Member Rights in Kentucky Limited Liability Companies
All members of Kentucky Limited Liability Companies, whether they hold a majority or minority membership interest, have rights under Kentucky statutory and common law, but these rights may be modified, curtailed or extended to a nearly unlimited extent by the provisions of the operating agreement. In this post, we will briefly discuss various rights afforded to members of Kentucky LLCs, which are less statutorily-defined than other corporate rights under state law.
From the outset, Kentucky law leans heavily in favor of drafting additional rights into an operating agreement. KRS 275.003(3), for example, reads, "A written operating agreement may provide rights to any person, including a person who is not a member or otherwise a party to the operating agreement, to the extent set forth therein." This provides a fairly broad license to grant rights to members and even non-members through the operating agreement.
Kentucky's LLC provides a few basic members rights as default provisions, although these can be largely superseded by controlling language in operating agreements. By way of example:
1. Members have the right to vote in proportion to their contributions as stated in the records of the LLC, provided those contributions have been made;
2. Unless the management of the LLC has been turned over to a manager or managers, the members have the right and authority to manage the LLC;
3. KRS 275.235 codifies a member's right to receive distributions of cash or other assets, giving a member owed such a distribution the same status as a creditor of the LLC;
4. Members of an LLC have, under KRS 275.185, a right to inspect the records of the LLC and copy them at their own expense, providing them with an up-to-date picture of the activities of the LLC that will allow them to stay informed; and
5. By default, the members of a member-managed LLC have the right to withdraw of their own volition, while members of a manager-managed LLC must have the consent of all other members to withdraw.
Although not codified, members in Kentucky have a common law right to bring derivative actions. Brought on behalf of the entity itself, these suits are a significant tool in providing a check on the power of those controlling the entity. This suit can correct wrongs committed through mismanagement of the LLC, and any proceeds from the suit are awarded directly to the entity.
Importantly, Kentucky specifically excludes dissenters' rights in statutory default provisions, but these rights can be drafted into the articles of organization or operating agreement. These rights are also known as the right to an appraisal, which allows, in certain circumstances, a member to sell his or her membership interest back to the LLC for fair market value. This occurs when the LLC enters into some form of transaction without the consent of that member that would alter the character of that member's investment in the LLC, i.e., a conversion of the LLC into another entity, a merger, or a sale of the company's assets. Operating agreements that include dissenters' rights should further include procedures for members asserting such rights.
Remember, all members of Kentucky LLCs owe specific duties to the other members of the LLC and the LLC itself. Finally, every member of an LLC has a right to procure independent counsel to represent his or her interests regarding the creation and operation of an LLC. That advocate can review all the pertinent documents to ensure the member's awareness of his or her rights, as well as any important LLC developments.