Legal Question in Business Law in California

Disclosure rules for members in LLC

Background:

A 4 member LLC in California. The ''CEO'' of this LLC has

declared that it is ''not appropriate and not necessary'' for any other

member to have access to the detailed budget of the company

(including all checks paid out, salaries, etc). Additionally, the CEO

has declared that only he can inject money into the company, if

needed, to increase equity stake. The ''CEO'' is one of the original

co-founders of the company ... the other founder is in the process

of leaving the company.

Questions:

(1) What are our rights as members of the company (we all have

percentage ownership as determined by shares vesting)? Do we

have the right to know what the CEO is spending money on and

other details of the company's finances?

(2) Does the LLC terminate upon the departure of a previous

member and reform under new rules as dictated by the current

members?

END


Asked on 11/28/02, 10:13 pm

1 Answer from Attorneys
Mitchell Roth MW Roth, Professional Law Corporation

Re: Disclosure rules for members in LLC

There are rules that govern such matters in the absence of agreement to the contrary. One would need to look at subscriber agreements and that sort of thing to be sure in your case. That being said, you probably do have cause for concern because transparency is the norm, and majority shareholders have fiduciary obligations to minority shareholders. You should have an attorney look into things without delay on behalf of minority shareholders of the LLC. If your suspicions are well-founded, delay can be very costly. The minority shareholders have a commonality of interest and can be represented by the same lawyer in this matter, making the process much more affordable for all concerned.

Depending upon what is found once the attorney digs under the surface, it may well be possible to lower the out of pocket costs for the minority shareholders by switching to representation under a contingency or partial contigency arrangement.

If we can be of further assistance, let me know.

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Answered on 11/29/02, 10:03 am


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