How to Remove a Managing Member or Officer in Texas

First, identify the role

Four different legal positions hide behind the phrase 'the guy running the company,' and each has its own removal rule.

Removing an LLC manager

Section 101.251 says the governing authority of an LLC is its managers if the company agreement, or failing that the certificate of formation, provides for managers; otherwise it is the members. In a manager-managed company, section 101.304 lets the members remove a manager with or without cause at a meeting of members called for that purpose. The statute does not set the vote; section 101.355 supplies the default of a majority of the members voting at a meeting with a quorum, and section 101.052 lets the company agreement replace all of it. If the agreement says managers serve at the pleasure of a 75 percent vote, or can be removed only for cause defined in the agreement, that controls. A manager elected by a class or group of members can be removed only by that class or group (§ 101.306).

The steps, in the default case:

1. Read the agreement for the removal clause, the vote, the notice period and who may call a meeting.
2. Call the meeting in the manner the agreement requires, stating removal as its purpose. A meeting called for something else, or a hallway vote, does not satisfy section 101.304.
3. Hold the vote and record it in minutes or a written consent signed by the required members.
4. Elect a replacement or fill the vacancy as the agreement provides (§§ 101.303, 101.305).
5. Give notice to the bank, the registered agent, major counterparties and the Secretary of State on the next public information report, and change signature authority and system access.

The managing member problem

In a member-managed LLC the person running the company is doing so as a member, and section 101.107 says a member may not be expelled. His ownership cannot be voted away. What the members can do is change who manages: amend the company agreement to provide for managers and elect someone else, or restrict his authority, by whatever vote the agreement requires for amendments. Many agreements require unanimous consent to amend, which gives the managing member a veto over his own removal. Where that is the position, the practical routes are a negotiated buyout, enforcement of any buy-sell or default provision the agreement contains, or a court. The judicial options are a receiver under section 11.404 where his conduct is oppressive or fraudulent or he is wasting assets, and a winding up under section 11.314 where his conduct makes it not reasonably practicable to carry on the business with him; see asking a court to appoint a receiver or dissolve a Texas company. Whether ownership itself can be forced out is covered in whether you can force a partner out of a Texas LLC.

Removing an officer

Officers are easier. Section 3.104 lets the governing authority remove an officer with or without cause, subject to the governing documents, and provides that removal does not prejudice the officer's contract rights. Election to an office does not by itself create a contract right. So the board or the managers can take the title and the authority at a meeting, but if the officer has an employment agreement with a term, severance or a for-cause definition, removing him without cause triggers whatever that agreement says. Read it before the vote. The company's exposure, and its claims against the departing executive, are discussed in what the company can do when an executive breaches an employment agreement.

Removing a director

Section 21.409 lets shareholders remove one or all directors, with or without cause, at a meeting called for that purpose, by the vote of a majority of the shares entitled to vote in the election of that director, unless the certificate of formation or bylaws provide otherwise. If a class or series elects a director, only that class votes on removal. Where cumulative voting is in effect, a director cannot be removed if the votes against removal would have been enough to elect him. Directors on a staggered board can be removed only for cause unless the certificate provides otherwise. In a closely held corporation a shareholders' agreement under section 21.101 may set its own removal rules, name directors, or eliminate the board altogether.

Removing a general partner

A partner cannot be voted out at will. Section 152.501(b) allows expulsion as the partnership agreement provides, or by a majority in interest of the other partners on narrow grounds such as unlawfulness of carrying on the business with him or his transfer of substantially all of his interest. Otherwise expulsion requires a court finding that the partner engaged in wrongful conduct that materially harmed the business, willfully or persistently breached the agreement or his statutory duties, or made it not reasonably practicable to carry on the business with him (§ 152.501(b)(5)). An expelled partner is entitled to the fair value of his interest under the redemption provisions, reduced if his withdrawal was wrongful.

Example

Suppose four members own a Dallas IT services LLC. The agreement names one of them as the sole manager, says managers 'may be removed by the members' without stating a vote, and requires 10 days' written notice of any members' meeting. The other three send notice of a meeting to consider removal, wait the 10 days, meet, and vote three to one to remove him and elect one of themselves. That is valid under sections 101.304 and 101.355. He remains a 25 percent member with full rights to distributions and records. If the three had instead changed the bank signers the morning after an argument and told him by text that he was 'out,' the removal would be ineffective, his interference claim would be live, and his position in any later buyout negotiation would be stronger.

What the removed person can do

Challenge the procedure: no proper notice, wrong vote, meeting not called for the purpose. Sue on an employment or management agreement if one exists. Demand records, which he is still entitled to as a member or shareholder. Bring fiduciary claims if the removal was a step in diverting the business to the others. And, if he is also an owner, invoke any buy-sell or put right the agreement gives him. The remedies available to an owner who was pushed out are in what your rights are when you are pushed out of your own company.

Common mistakes

• Treating 'managing member' as an office that can be voted away when the agreement makes management a right of membership.
• Skipping the meeting formality because 'everyone knew.'
• Removing the manager without a replacement who can sign, so payroll and vendor payments stall.
• Forgetting that the removed manager remains an owner entitled to distributions and information.
• Removing for 'cause' in the minutes when the agreement allows removal without cause, which invites a fight over whether cause existed.

When to involve a litigator

Before the meeting notice goes out. The notice, the minutes and the first communications to the removed manager are the documents a court will read if the removal is challenged, and they are cheap to get right and expensive to fix. Tina Wysk represents owners who remove managers and managers who are removed, in Dallas state and federal courts and in arbitration.