Minnesota LLC Formation V: Member Control Agreement

Member Control Agreement can be the most important governance document in the process of the LLC Formation because it may provide the LLC members with maximum governance flexibility, including overruling some provisions of the Minnesota Limited Liability Company Act.

In fact, a Member Control Agreement may completely reorganize the governance structure of an LLC away form the Act’s default corporate model.  Instead, the members of the LLC may choose to adopt a partnership-like governance model which may greatly facilitate the conduct of business, especially where there are few LLC members.

One of the least-known aspects of a Member Control Agreement is that a person, who is neither a member nor a party to a contribution agreement, may nevertheless be a party to a Member Control Agreement.  This provision may provide a new level of flexibility by incorporating in the Agreement persons who may have financial rights under the Agreement even though they do not possess the usual membership rights (such as voting).

Typically, a Member Control Agreement can regulate a wide range of ownership and management issues, including: transfer of membership interest; contributions of capital, property or services during and after the formation of an LLC, management and governance structure of an LLC, tax elections, distributions of cash and other assets, allocation of profit and loss, establishment and maintenance of bank accounts, books and records; access to books and records, valuation of membership interests, employment of members, dissolution and winding up of the LLC, et cetera. A Member Control Agreement may even re-determine the rights of dissenting members as provided in Minn. Stat. §322B.383 and Minn. Stat. §322B.386. Even this non-exclusive list of issues already emphasizes the significance of the Member Control Agreement to the operation of the LLC.

Precisely due to this significance, special requirements are imposed by the Act on the execution of a Member Control Agreement. In order to be valid, a Member Control Agreement must scrupulously follow the requirements of Minn. Stat. §322B.37.  Even then, the Agreement can only be enforced “by persons who are parties to it and is binding upon and enforceable against only those persons and other persons having knowledge of the existence of the member control agreement.” Minn. Stat. §322B.37, Subd. 3(a). Finally, special recordkeeping requirements are demanded by the Act, including filing of the Member Control Agreement with the required records of an LLC.  The records themselves must note that the members’ interests are governed by a Member Control Agreement.

Thus, a Member Control Agreement may provide a great business opportunity by allowing maximum flexibility in the governance structure of an LLC.  This opportunity, however, must be handled with care and knowledge of a legal professional; otherwise, it may turn into a litigation nightmare.  Therefore, you should retain a Minnesota business lawyer to advise you and ultimately draft the Agreement.

Sherayzen Law Office is an experienced business law firm with one of its primary concentrations in advising and creating business governance documents.  We can advise you with respect to whether you need a Member Control Agreement, help you negotiate the necessary provision, draft the Agreement, make sure it is properly executed, and establish the right recordkeeping procedures to comply with Minn. Stat. §322B.37.