Drafting LLC Company Agreements: Simple Majority v. Super Majority
January 2, 2014 | By Vela Wood
Our previous blog outlined the differences between and the advantages and disadvantages of a member-managed LLC and a manager-managed LLC. It only makes sense to now discuss how a business decision is made by the member(s) of the LLC.
Section 101.354 of the Texas Business Organizations Code (TBOC) provides that “each governing person, member, or committee member of a limited liability company has an equal vote at a meeting of the governing authority, members, or committee of the company.”
Put simply, this means each member of the LLC has one vote. From there, the level of consent required to make certain decisions is provided in the Company Agreement, if one has been adopted by the LLC, or if a Company Agreement hasn’t been adopted, in the TBOC (default provisions).
“Simple Majority” or “Majority” is defined as more than 50% and “Super Majority” is defined as some percentage, determined by the members, that is higher than a simple majority. You may ask, “Well, why do these numbers matter? They matter because these terms are typically associated with the LLC members’ ability to vote and make decisions.
The members of the LLC can alter the definition of either of these terms. This is not uncommon, and in some cases, it is necessary. For example, if there are only two members in an LLC and their ownership is split 60/40, and super majority is defined as 66.67%, then it may be in the 60% members’ best interest to change the definition of super majority to 59%, otherwise, such decision will require unanimous consent. This could be troublesome if the company needed to act fast on the approval of a project, merger, or any other business decision.
Another common scenario is when you have two members and each owns 50%. Well, if the definition of simple majority is more than 50%, you will essentially need both members’ consent to make a decision. This is okay if both members want to work together to make decisions, but it can also cripple the company if the members are in a deadlock and can’t come to an agreement.
While the above paragraph mentions a few examples where the simple majority and super majority definition may be important, the following are some other areas where the definition may matter as well:
- Amendment of the Company Agreement
- Amendment of the Certificate of Formation
- Admission of a member
- Sale of substantially all of the LLC’s assets
- Winding up
If you still have questions or are unsure of what vote should be necessary under certain situations, reach out to a lawyer who will be able to assist you with your specific situation.
Posted in Company Agreement Series, Startups
Vela | Wood is a boutique corporate law firm that focuses on small businesses, entrepreneurs, and startups.