You own thirty percent of the company, and for the first ten years that felt like a partnership. Then the managing member stopped returning your calls. The distributions shrank and then stopped, though the company is plainly doing well. You are no longer copied on decisions. The manager’s salary has grown to a number that happens to absorb most of the profit you used to share. You are still a member on paper, but you have been pushed to the door without anyone touching the lock.
This is a freeze-out, and the Illinois Limited Liability Company Act gives a minority member real remedies for it. The managing member is counting on you believing that whoever controls the company controls your fate. The statute says otherwise. If you are the frozen-out member, the law gives you leverage the manager would rather you never discover.
What counts as oppression of an LLC member in Illinois?
The LLC Act, at 805 ILCS 180/35-1, lets a member ask a court to dissolve the company, or to grant a lesser remedy, when those in control have acted, are acting, or will act in a manner that is oppressive and directly harmful to the applicant. Illinois courts describe oppressive conduct as conduct that is arbitrary, overbearing, and heavy-handed, and they have recognized that paying lavish compensation to those in control while withholding distributions from a minority owner can itself be oppressive, depending on the company’s overall financial picture. Freezing a member out of management and money is not a gray area. It is the textbook case the statute was written to reach.
What does the managing member owe me?
More than the manager admits. In a member-managed LLC, the members owe one another fiduciary duties of loyalty and care, as the appellate court held in Anest v. Audino. A manager who steers the company’s money, opportunities, or business to himself has not made a hard call, he has breached a duty, and that breach is a claim in its own right that often travels alongside the oppression remedy. The operating agreement can refine these duties, but the Act does not let it eliminate the obligation of good faith.
Use your right to the records first
You cannot prove a freeze-out from the outside, and you do not have to. Under 805 ILCS 180/10-15, a member may demand access to the company’s records and to information about its activities and financial condition that is material to the member’s interest, and the company must respond within ten days. A manager who stonewalls a proper demand exposes the company to an action to compel and to an award of the costs and fees of bringing it. The records you obtain are usually the foundation of everything that follows.
The dissolution remedy sits at the top of the statute, but it is not the only one, and it is rarely the one a frozen-out member actually wants. Courts can order a buyout of your interest, can enjoin the conduct, and can fashion other relief short of ending the business. As with corporations, the practical fight is usually about the value of your interest rather than whether the company survives. Read your operating agreement before you move, because a buy-sell clause or a valuation formula in that document may control how your interest is priced, and because in a manager-managed company a non-managing member’s own conduct is judged differently than a manager’s.
Three steps matter in the first month. First, send a proper written records demand, because the ten-day clock and the fee-shifting that follows a refusal put immediate pressure on the manager. Second, document the pattern, the stopped distributions, the inflated compensation, the exclusion from decisions, because oppression is proven by a course of conduct, not a single slight. Third, read the operating agreement before you accept any characterization of what you are owed, since its terms on distributions, management, and buyout often decide the case.
A freeze-out is designed to make you feel powerless so that you sell cheap or walk away. The LLC Act was written precisely to take that leverage back. For a fuller picture of the duties at stake, see our discussion of what Illinois law protects minority shareholders and LLC members from.
Can the operating agreement take away these protections?
Only to a point. The Illinois LLC Act, at 805 ILCS 180/15-3, lets the members define many of their duties and the standards by which their conduct is judged, and a well-drafted operating agreement can narrow what counts as a breach. What the agreement cannot do is eliminate the obligation of good faith and fair dealing. A managing member who treats a clause as license to starve you of distributions while enriching himself is testing a limit the statute does not allow him to cross.
What remedies short of dissolution can a court order?
Most frozen-out members do not actually want the company shut down, and Illinois does not force that choice. Under the oppression provisions a court can order the company or the controlling members to buy your interest, can enjoin the conduct that is harming you, can order an accounting of what was diverted, and can award damages for breaches of fiduciary duty. Dissolution is the lever that makes the other remedies credible, because the controlling member knows a court can reach it, but the practical fight is almost always about the price and terms of your exit.
How is an LLC freeze-out different from a corporate freeze-out?
The concept is the same, the statute is different. Oppression of a corporate shareholder is governed by section 12.56 of the Business Corporation Act, while oppression of an LLC member runs through the LLC Act at 805 ILCS 180/35-1. The two standards have grown up together, and Illinois courts often read the LLC oppression remedy in light of the corporate decisions. If you also hold shares in a related corporation, you may have parallel claims under both statutes, which is one reason these disputes are rarely as simple as the entity chart suggests.
What if I am a passive member in a manager-managed company?
The Act treats you differently depending on your role. A member who is not a manager in a manager-managed company does not breach a duty merely by pursuing his own interest, which both limits what the managing member can demand of you and frames what you can demand of him. Knowing which box you fall into, manager or passive member, shapes both the duties you owe and the ones you are owed.
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If you have been squeezed out of an LLC you helped build, Illinois law gives you remedies the managing member is hoping you never use. Call DiTommaso Lubin, P.C. at 630-333-0333 for a free consultation, or contact us online. This post is for general information and is not legal advice.
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Peter S. Lubin and James V. DiTommaso are Chicago business litigation lawyers who try cases throughout Illinois. Peter is a graduate of the University of Chicago Law School, where he has taught trial practice for decades, and he has been recognized as an Illinois Super Lawyer. He has served as lead counsel in more than one hundred class actions and has handled more than one hundred shareholder, LLC, derivative, breach of fiduciary duty, and fraud matters, on both the plaintiff and the defense side. Crain’s Chicago Business credited him with the largest class action settlement of the year for a $40 million recovery in Erikson v. Ameritech, and the firm has been named DuPage County Law Firm of the Year. The firm and its lawyers have represented clients such as McDonald’s, Motorola, and Experian, and have litigated against companies including AT&T and General Motors. James DiTommaso, a graduate of Chicago-Kent College of Law with a certificate in business law, has served with the Illinois Appellate Court and has argued a case before the Illinois Supreme Court. He litigates these disputes in the Illinois trial and appellate courts and in the federal courts. When you hire this firm, the lawyers whose names are on the door are the ones who handle your case.