The Silent Partner and the Conflicted Vote
Three members of an LLC-Ava (40%), Ben (35%), and Cal (25%)-operate a bakery. The operating agreement requires "majority approval of members" for expenditures over $50,000 and is silent on conflicts. Ava, who also owns a separate flour company, proposes that the LLC buy $80,000 of flour from her company at market price. Ben is indifferent; Cal objects, arguing Ava is self-dealing. Ava and Ben vote yes; Cal sues, seeking to void the contract. The LLC has no manager and no provision adopting a statutory default on conflicted transactions. Ava did disclose her ownership before the vote. Separately, Ben wants to sell his 35% interest to an outsider; the agreement is silent on transfer restrictions.
1. Is the flour contract voidable, and what standard applies to Ava's vote?
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Under the default LLC statutes (e.g., ULLCA/RULLCA), a member owes duties of loyalty and care. A conflicted transaction is generally not voidable solely because of the conflict if the member discloses all material facts and the transaction is fair, or if it is approved by disinterested members after disclosure. Here Ava disclosed her ownership, but she voted on her own transaction. Whether her vote counts depends on the operating agreement and default rule: many statutes exclude the interested member from the disinterested approval count. If Ava's vote is excluded, only Ben's 35% remains-less than a majority of the 75% disinterested interest-so approval may fail. The contract is voidable unless Ava proves fairness (market price helps but is not dispositive). Cal should seek rescission or damages; the LLC may ratify after full disclosure by disinterested members.
2. May Ben freely transfer his interest, and what rights does the transferee get?
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Silence in the operating agreement generally means the default rule applies. Under RULLCA and most LLC statutes, a member may transfer the economic interest without consent, but the transferee receives only the right to distributions and allocations-not membership rights such as voting or management-unless admitted as a member by unanimous or statutory approval. Ben may assign his 35% economic interest, but the outsider cannot vote or inspect books as a member absent admission. If the agreement or statute requires consent, Ben must obtain it. Cal and Ava should be advised that a transfer does not automatically alter governance, but they may negotiate a buy-sell provision to prevent unwanted economic partners.