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Get out of my sandbox! Expulsion of a LLC Member under Wyo. Stat. 17-29-602

So, you have a bad apple as a member of your Wyoming limited liability company (LLC), how do you get rid of them? The best option is usually to reach an agreement for the company or a specific member to purchase the troublemaker’s membership interest. If, however, an amicable solution cannot be reached, the company may be able to expel the member pursuant to Wyo. Stat. 17-29-602. Section 602 governs the general circumstances when dissociation of a member occurs but also provides for expulsion of a member in the following circumstances: i) pursuant to the company’s operating agreement; ii) with unanimous consent of the other members; and iii) by judicial action.

Pursuant to Section 602, the easiest course of action is to expel the member under the company’s operating agreement but, unfortunately, few operating agreements address the expulsion of troublemakers. The next simplest course of action under Section 602 is to vote them out. However, this option is only available in very limited circumstances. Specifically, voting the bad apple out pursuant to the statute is available when it is either: unlawful to carry on the company’s activities as long as the troublemaker remains a member or there has been a transfer of all of the troublemaker’s transferable membership interest. Note: even if the troublemaker’s membership interest has been fully transferred, they cannot be expelled if the transfer was: a transfer for security purposes or due to a charging order in effect under Wyo. Stat. 17-29-503.

The company may be left with the most expensive and least desirable but still possible remedy of filing a lawsuit to expel the member. In order to expel the troublemaker by judicial action, the company (as opposed to an individual member) must bring the action and prove one of the following:

(A) the member has engaged, or is engaging, in wrongful conduct that has adversely and materially affected, or will adversely and materially affect, the company’s activities;

(B) the member has willfully or persistently committed, or is willfully and persistently committing, a material breach of the operating agreement or the person’s fiduciary duties or obligations under Wyo. Stat. 17-29-409; or

(C) the member has engaged in, or is engaging in, conduct relating to the company’s activities which makes it not reasonably practicable to carry on the activities with the person as a member.

Beyond the expense and general litigation risk for the company, even if the member is judicially expelled, there are a couple of caveats that require careful consideration. First and foremost, expulsion of the troublemaker will successfully remove him from all management and other business operations BUT the troublemaker will continue to own his interest in the company as a “transferee interest” also known as an “economic interest”. See Wyo. Stat. 17-29-603. Accordingly, the former member will be entitled to certain financial information owned by the company and, perhaps more importantly, will continue to be entitled to his share of the profits, losses and distributions under the company’s operating agreement. So, effectively, the company may kick the offending member out of the sandbox but still have to pass him buckets of sand to build his castle. Secondly, if the company is member-managed, the troublemaker’s fiduciary duties as a member end with regard to matters arising and events occurring after his dissociation. Terminating fiduciary duties owed by the troublemaker may be too disadvantageous to the company for the company to expel him, particularly if the member begins competing with the company while still receiving distributions as an economic interest owner.

Expulsion of a member is, obviously, an aggressive course of action and must be thoroughly examined. The risk of litigation to the company and its other members must be studied even if expulsion occurs under the operating agreement or by unanimous vote. However, Section 602 does provide some options for a company to remove a problem member at least from the company’s management and business operations.

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