Change of voting rights in an LLC

[Myers.Media.Group.Investr]

Jurisdiction

California

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 also 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.

 

[adjusterjack]

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

No, you wouldn't, because CA LLC law is the only law that counts. And if you didn't understand what you were getting into when you joined the LLC, and don't understand your rights now, especially if there is a lot of money potentially at stake, you should be talking to a lawyer who can read your operating agreement.

We can't see it from here unless you want to upload a copy, redacting any identifying information, of course.

It might not be an "illegal taking" if the operating agreement allows for it.

I am an interest holder in an LLC.

What does that mean?

And what's the difference between unit vote and member vote? Who would be losing voting rights?

Details count.

 

[Myers.Media.Group.Investr]

Interest holder / membership interest holder / holder of membership interest.

> And what's the difference between unit vote and member vote? Who would be losing voting rights?

In the current operating agreement, each unit = 1 vote. There are 100 units held by 11 members.

The proposal is to change this to "one man one vote" (no person can have more than one vote).

The three founding members would be losing voting rights. One of the founding members is the manager, and the new OA would give him sufficient control that he doesn't care about the member votes, since they would be for all practical purposes, moot.

 

[adjusterjack]

You still haven't established that voting on this proposal is allowed by the operating agreement. Upload a copy if you like. Operating agreements are generally comprehensive enough to allow it so let's assume that it is.

Why wouldn't the owners of the majority of the units just band together and vote it down?

"Taxing Matters" (an attorney who participates here as "Tax Counsel") has responded to your question on another site. I'll repeat it here for you:

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.

 

[army judge]

The three founding members would be losing voting rights. One of the founding members is the manager, and the new OA would give him sufficient control that he doesn't care about the member votes, since they would be for all practical purposes, moot

Ballpark numbers, how much of your loot has the "founder of the scheme" managed to get you to contribute to the "scheme"?

Would you be able to convince the "founder of the scheme" to refund any of your loot back to you, allowing you to walk away without being fully fleeced?

There are times in a person's life when walking away permits one to cut her/his losses.

I've had many opportunities to get in on the ground floor of many "schemes".

Whenever such an opportunity has reared it's head throughout my life, I always reply, "Gee, thanks, but no thanks. I pass, allowing the lot of you to engorge your gullets fully."

 

[zddoodah]

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.

Are you supposing that, just because "some members want" this, they'll automatically get what they want? It's impossible to know if they can get what they want without reading the LLC's governing documents.

And what's the difference between unit vote and member vote?

"Member vote" means that each member's vote counts equally. "Unit vote" means that each member's vote is weighted by the amount of his/her interest. For example, if Member A owns 51%, Member B owns 29%, Member C owns 10%, and Member D owns 10%, then Member A gets 51 votes, Member B gets 29 votes, etc. Pretty basic concept of corporate/LLC law.