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Actives International L.L.C. v. Reitz

2005 WL 1861939 (N.J. Super. Ch. Div. 2005) (Unpublished)

LIMITED LIABILITY COMPANIES; MEMBERS; EXPULSION—When a member’s inability to work with a limited liability company’s customers and suppliers rises to the level that it is impractical to keep her or him as a member, New Jersey law allows a court to expel that member.

A limited liability company was formed to develop, distribute, and sell raw materials for use in cosmetic, nutritional, and pharmaceutical products. The company had three members—a corporation and two individuals. When the company was formed, the members entered into an operating agreement that contains restrictive covenants and non-disclosure provisions. The company had contacts in the cosmetics industry, but brought in one of the members to develop the company’s contacts in the nutritional and pharmaceutical industries. That member, who was given the title of vice president of sales and marketing, had little experience in the cosmetics industry which, at the time, comprised a majority of the company’s business. Inter-company disputes arose concerning that vice president’s performance, particularly his failure to develop significant contacts in the nutritional and pharmaceutical industries. In addition, the other members were concerned that the vice president’s relationship with the company’s biggest suppliers had deteriorated to a point where those suppliers refused to work with him. The other members also suspected that the vice president had formed a competing business and was diverting corporate opportunities to that new business. They also worried that, based on the vice president’s inability to work with the company’s main suppliers and his inability to cultivate the relationships he was hired to develop, he could no longer function as the company’s salesman. These members could not resolve all of their issues, but they agreed that the vice president had to leave the company. They established a mechanism for setting a purchase price for his membership interest. The company then sued to expel the vice president as a member and sued him for damages resulting from his breach of certain restrictive covenants, breach of his fiduciary duty to the company, theft of trade secrets, and tortious interference. The Court noted that the New Jersey Limited Liability Company Act, N.J.S.A. 42:2B-24, provides that a member of a limited liability company can be expelled if the other members file an application to have him expelled because: (a) the member engaged in wrongful conduct that materially adversely effected the company’s business; (b) the member willfully breached the operating agreement; or (c) the member engaged in conduct related to the company’s business that makes it impractical to have him carry on as a member. Even though the vice president disputed engaging in wrongful conduct, it was clear to the Court, and the vice president admitted, that his relationship with the company’s main supplier deteriorated to the point that they could no longer could deal with him. The Court held that this deterioration in the business relationships met the test for removing that member because it was impractical to keep him as a member.

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