TL;DR — Key Takeaways
- In a business partner dispute california law gives an LLC owner far more standing than a corporate owner. Corporations Code section 17707.03(a) allows an action “[p]ursuant to an action filed by any manager or by any member or members.” A corporate shareholder generally needs to hold not less than 33 1/3 percent under section 1800(a)(2) – unless the company is a close corporation, or has 35 or fewer shareholders for one specific ground.
- The same dispute produces a materially different number depending on the entity, and almost nothing written on this says so. A corporate minority owner bought out under section 2000 is valued “on the basis of the liquidation value as of the valuation date.” An LLC member bought out under section 17707.03(c)(1) is purchased “at their fair market value.”
- Filing for dissolution can end with the filer being bought out instead. Both statutes let the other side avoid dissolution by purchasing the moving party’s interest for cash, with the court appointing “three disinterested appraisers” whose confirmed award is “final and conclusive upon all parties.”
- In a manager-managed LLC, a non-manager member owes no fiduciary duty at all merely by being a member. Section 17704.09(f)(3) says so expressly, which means whether a fiduciary claim between owners even exists can turn on a single box on the articles of organization.
- There is no general power to buy out a difficult partner. Expulsion under section 17706.02(d) requires the unanimous consent of the other members plus one of four narrow situations, none of which is disagreement; judicial expulsion under 17706.02(e) is on application by the company, not by an individual member.
The Direct Answer
California supplies statutory remedies rather than a general right to force a partner out. An LLC member or manager may petition for judicial dissolution on five grounds including deadlock, and the other members may avoid it by buying the petitioner out at fair market value. Corporate shareholders face a percentage threshold and a liquidation-value buyout.
Business Partner Dispute California Outcomes Depend on One Document
The operating agreement or the articles, read before anything else. Two facts recorded there decide most of the available remedies before any dispute exists.
The first is whether the LLC is member-managed or manager-managed, because that determines whether fiduciary duties run between the owners at all. The second is what the agreement itself says about deadlock, buy-sell, valuation and expulsion, because in most of these provisions the statute is a default that a well-drafted agreement improves on.
What the statutes then supply is a floor. And the floor differs by entity type in two ways that matter more than most owners expect: who is allowed to go to court, and how the buyout is priced.
| California LLC | California corporation | |
|---|---|---|
| Who may petition | “[A]ny manager or … any member or members” (Sec. 17707.03(a)) | Generally holders of not less than 33 1/3 percent, half or more of the directors, or any shareholder of a close corporation (Sec. 1800(a)) |
| Buyout price | “[F]air market value” (Sec. 17707.03(c)(1)) | “[L]iquidation value as of the valuation date,” taking account of a possible sale of the whole business as a going concern in liquidation (Sec. 2000(a)) |
| Who may buy out the petitioner | The other members | The corporation, or holders of 50 percent or more of the voting power |
| Appraisal | Three disinterested appraisers; confirmed award final and conclusive | Three disinterested appraisers; confirmed award final and conclusive |
Read the second row twice. The same 25 percent owner, in the same fight, is worth a different amount depending on whether the entity is an LLC or a corporation – and liquidation value is ordinarily the lower of the two measures.
What Are My Options When a Business Partner Stops Performing?
Fewer than most owners assume, and none of them is a self-help removal.
Start with the agreement. If the operating agreement or shareholder agreement contains a buy-sell provision, a deadlock mechanism, a performance obligation, or grounds for expulsion, those are the primary remedies and they usually work faster and cheaper than a petition. Section 17706.02(c) recognizes expulsion “pursuant to the operating agreement” as its own route, which only exists if someone drafted it.
Where the agreement is silent, the statutory options are:
- Negotiate a voluntary buyout. This is the outcome most of these disputes reach anyway, and it reaches it more cheaply before a filing than after.
- Dissociation by the other person’s own act. Section 17706.02(a) covers a member’s express will to withdraw; (b) an event stated in the operating agreement; and (f) death, or in a member-managed LLC the appointment of a guardian or general conservator.
- Expulsion by unanimous consent of the other members, but only in the four narrow situations in section 17706.02(d), discussed below.
- Judicial expulsion, but only on application by the company, under section 17706.02(e).
- A fiduciary claim, if one is available at all – which depends on the management structure.
- A petition for judicial dissolution, which is the pressure remedy, and which can rebound.
What is not on that list is a right to remove someone for underperformance, absence or bad judgment. Poor performance is not a statutory ground for expulsion, and section 17704.09(e) makes the point from the other direction: “A member does not violate a duty or obligation under this article or under the operating agreement merely because the member’s conduct furthers the member’s own interest.” A partner acting selfishly is not, by that fact alone, in breach.
How Does Deadlock Get Resolved in an LLC or Corporation?
By petition, in both – but the LLC route is considerably easier to open, and the llc member deadlock california question is really a standing question.
For an LLC, deadlock is a named ground. Section 17707.03(b) lists five: that “[i]t is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement”; that dissolution “is reasonably necessary for the protection of the rights or interests of the complaining members”; that the business “has been abandoned”; that “[t]he management of the limited liability company is deadlocked or subject to internal dissension”; and that those in control “have been guilty of, or have knowingly countenanced, persistent and pervasive fraud, mismanagement, or abuse of authority.”
For a corporation, deadlock is narrower and comes in two flavours. Section 1800(b)(2) requires an even number of directors “who are equally divided and cannot agree as to the management of its affairs,” such that the business can no longer be conducted to advantage or the property is in danger, and that the voting shareholders “are so divided into factions that they cannot elect a board consisting of an uneven number.” Both halves are required. Section 1800(b)(3) covers shareholder deadlock: two or more factions “so deadlocked that its business can no longer be conducted with advantage to its shareholders,” or a failure at two consecutive annual meetings to elect successors to directors.
Two further corporate grounds are worth knowing because they do not require deadlock at all. Section 1800(b)(4) reaches those in control who are guilty of or knowingly countenance persistent and pervasive fraud, mismanagement or abuse of authority, “or persistent unfairness toward any shareholders.” And section 1800(b)(5) allows a corporation with 35 or fewer shareholders to be dissolved where “liquidation is reasonably necessary for the protection of the rights or interests of the complaining shareholder or shareholders” – a standard closer to the LLC’s than to the rest of section 1800.
There is one trap in choosing a ground, and it is a drafting-level point. Under section 17707.03(c)(1), damages for a moving party’s breach of an agreement in initiating the proceeding may be deducted from the buyout price – but a member who sues for dissolution on those grounds is not “liable for damages for breach of contract in bringing that action.” Abandonment, deadlock and fraud or mismanagement are the protected grounds. A member who sues on impracticability or on protection of their own interests is not protected. The corporate statute is stingier still: section 2000(a) allows the deduction “unless the ground for dissolution is that specified in paragraph (4) of subdivision (b) of Section 1800,” which protects only the fraud and unfairness ground.
Can a Partner or Member Be Forced Out in California?
Yes, but not on demand, and the available routes are narrow enough that most exits are negotiated.
Expulsion by the members requires two things at once under section 17706.02(d): the unanimous consent of the other members, and one of four situations – that it is unlawful to carry on the business with that person as a member; that all of their transferable interest has been transferred, other than for security or under an unforeclosed charging order; that a corporate member has dissolved, had its charter revoked or its right to conduct business suspended and has not cured within 90 days after notice; or that an LLC or partnership member has dissolved and is winding up.
None of those four is a disagreement, a deadlock, or a failure to pull their weight. In a two-member LLC, unanimous consent of the others is the other member’s consent, which makes this route unavailable in exactly the case where it is most wanted.
Judicial expulsion under section 17706.02(e) is broader on its grounds and narrower on its standing. The grounds are wrongful conduct “that has adversely and materially affected, or will adversely and materially affect, the limited liability company’s activities”; having “[w]illfully or persistently committed … a material breach of the operating agreement or the person’s duties or obligations under Section 17704.09”; or conduct “that makes it not reasonably practicable to carry on the activities with the person as a member.” But the application is made by the limited liability company, not by an individual member – which in a deadlocked company is itself a problem, because the company cannot decide to file.
That leaves the dissolution petition as the practical lever, and it works in a way that surprises people. Section 17707.03(c)(1) lets the other members avoid dissolution “by purchasing for cash the membership interests owned by the members so initiating the proceeding, the ‘moving parties,’ at their fair market value.” The corporate equivalent in section 2000(a) lets the corporation, or holders of 50 percent or more of the voting power, do the same at fair value determined on a liquidation basis.
So a petition to dissolve is often, in substance, an offer to be bought out. Under section 17707.03(c)(5) “the valuation date shall be the date upon which the action for judicial dissolution was commenced,” absent a court order for good cause, and under (c)(2) the moving parties can be required to post a bond for the other side’s estimated expenses including attorney’s fees. A petition filed as leverage can end with the filer holding a cheque and no company – which is a reasonable outcome if that was the goal and a bad one if it was not.
What Is a Claim for Breach Of Fiduciary Duty Between Owners?
A much more limited thing than the phrase suggests, and in one common structure it does not exist.
Section 17704.09 defines the duties, and it defines them narrowly. In a member-managed LLC, a member owes duties of loyalty and care. The duty of loyalty “is limited to the following” three items: to account for and hold as trustee any property, profit or benefit derived from the conduct or winding up of the business or from use of company property, “including the appropriation of a limited liability company opportunity”; to refrain from dealing with the company as, or on behalf of, a person with an adverse interest; and to refrain from competing with the company.
The duty of care is narrower again. It “is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.” That is a gross negligence standard, not a reasonable care standard, so ordinary bad business decisions are not breaches. Subdivision (d) requires both duties to be discharged consistently with the obligation of good faith and fair dealing, and subdivision (e) confirms that self-interest alone is not a violation.
Then subdivision (f) does the thing nobody expects. In a manager-managed LLC, subdivisions (a), (b), (c) and (e) “apply to the manager or managers and not the members,” and paragraph (3) states: “Except as otherwise provided, a member does not have any fiduciary duty to the limited liability company or to any other member solely by reason of being a member.”
Read that against a real dispute. In a manager-managed LLC, a passive member who competes with the company, takes an opportunity, or deals adversely with it is not in breach of a statutory fiduciary duty by virtue of membership. The claim has to come from somewhere else – the operating agreement, a contract, a separate role such as officer or employee, or the good faith and fair dealing obligation in subdivision (d), which subdivision (f)(2) does apply to members. Whether the articles said member-managed or manager-managed can therefore decide whether there is a claim at all.
When Is Judicial Dissolution the Right Remedy?
When the relationship cannot continue, the agreement supplies no exit, and the owner is prepared for either outcome – the company wound up, or their own interest bought.
The judicial dissolution california llc route has real advantages. Standing is open to any member or manager. Deadlock and internal dissension are a named ground. Bringing the action on deadlock, abandonment or fraud does not expose the member to breach-of-contract damages in the buyout. And the appraisal process is defined: section 17707.03(c)(3) provides that “[t]he court shall appoint three disinterested appraisers,” and their award, “when confirmed by the court, shall be final and conclusive upon all parties,” with judgment entered against non-paying purchasers and their sureties for the moving parties’ expenses including attorney’s fees.
It also has costs a client should hear before filing. The bond requirement under (c)(2) is real money at the outset. The valuation date is fixed at commencement, which can help or hurt depending on where the business is heading. Litigation is public and slow. And dismissal does not undo the exposure: under section 17707.03(c)(6), a dismissal “shall not affect the other members’ rights to avoid dissolution pursuant to this section.”
For a corporation the calculus is different mainly because of the two thresholds. A shareholder below 33 1/3 percent has no standing under section 1800(a)(2) unless the corporation is a close corporation, in which case any shareholder may file, or unless it has 35 or fewer shareholders and the ground is the protective one in (b)(5). A minority shareholder in an ordinary closely held California corporation that is not a statutory close corporation may have no dissolution remedy at all – which is the strongest argument there is for a shareholder agreement written before the dispute.
And the valuation contrast should decide the entity conversation earlier than the dispute. Liquidation value under section 2000(a) and fair market value under section 17707.03(c)(1) are not the same number for a profitable operating business.
When to Bring Counsel In
At the point of the first serious disagreement, and before anything is filed or announced.
The reason is that almost every decision in this area is path-dependent. Which ground is pleaded determines whether breach-of-contract damages can be deducted from the buyout. Which entity you are in determines who has standing and how the interest is priced. Whether the LLC is manager-managed determines whether a fiduciary claim exists. A petition intended as leverage can convert into a forced sale of the petitioner’s own interest at a valuation date fixed on the filing day.
The earlier moment is better still. Buy-sell terms, deadlock-breaking mechanics, a stated valuation method and expulsion grounds all cost very little to draft into a written partnership agreement or a shareholder agreement, and they replace every default above with something the owners chose.
Related reading includes how to add or remove a member from a California LLC, what a buy-sell agreement does, how to dissolve a business in California when the owners agree, and how a fiduciary duty claim works against a trustee, which is a different relationship governed by different rules.
Work with Bay Legal
Bay Legal, PC advises California business owners on partner and member disputes, deadlock, expulsion and dissociation, fiduciary duty claims between owners, judicial dissolution and statutory buyouts, and the agreements that prevent all of it. Call (650) 668-8000 in Northern California or (213) 668-8000 in Southern California, or schedule a consultation at https://baylegal.com/contact-us/.
Frequently Asked Questions
What are my options when a business partner stops performing?
Start with the agreement, because a buy-sell, deadlock or expulsion provision is faster and cheaper than a petition. Where it is silent, the statutory routes are a negotiated buyout, dissociation by the person’s own act under Corporations Code section 17706.02(a), expulsion by unanimous consent of the other members in four narrow situations, judicial expulsion on the company’s application, a fiduciary claim if one exists, and a dissolution petition. Underperformance itself is not a ground, and section 17704.09(e) confirms that acting in one’s own interest is not automatically a breach.
How does deadlock get resolved in an LLC or corporation?
By petition, but on different terms. Section 17707.03(b)(4) names deadlock or internal dissension as a ground for an LLC, and any member or manager may file. For a corporation, section 1800(b)(2) requires both an evenly divided board that cannot manage the business and shareholders so divided into factions that they cannot elect an uneven-numbered board; section 1800(b)(3) covers shareholder deadlock or a failure at two consecutive annual meetings to elect directors. In both entities the other side can avoid dissolution by buying the petitioner out.
Can a partner or member be forced out in California?
Only through narrow routes. Expulsion under section 17706.02(d) needs the unanimous consent of the other members plus one of four situations – illegality, a full transfer of the interest, a corporate member’s dissolution or suspension uncured for 90 days, or an entity member winding up. Judicial expulsion under 17706.02(e) requires wrongful conduct, a willful or persistent material breach, or impracticability, and the application is made by the company rather than a member. Most exits are therefore negotiated or arrive through a dissolution petition and buyout.
What is a claim for breach of fiduciary duty between owners?
A narrower claim than the phrase implies. Section 17704.09(b) limits the duty of loyalty to three items: accounting for property, profit or benefit including an appropriated company opportunity, refraining from adverse dealing, and refraining from competing. The duty of care is limited to grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law. In a manager-managed LLC these apply to the managers, and subdivision (f)(3) provides that a member owes no fiduciary duty solely by reason of being a member.
When is judicial dissolution the right remedy?
When the relationship cannot continue, the agreement offers no exit, and the owner accepts either outcome – wind-up or being bought out. For an LLC it is comparatively accessible: any member or manager may file, deadlock is a named ground, and suing on abandonment, deadlock or fraud avoids a damages deduction from the price. The costs are a bond, a valuation date fixed at commencement, and a public dispute. For a corporation, a holder of less than 33 1/3 percent that is not a close corporation may have no remedy.
