California Business Divorce: The Power of LLC Members to Ratify Past Actions Despite Defective Meeting Notices

Here’s What Happened

This dispute arose from the operations of 409 North Camden, LLC, which owns a two-story office building in Beverly Hills. The property's history dates back to 1963, when six friends purchased it as tenants in common. For over 50 years, the original purchasers and their heirs managed the property without any formal partnership agreement. In 2016, the owners formed 409 North Camden as a manager-managed LLC, and transferred ownership of the building to the LLC.

In 2020, Camden Systems purchased a 22.5% membership interest from three existing members, becoming the largest single stakeholder in the LLC. Prior to Camden Systems' arrival, the LLC had made cash distributions to its members in the total amount of $773,000, with each distribution authorized by majority vote. However, the members chose not to authorize any distributions after Camden Systems became a member in July 2020.

The conflict over distributions between the members came to a head in the lead-up to the LLC's February 2021 annual meeting. On January 11, 2021 notice was sent to the members of 409 North Camden that the annual meeting would take place on February 20, 2021. On February 11, 2021 the company's members received a meeting agenda for the annual meeting, listing four action items that members would vote on at the meeting.

Camden Systems’ attorney then sent a letter objecting to the propriety of the meeting, citing several defects including failure to produce certain corporate records, failure of the January meeting notice to state the general nature of the business to be transacted, and untimely notice of the meeting because the February 11 meeting agenda was sent less than 10 days before the meeting.

Despite the objections of Camden Systems, the majority of the members approved several significant actions at the meeting, including withholding cash distributions and an indemnification resolution. When Camden Systems filed suit to challenge these actions (in its individual capacity and derivatively on behalf of 409 North Camden), the members responded by holding a properly noticed meeting in February 2022 to ratify their previous decisions while the litigation was pending.

The member defendants then filed a motion for summary judgment in the lower court arguing that even if the notice for the February 2021 meeting was defective, they properly ratified the decisions made at that meeting with their subsequent (properly noticed) meeting and, separately, that Camden Systems lacked standing to challenge distributions that were made before it was a member. The lower court granted the motion for summary judgment, and the decision was appealed.

The Legal Dispute

The core of plaintiff Camden Systems' legal challenge focused on two main issues. First, Camden Systems sought to invalidate the actions taken at the February 2021 meeting, arguing that the defective notice—both in timing and content—rendered all decisions made at that meeting void. Second, Camden Systems attempted to claw back distributions made to members before it joined the LLC, arguing these distributions were improperly authorized at meetings that similarly failed to satisfy notice requirements.

The majority members mounted a straightforward defense: even if the February 2021 meeting notices were defective, they had properly ratified all contested actions at a subsequent meeting in February 2022. This meeting was properly noticed, with detailed agenda items specifically identifying each prior action to be ratified. The majority members argued that this ratification cured any procedural defects in the earlier actions. They also challenged Camden Systems' standing to contest distributions made before it became a member, noting that California law only permits derivative claims by members who held interests at the time of the disputed transactions.

The case presented the Court of Appeal with an interesting question to consider: While corporations have long possessed the power to ratify previous actions, could LLC members exercise the same authority?

The Court’s Analysis

The Court of Appeal's analysis first addressed the undisputed defects in the February 2021 meeting notices. Under California's Revised Uniform Limited Liability Company Act, member meetings require written notice at least 10 days before the meeting date, and the notice must specify "the general nature of the business to be transacted." The court concluded that both the January 2021 notice (which lacked sufficient detail about proposed actions) and the February 11 notice (sent less than 10 days before the meeting) failed to meet these requirements.

However, the court then turned to the issue of whether LLCs possess the power to ratify previous actions. While acknowledging that ratification is well-established in corporate law, Camden Systems argued that this power doesn't extend to LLCs because the legislature hadn't explicitly granted it. The court rejected this argument, pointing to a key provision of the LLC Act, which provides that an LLC "shall have all the powers of a natural person in carrying out its business activities." (§ 17701.05.) Since individuals can ratify actions taken on their behalf, the court reasoned, LLCs must possess the same power.

The court was not persuaded by Camden Systems' attempt to draw negative implications from the legislature's recent codification of corporate ratification procedures. Rather than creating new ratification powers, the court explained, the legislation merely established procedures for exercising pre-existing ratification rights.

The court also found Camden Systems' lacked standing to challenge pre-2020 distributions, holding that California law clearly limits derivative claims to members who held interests when the disputed transactions occurred. The fact that some distributions were paid after Camden Systems became a member didn't change this analysis, as the critical decisions authorizing those distributions were made before its membership.

Practical Takeaways and Best Practices

This decision provides valuable lessons for LLC members in exercising their corporate governance responsibilities. While ratification may offer a safety net for procedural missteps, prevention remains the best defense. Here are a few practical best practices to consider.

First, establish clear meeting notice procedures and follow them. California law requires at least 10 days' written notice for member meetings, and notices must specify the general nature of business to be conducted. Consider working with legal counsel to create a standardized notice template that includes timing requirements and a comprehensive agenda section.

Second, maintain detailed, written records of all member approvals and corporate actions. The majority members in Camden Systems prevailed in part because they could demonstrate exactly which prior actions they were ratifying at their 2022 meeting. Document not only the decisions made, but also the procedure followed in making them. This documentation proves invaluable if actions are later challenged.

Third, understand the limits of derivative claims by new members. The court's ruling reinforces that incoming LLC members generally cannot challenge actions taken before their arrival. When negotiating the purchase of LLC interests, potential buyers should conduct thorough due diligence on past corporate actions and consider addressing any concerns in their purchase agreements.

Finally, while ratification can cure procedural defects, it should not be relied upon as a primary governance strategy. The Camden Systems litigation likely cost substantial time and money that could have been avoided through proper procedures. When procedural mistakes do occur, however, prompt ratification at a properly noticed meeting may help prevent or resolve disputes before they escalate to litigation.

Conclusion

The Camden Systems decision clarifies important aspects of LLC governance in California. By confirming that LLCs possess the same ratification powers as corporations, the Court of Appeal has provided a clear mechanism for curing procedural defects in LLC decision-making. However, the extensive litigation in this case serves as a cautionary tale. While it's reassuring to know that ratification is available when needed, the better course is to implement robust governance procedures that eliminate the need for after-the-fact fixes.