Cash-Out Mergers And Majority Control
Cash-mergers are one way controlling members of LLCs can legally extinguish the interest of minority members. One of the leading commentators on “business divorce” is New York lawyer Peter Mahler. This week, Peter outlined an influential New York appellate decision (see here), which dramatically alters the ability of controlling members of LLCs to oust minority members by means of a cash-out merger.
It is important to note the difference in law between Washington and New York as it pertains to minority members’ ability to challenge a cash-merger. Relevant New York law (under New York LLC Law Section 1002(g)) does not provide a “fraud exception.” The fraud exception would allow minority members to challenge the validity of a cash-out merger, so long as the minority pleads the existence of fraud. This exception, however, exists under Washington law:
A member entitled to dissent and obtain payment for the member’s interest in a limited liability company under this article may not challenge the merger creating the member’s entitlement unless the merger fails to comply with the procedural requirements imposed by this chapter, Title 23B RCW, chapter 25.05 RCW, chapter 25.10 RCW, or the limited liability company agreement, or is fraudulent with respect to the member or the limited liability company.
Peter Mahler’s provides great insight into the law of cash-mergers and the significance behind the decision and I strongly recommend his writing for your reading.