Can You Force a Partner Out of an LLC in Texas?

The default rule: no expulsion

Many owners assume a majority can vote a troublesome member out of an LLC the way a board can fire an officer. In Texas the default is the opposite. Section 101.107 of the Business Organizations Code says a member of a limited liability company may not withdraw or be expelled from the company. The section protects both sides: the member cannot walk away and demand his capital back, and the others cannot push him out and keep the business.

The rule is a default, not a ceiling. Section 101.052 lets the company agreement govern the relations among members and managers, and section 101.107 is not on the list in section 101.054 of provisions that cannot be waived or modified. So the first question is always the same: what does the agreement say?

What a company agreement can provide

Agreements that anticipate this problem usually contain one or more of these tools:

• For-cause expulsion. A vote of the other members removes a member who commits a listed act: fraud, felony conviction, breach of the agreement uncured after notice, bankruptcy, competing with the company. The clause should say who votes, what percentage, what notice and cure period apply, and what happens to the expelled member's interest.
• Mandatory buyout triggers. Death, disability, divorce, termination of employment, or an attempted transfer triggers a right or obligation to buy the interest at a formula or appraised price. This is the most common route to removing an owner, because it converts the question from 'can we' to 'at what price.'
• Drag-along or call rights. A majority can require the minority to sell on a sale of the company, or the company can call the interest at a stated price in defined circumstances.
• Deadlock and shotgun provisions. One side names a price; the other must buy or sell at it.

Because the agreement controls, the language will be read closely. A clause that allows removal 'as manager' does not allow expulsion 'as member.' A buyout formula that references 'book value' will be enforced as written even when book value is far from what the business would sell for. For how those prices are set and fought over, see how a partner buyout is priced and enforced in Texas.

What a majority can do without an expulsion clause

Quite a lot, short of taking the interest. The governing authority of an LLC, managers or members depending on the certificate and the agreement, directs the business (sections 101.251 and 101.252). A majority of the governing persons can act on ordinary matters, and section 101.356 lets a majority of all governing persons approve actions outside the ordinary course. So a majority can:

• Remove the member from any manager or officer role if the agreement allows removal by majority, and end his authority to sign for the company. The procedure is in how to remove a managing member or officer in Texas.
• End his employment and salary, subject to any employment agreement.
• Change signature authority on bank accounts and revoke system access.
• Sue him for breach of the agreement or of any duties he owes, and seek an injunction if he is harming the company.

What a majority cannot do is cancel his membership interest, stop his share of distributions declared to all members, or deny him the records rights in section 101.502. A member who is removed from management but still owns 30 percent is still a 30 percent owner, with a 30 percent claim on every distribution and a right to see the books.

Example

Suppose three members own a Dallas commercial cleaning LLC equally. One has stopped showing up, is behind on his capital call and has started bidding on the company's accounts through a side business. The agreement is a form downloaded years ago with no expulsion or buyout clause. The other two can remove him as manager (the agreement allows removal by majority), cut off his authority and pay, and sue him for competing in breach of his duties. They cannot vote his one-third interest away. Their realistic exits are a negotiated buyout, with the competition claim as pressure on price, or a petition under section 11.314 asking a court to wind up the company because his conduct makes it not reasonably practicable to carry on the business with him.

Can a court remove an LLC member?

Not directly. The Business Organizations Code has no provision for judicial expulsion of an LLC member, and Texas courts have no general power to order one owner to sell to another; in Ritchie v. Rupe (Tex. 2014) the Supreme Court of Texas held that even the receivership statute does not authorize a court-ordered buyout. What a court can do is end or restructure the company:

• Judicial winding up, section 11.314. A district court in the county of the company's registered or principal office may order an LLC wound up and terminated on an owner's application if the economic purpose of the entity is likely to be unreasonably frustrated, another owner has engaged in conduct relating to the business that makes it not reasonably practicable to carry on the business with that owner, or it is not reasonably practicable to carry on in conformity with the governing documents. Winding up ends the company for everyone, which is why it is used mainly as pressure toward a buyout.
• Rehabilitative receivership, section 11.404. An owner can ask for a receiver over the company's property and business when, among other grounds, the governing persons are deadlocked and irreparable injury is threatened, their actions are illegal, oppressive or fraudulent, or company property is being misapplied or wasted, and only if all other legal and equitable remedies are inadequate. A receiver runs the company; he does not expel anyone.

These remedies are covered in asking a court to appoint a receiver or dissolve a Texas company.

General partnerships are different

If the business is a general partnership rather than an LLC, the statute does allow expulsion. Section 152.501(b) lists events of withdrawal that include expulsion as provided by the partnership agreement; expulsion by vote of a majority-in-interest of the other partners when it is unlawful to continue with that partner, when he has transferred substantially all of his interest, or when an entity partner has been terminated; and expulsion by judicial decree, on application by the partnership or another partner, if the court finds that the partner engaged in wrongful conduct that adversely and materially affected the business, wilfully or persistently committed a material breach of the agreement or of the duties in sections 152.204 to 152.206, or engaged in conduct that made it not reasonably practicable to carry on the business with him. An expelled partner's interest is redeemed at fair value under sections 152.601 and 152.602, with setoffs for damages he caused. The partnership agreement cannot vary the court's power to expel (section 152.002(b)(6)).

What forcing a partner out costs the business

Removing an owner is a transaction as much as a fight. The company will need to fund a buyout or absorb a winding up, replace whatever the departing member did, handle customer and lender questions, and manage the risk that he competes afterward. A litigator's value at this stage is to read the agreement for every clause that bears on exit, price the alternatives, and sequence the steps, management removal, records control, demand, suit, so each strengthens the company's position in the buyout talks. Tina Wysk represents owners on both sides of partnership disputes in Dallas state and federal courts and in arbitration.