Limited liability companies are contractual arrangements, and their members can generally agree to govern themselves as they choose, subject to certain limitations posed by the applicable LLC Act. In B&S MS Holdings, LLC v. Landrum, --- So.3d ---, 2020 WL 4360836 (Miss. July 30, 2020), the Supreme Court of Mississippi found that the contractual freedom enjoyed by LLCs can trump seemingly mandatory provisions of the Mississippi LLC Act.
In their operating agreement, the members of Livingston Holdings, LLC agreed to a broad arbitration provision covering all disputes relating to the LLC. The members also agreed to waive their right “to maintain any action for a decree of dissolution.” Id. at *5. After a falling out involving a third party consultant, the majority owner of Livingston filed a complaint for dissolution of the LLC in court under Section 803 of the Mississippi LLC Act. The minority owner contended that the operating agreement required arbitration of the claim and that the parties waived their right to an action for judicial dissolution in any event.
Section 803 provides that upon application by a member, “the chancery court . . . may decree dissolution of a limited liability company” under specified circumstances. Miss. Code. § 79-29-803(1) (emphasis added). Elsewhere, the LLC Act provides that “the operating agreement may not . . . [v]ary the power of a court to decree dissolution in the circumstances specified in” Section 803. Miss. Code 79-29-123(3).
Both the trial court and Supreme Court held that the members had to arbitrate the dissolution claim, and waived their right to judicial dissolution. The Supreme Court reasoned that while Section 79-29-123 “states that an operating agreement may not vary the court’s power to decree dissolution . . . Section 79-29-803(1) clearly states that a trial court may decree dissolution of a limited liability company.” B&S, 2020 WL 4360836, at *4. “It does not state that a trial court must decree dissolution of the company.” Id. In other words, the trial court may decree dissolution, but so may an arbitrator.
The Supreme Court cited two other provisions of the LLC Act in support of its ruling. First, the LLC Act states that “[i]t is the policy of this chapter to give maximum effect to the principle of freedom of contract and to the enforceability of operating agreements.” Id. at *4 (citing Miss. Code 79-29-1201(2)). Second, the LLC Act states that “[e]xcept by agreeing to arbitrate any arbitrable matter . . . a member who is not a manager may not waive its right to maintain a legal action or proceeding” relating to the LLC. Miss. Code 79-29-1211; see also B&S, 2020 WL 4360836, at *4. These provisions together support the Court’s conclusion that Mississippi LLCs have a great deal of freedom of choice, including the choice to arbitrate their disputes.
On the other hand, it is hard to see how an operating agreement that completely removes the power of courts to consider dissolution claims as consistent with Section 123(3)’s admonition that LLCs may not “vary” the court’s power to decree dissolution. As the dissent put it, “affirm[ing] the order for arbitration essentially writes [Section 123(3)] out of exitstence.” Id. at *6.
B&S is a reminder that LLCs are, first and foremost, creatures of contract. Courts will often go out of their way to enforce the members’ bargain, even where parts of an LLC Act appear to stand in the way.