Authority Issue in Management

Some legal codes or statutory schemes are laden with plentiful default rules to guide decisions or dissuade or prevent certain acts, conduct or misconduct. The Illinois Limited Liability Act is not such a regime. There are few default rules for operating an LLC. Therefore, there is a premium on members and managers (members or non-members) to have a competent working knowledge of issues regarding authority to act, give notice, hold meetings and acts that require consent.

The hopefully well-planned Articles of Organization and LLC Operating Agreement are the vehicles for expressing these “missing” default rules. These default rules can differ depending upon the myriad type of LLC in question.

The Operating Agreement is the forum to specify acts that require a supermajority, a simple majority, or unanimous approval for various acts or issues. It is also the place to specify which acts of approval must come from one or more classes of membership.

While Illinois permits single member LLCs, in a business or business dispute context, it is more common to see LLCs with multiple members. As we have discussed regarding member managed LLCs, and regarding manager-managed LLCs, there can be multiple members who manage an LLC or multiple managers.

To reduce potential conflict, it is imperative for LLC leadership team or management to know which acts on behalf of an LLC can be taken with authority, with no meeting or no consent, and which cannot. This distinction is especially important in leadership or management if a member or manager wishes to delegate his or her authority or appoint a proxy to vote or act. Thus, the premium on a well conceived and well drafted Articles of Organization and Operating Agreement.

To demonstrate the breath and scope of authority that LLC members have unless expressly limited, it is useful to examine the example of the transfer of a LLC’s real estate interests. Unless a LLC’s Articles of Organization specifically and expressly limit members’ authority, members can act as the LLCs agent, and any member of a member-managed or manager of a manager-managed LLC can sign any contract that transfers real property or the LLCs interest in real property.

While this may seem radical, this same broad authority applies to each member of a member-managed LLC, who is an agent of the LLC. Subject to some statutory limitations, an act of any member on behalf of a member-managed LLC in the ordinary course of business, binds the LLC, unless that member lacked authority and the person with whom that member dealt knew that member lacked authority.

In member-managed LLCs, unless the Operating Agreement states otherwise, all members have equal management rights. Except for decisions requiring all members’ consent (see below), any decision is binding with a simple majority of members.

In a manager-managed LLC, unless the Operating Agreement states otherwise, managers must be designated, appointed, elected, removed or replaced by a majority of members. Unless a manager resigns or is removed, the managers remain in place until a successor is installed. Except for decisions requiring all members’ consent, managers have the exclusive right to decide how to manage the LLC. Inter se, managers have equal management rights and their decisions need only a majority. Managers can select proxies if consistent with or not in violation of the Operating Agreement.

Unless otherwise permitted in the Operating Agreement, the Illinois Limited Liability Act does provide some default rules that prescribe which management decisions for fundamentally organic acts do require all members’ consent.

There are eleven such decisions enumerated beginning at 805 ILCS 180/15-5.

1. Any amendment to the Operating Agreement;
2. Any amendment to the Articles of Organization;
3. Compromise of a member’s obligation to make a contribution;
4. Compromise of an obligation of a member to return money or other property paid or distributed in violation of the Act;
5. Any decision to make interim distributions (including redemption of an interest);
6. Admission of a new member;
7. Use of the LLC’s property to redeem an interest subject to a charging order;
8. Consent to dissolve the LLC;
9. Waiver of the right to wind up the LLC’s business and terminate the LLC;
10. Consent to merge with another entity;
11. Sale, lease, exchange or other disposal of all, or substantially all, of the LLC’s property with or without goodwill.

The LLC lawyers at Lubin Austermuehle have many years of experience defending and prosecuting claims involving LLC members including breach of fiduciary duty and fraud claims and claims involving the freeze-out of members in the federal and state Chancery courts in Illinois in a wide variety of business dispute lawsuits. We are knowledgeable regarding the changes and complexities of LLC law. We are committed to fighting for our clients’ rights in LLC dispute cases at both the trial and appellate court levels. We have successfully defended or prosecuted LLC cases achieving large settlements for our clients or winning them control of their business. Conveniently located in Chicago and Elmhurst, Illinois, we have successfully litigated business separation, accounting and breach of fiduciary duty cases for clients all over the Chicago area. To schedule a consultation with one of our skilled attorneys, you can contact us online or give us a call at 630-333-0333.