LLC Members May Ratify Prior Defective Actions
Actions taken within business entities are sometimes deemed invalid due to procedural defects. For corporations, section 119 of the Corporations Code establishes a clear procedure by which defective actions can be ratified and validated by the corporate shareholders and board of directors.
Do LLC members have that same power?
An opinion recently published by California’s Second Appellate District — Camden Systems, LLC v. 409 North Camden, LLC — addresses the issue.
Facts: actions approved at a procedurally defective meeting are later ratified
The LLC — 409 North Camden, LLC — was formed by a group of six friends in 1963 who purchased a two-story office building in Beverly Hills. From 1963 until 2016, that same group and some of their heirs owned the building as tenants in common. In 2016, the owners formed a manager-managed LLC and transferred ownership of the building into the LLC.
In 2020, Camden Systems became a member by purchasing the membership interests of three existing members. Camden Systems owned a 22.5% interest in the LLC.
Shortly after Camden Systems purchased its membership interest, frictions arose between Camden Systems and the other members. Camden Systems was accused by the other members of threatening them and attempting to strong-arm a sale of the entire company.
On January 11, 2021, the manager of 409 North Camden, LLC sent a notice for the LLC’s annual meeting to take place on February 20, 2021. The notice stated that an agenda would be distributed a few days before the meeting. The manager sent a meeting agenda on February 11, 2021, which listed several agenda items, including re-election of the manager, withholding cash distributions for the first quarter of 2021, and other items.
At the meeting, a majority of the members approved the actions, but Camden Systems objected and abstained from voting based on improper notice. Later, during the litigation, it was not disputed that the notices for the February 20, 2021 meeting were defective, and the actions taken at that meeting were invalid at the time.
Camden Systems filed a lawsuit challenging the actions taken at the February 2021 meeting, among other alleged claims.
After the lawsuit was filed, the LLC’s members adopted by majority vote a written resolution regarding the lawsuit. The resolution recited Camden System’s strong-arm tactics, and resolved that the LLC would: (1) withhold distributions and instead use available cash to defend the litigation, and (2) indemnify and hold the manager and members harmless against the lawsuit. The resolution was signed by all members except Camden Systems.
Several months later, the manager gave proper notice of another annual meeting with an agenda. At that meeting, a majority of the members approved an action item ratifying the members’ prior actions retroactively, including actions taken at the procedurally defective February 20, 2021 meeting.
Trial court: summary judgment granted; ratification was effective
Based on the ratification, the LLC moved for summary judgment against Camden System’s claims. The trial court granted the motion, and Camden Systems appealed.
Court of Appeal: affirmed; ratification was effective
The Court of Appeal affirmed the trial court’s decision.
Camden Systems’ main argument was that the ratification in 2022 “had no legal effect” because LLCs “do not have the power to ratify earlier actions.” Camden Systems pointed to Corporations Code section 119, which addresses ratification in the context of corporations, and the lack of any comparable statute within California’s Revised Uniform Limited Liability Company Act (RULLCA).
The Court of Appeal rejected Camden Systems’ argument. The court noted that the concept of ratification “has repeatedly been applied in the context of corporate governance” dating back well beyond the more recent enactment of section 119 in 2022. Further, the court held section 119 “did not grant the right of ratification to corporations; it merely established a procedure by which such ratifications could occur.”
The court stated: “Camden Systems has not cited any authority for the proposition that general principles of ratification cannot be applied to limited liability companies in the same way those principles are applied to corporations, labor unions, and other organizations.” Under Corporations Code section 17701.05 (part of RULLCA), LLCs generally “have all the powers of a natural person” in carrying out the LLC’s activities. As such, an LLC has “the same authority as an individual to ratify a previous action.”
Thus, the LLC’s ratification of its earlier actions was valid.
Lesson
Under the Camden Systems opinion, LLC members can ratify prior LLC actions that were procedurally defective at the time, making them effective.