may worry that their LLC’s carefully written operating agreements could be called into question by mere allegations that some conversation or conduct changed the written understanding. Members could start lawsuits claiming that unwritten agreements re-worked important aspects of member rights (e.g., the right to receive distributions) and manager duties (e.g., the duty of loyalty to the LLC). This type of litigation over unwritten agreements is likely to become more common because members have an incentive to argue that written agreements simply do not reflect their more advantageous oral and conduct based agreements.
With the help of counsel, LLCs and their members can proactively protect their written agreements and minimize the risk of attacks by unwritten agreements. Messerli & Kramer’s business litigators are not only experienced in representing LLCs and their members in litigation, but can provide valuable counseling and advice to avoid litigation. Remember, an ounce of prevention can be worth a pound of litigation.
This communication does not constitute legal advice or create an attorney-client relationship. Please consult an attorney if you have questions.