1. Where a member (the Conflicted Member) in a limited liability company with two or more members (the LLC) has an interest in a related-party transaction or contract (an RPT) with the Multi-Member LLC, the Enterprise Law 2014 requires the RPT to be approved by the Members’ Council (MC) of the LLC excluding the votes of the Conflicted Member. However, relating to the approval process, the Enterprise Law 2014 is not clear on the following issues:
1.1. whether the charter capital of the Conflicted Member should be excluded from the calculation of quorum of the MC’s meeting to approve the RPT? and
1.2. if the Conflicted Member is the chairman of the MC, whether the Conflicted Member can still preside over the MC’s meeting?
2. Regarding the first issue, Article 59.1 of the Enterprise Law 2014 provides that the quorum of a MC’s meeting is “65% of the charter capital” of the LLC. Accordingly, the charter capital of the Conflicted Member seems to be counted towards the quorum of the MC’s meeting despite that the Conflicted Member is not entitled to vote in the meeting. This is an illogical consequence. In practice, allowing the Conflicted Member to attend the MC’s meeting to approve the RPT involving such Conflicted Member is not convenient for other members of the MC. In addition, if the Conflicted Member holds more than 35% of the charter capital, then the Conflicted Member can delay the MC’s meeting to approve the RPT by not attending the MC’s meeting and causing a lack of quorum (at least at the first call of the meeting).
3. For the second issue, one may argue the Conflicted Member cannot be the chairperson presiding the meeting. This is because the chairperson being a Conflicted Member may wield the authority of the chairperson to skew the outcome of the meeting towards his/her own interest. For example, the minutes of the meeting need the signature of the chairperson, so the Conflicted Member, as a chairperson, may decline to sign the minutes. Therefore, the Conflicted Member does not have the “sufficient capacity” to perform the fiduciary duties of the chairperson. Under Article 57.4 of the Enterprise Law 2014, such Conflicted Member has to authorize other member to perform the authority of the chairperson.
4. One counter-argument would be that there is no clear explanation of “sufficient capacity” under the Enterprise Law 2014, thus the “capacity” here may mean civil legal capacity. And if such capacity of the Conflicted Member is not restricted by a court decision then he/she can still assume the role of chairperson as long as he/she refrains from voting as required by the Enterprise Law 2014.
This post is contributed by Ha Thanh Phuc, a trainee at Venture North Law.