Recently, in Saltzer v. Rolka and Loube, the Superior Court of Pennsylvania considered the not so uncommon scenario – the buyout of a terminated member of a limited liability company where the operating agreement provided no formula for the buyout upon termination.
In 2007, David Rolka, Robert Loube and Matthew Saltzer formed a limited liability company to consult with public utilities. Their operating agreement did not include any provision to address member separation by death or otherwise. Over the years, the parties talked about amending the agreement to provide for a buyout provision, however, they never got around to it. In 2013, the company purchased life insurance on all three members, naming the company as the beneficiary, with the idea that the proceeds would be used to buy the share of a deceased member. However, there still was no formal agreement to determine the value or the mechanism by which shares would be purchased. Saltzer was fired as an employee the same day that the company purchased the life insurance policies. Nonetheless, as an owner, he continued to share in the company’s profits.
After a year, over Saltzer’s objection, Rolka and Loube amended the operating agreement, by majority vote, to grant them the right to proceed with a buyout of Saltzer’s minority interest. The amended agreement provided for the first time a formula by which the price for the forced sale would be set. The next day, they advised Saltzer that they were purchasing his shares for $63,389, which was a calculation based upon their new formula.
Not surprisingly, Saltzer filed suit, contending that he was not fairly compensated for his membership share. Rejecting the new formula in the amended operating agreement, and adopting Saltzer’s expert’s opinion that his interest was worth $294,000, the Court agreed with Saltzer. The Court found that Rolka and Loube had amended the operating agreement in violation of Pennsylvania’s Limited Liability Company Act.
The Act provides that unless the operating agreement says otherwise, “the affirmative vote or consent of all members is required … to amend the operating agreement.” To fit within the contractual exception, Rolka and Loube relied upon Section 6.02 of their operating agreement, which provided that “except as otherwise provided in the Limited Liability Company Act, or this agreement, whenever any action is to be taken by vote of the members it shall be authorized upon receiving the affirmative vote of a majority of the votes cast by all members entitled to vote thereon.” Section 9.04 of the operating agreement further provided for amendment of the operating agreement “by vote of the members at an annual or special meeting of the members.” The Court found that since this section merely stated “by vote of members,” rather than the more explicit “by majority vote of members,” the statutory requirement for unanimous consent of all was still required to amend the operating agreement.
There are some lessons to be learned. Review the language of your operating agreement and compare it to the statute to ensure that if changes are to be made, they are made properly, and as members envisioned. Also make sure that provisions are made for the valuation of membership interests and buy-out in the event of death or termination. Procrastination inevitably invites trouble. If we can help, let us know.