‘Texas shootouts’ and New Hampshire LLCs
Such a contractual provision may avoid deadlock between members
About 60 percent of all New Hampshire LLCs are single-member LLCs, and about 5 percent have three or more members. This means that about 35 percent have two members. In most two-member LLCs, the paramount issue is deadlock.
Relationships between the members of two-member LLCs are like relationships between spouses; sooner or later, the members are likely to discover major issues between them, and if they don’t have a good method of resolving them, these issues can destroy their LLC. It happens all the time.
The New Hampshire Revised Limited Liability Company Act — which applies to all New Hampshire LLCs, not only those formed in 2013, but also older LLCs — contains two provisions for resolving deadlocks among the members of multi-member LLCs. The first, in Section 134 of the revised act, provides rules for when a deadlock may be resolved by dissolving and liquidating the LLC. The second, in Section 104, provides rules under which members may seek the removal of other members in deadlock situations.
However, dissolution is obviously a drastic solution for a member deadlock, and both Section 134 and the above member removal provision under Section 104 give New Hampshire courts an almost terrifyingly broad discretion in addressing member deadlocks. Many members of two-member LLCs may not want to entrust their fate as LLC members and the fate of their LLCs to possible judicial misunderstandings of their situations and positions.
If you are a member of a two-member New Hampshire LLC, a potentially powerful way for you to avoid undue judicial intrusion in the case of a deadlock with your co-member is to have a written operating agreement in which you include a “Texas shootout” provision.
Under such a provision, a member who disagrees with his or her co-member about a critical LLC issue may offer to buy out the other member on price and non-price terms that the first member believes to be reasonable.
The second member must either accept these terms or agree to buy out the first member on the same terms. The fact that the second member will have an option to buy out the first member is likely to force the first member to fashion these terms with great care, since the first member may well end up as the member who is bought out.
One member standing
As you may already have guessed, the reason it is called a “Texas shootout provision” is that, after its implementation, only one member will be left standing. But Texas shootout provisions can also be crafted for LLCs with more than two members.
When might you not want a Texas shootout provision in your operating agreement? The most obvious situation is when your co-member has more money than you and thus will probably be in a stronger position to exercise a buy outright. But skillful drafting in your operating agreement can address this problem.
In fact, when the members of the New Hampshire Business and Industry Association committee that drafted the revised act were discussing how to deal with two-member New Hampshire LLC deadlocks, we considered expressly including a Texas shootout provision in the act. We decided against this inclusion because, for at least a significant number of LLCs, a statutory Texas shootout provision might create more problems than it would solve.
But will a contractual Texas shootout provision make sense in the operating agreement of your two-member LLC?
John Cunningham, of counsel to the Manchester-based law firm of McLane, Graf, Raulerson & Middleton, is author of "John Cunningham on New Hampshire's New LLC Act," available at cunninghamonllcs.com.