Change of voting rights in an LLC

[myers.media.group-investr]

I am an interest holder in an LLC. Some members want to change the voting rights from the traditional one-unit, one-vote to a one-person, one-vote scheme (no person can have more than one vote).

What are the potential remedies for the members who are losing voting rights? This seems like an "illegal taking" or conversion.

This seems like it would destroy the company's ability to attract investors. Concerned mostly the reputation risk, entity type questions aside.
(bad treatment of existing members)

(I understand that investors want to invest in corporations, not LLCs, but for the sake of this discussion, let’s ignore that for the moment)

This is a California LLC, but I would be interested in the general considerations for any other states also.

 

[quincy]

What is a “unit” and how is one unit/one vote different from one member/one vote?

How likely is approval of the change in voting rights if voted on by the members under the current one unit/one vote?

If your LLC is a California LLC, it will be the laws of California that are your concern, not the laws of other states.

 

[Taxing Matters]

What is a “unit” and how is one unit/one vote different from one member/one vote?

A LLC unit/interest is best compared to a share of stock in a corporation. So, for example, suppose that Amy, Brian, and Cindy form ABC, LLC. Amy puts in $50,000 and gets 50 of the authorized 100 units. Brian puts in $30,000 and gets 30 units. Cindy puts in $20,000 and gets 20 units. Each unit is entitled to one vote. Thus, Amy would get 50 votes, Brian gets 30 votes, and Cindy gets 20 votes. In short, Amy has 50% of the interests in the LLC and 50% of the voting power, Brian has 30% and and Cindy has 20%. In my example, of course, no one person has outright control, but Amy's vote is needed to get anything passed.

What the OP is talking about is a change where now Amy, Brian, and Cindy would now each have just 1 vote each regardless of the number of units they currently hold. Now each of them has 33% of the voting power and the power shifts such that Brian and Cindy can overrule any objection Amy has which they could not do before.

The problem is that Amy put in the most money, and generally should therefore have a correspondingly larger say in things. The arrangement of one vote per member regardless of the number of units owned is rarely, if ever used because of that distortion. It would be difficult indeed to get interest from investors for large amounts of investment with such an arrangement. I cannot see that anyone with a larger chunk of units being at all happy with this arrangement.

 

[quincy]

myers might want to think about selling his interest.

 

[adjusterjack]

Or, band together with majority unit owners and vote it down.

 

[quincy]

That could work, depending on the number of members and each members interest in the LLC.

 

[LdiJ]

I am an interest holder in an LLC. Some members want to change the voting rights from the traditional one-unit, one-vote to a one-person, one-vote scheme (no person can have more than one vote).

What are the potential remedies for the members who are losing voting rights? This seems like an "illegal taking" or conversion.

This seems like it would destroy the company's ability to attract investors. Concerned mostly the reputation risk, entity type questions aside.
(bad treatment of existing members)

(I understand that investors want to invest in corporations, not LLCs, but for the sake of this discussion, let’s ignore that for the moment)

This is a California LLC, but I would be interested in the general considerations for any other states also.

You are honestly going to want to get a consult with a local attorney, but you also want to look at what your operating agreement says regarding those kinds of changes. Generally voting rights in an LLC are based on percentage owned, so such an arrangement would certainly be unusual. Do the members who want to change the voting rights currently own the majority of the company? If so, it would be odd for them to want to make that kind of change, if not they couldn't pass a vote to make that change.

 

[quincy]

Here is a link to the applicable California law that addresses LLC voting rights:

https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=CORP&sectionNum=17704.07

See especially 17704.07(b)(2) and 17704.07(r).