What are the statutory requirements for LLC member expulsion under Delaware vs Texas law?

Statutory Requirements for LLC Member Expulsion: Delaware vs. Texas

Delaware law provides no statutory default for expelling an LLC member, making the Operating Agreement the sole source of authority. Conversely, Texas law provides specific statutory events under the Business Organizations Code that can trigger a member's withdrawal or expulsion, even absent specific contract language.

Delaware: The Primacy of Contract

Delaware is a contract-first jurisdiction. The Delaware Limited Liability Company Act (DLLCA) is designed to give maximum effect to the principle of freedom of contract. Consequently, the Act does not contain a "default" provision that allows members to vote out a fellow member.

The Necessity of an Operating Agreement

If your Delaware LLC Operating Agreement is silent on expulsion, you effectively cannot expel a member without their consent. To ensure you have the power to remove a member, your agreement must explicitly define:

• Triggering Events: Specific behaviors (e.g., breach of fiduciary duty, criminal conviction, or failure to make capital contributions).
• Voting Thresholds: The percentage of interest required to authorize the expulsion (e.g., 75% or 80%).
• Notice Requirements: The mandatory timeframe for providing notice to the member being expelled.
• Valuation Methodology: How the expelled member’s interest will be valued and the payout terms.

Key takeaway: In Delaware, if it is not in the Operating Agreement, it does not exist. Always ensure your agreement includes a 'buy-sell' or 'expulsion' clause before a dispute arises.

Action Item: Audit your current Delaware Operating Agreement to confirm it contains a specific "Expulsion" or "Involuntary Withdrawal" section. If it is missing, draft an amendment immediately.

Texas: Statutory Default Grounds

Unlike Delaware, the Texas Business Organizations Code (TBOC) provides a framework for the withdrawal and expulsion of members. Under Section 101.107, a member may be withdrawn or expelled under specific circumstances, even if the company agreement is less than comprehensive.

Statutory Triggers for Withdrawal

Under Texas law, a member may be expelled or withdrawn if:

• The member becomes a debtor in bankruptcy.
• The member is adjudicated incompetent by a court.
• The member dies (if an individual) or terminates (if an entity).
• The member is expelled by a vote of the other members as provided by the company agreement.
• A court orders the withdrawal due to the member's misconduct.

Comparison Table: Delaware vs. Texas

Key takeaway: While Texas provides statutory "safety nets," relying on them is risky. Statutory definitions of 'misconduct' are often litigated, whereas a well-drafted contract provides clear, predictable outcomes.

Action Item: If operating in Texas, review your Company Agreement to see if it overrides the TBOC defaults. If you prefer to avoid court-ordered expulsions, explicitly define your own expulsion triggers within your agreement.

Drafting for Enforceability

Regardless of the state, the enforceability of an expulsion clause hinges on the "Good Faith and Fair Dealing" standard. Even in Delaware, where contract freedom is paramount, courts will scrutinize the process used to expel a member to ensure it was not used to unfairly seize value.

Best Practices for Drafting

1. Define "Cause": Do not use vague terms like "bad behavior." Define specific, objective metrics for expulsion.
2. Establish a Valuation Floor: Use a formula-based valuation (e.g., book value or a multiple of EBITDA) to avoid "fair market value" disputes.
3. Include a Cure Period: For non-criminal breaches, provide a 30-day window for the member to remedy the issue before expulsion proceedings begin.
4. Procedural Due Process: Require a formal meeting and a written record of the vote to ensure the expulsion is defensible in court.

Action Item: Ensure your expulsion clause includes a "Cure Period" to protect the company from claims of bad faith.

Conclusion

Whether you are in Delaware or Texas, the quality of your Operating Agreement is the single most important factor in managing member disputes. TermScore can automatically analyze your existing contracts to identify missing expulsion clauses, ambiguous definitions of "cause," and potential conflicts with state statutes, ensuring your business is protected before a conflict arises.