Brief Fact Summary. Great Lakes Chemical Corporation (Plaintiff) bought NSC Technologies Company, LLC from the Monsanto Company (Defendant) and STI, and later sued the sellers under the Securities Exchange Act of 1934, alleging that they had failed to reveal quantifiable information in combination with the sale. The sellers stated that the interests sold were not â€œsecuritiesâ€ and moved to dismiss on those grounds.
Synopsis of Rule of Law. In aLimited Liability Company, non-stock interests, investment contracts, or interests recognized as securities are not considered securities as per the Securities Exchange Act of 1934.
Issue. Are interests that are neither stock, investment contracts, nor usuallyrecognized as securities, considered securities in a Limited Liability Company as per the Securities Exchange Act of 1934?
Held. (McKelvie, J.) No. Interests that are neither stock, investment contracts, nor usually recognized as securities, are not considered securities in a Limited Liability Company as per the Securities Exchange Act of 1934. Combining features of corporations and limited and general partnerships, LLCs act as hybrid entities. The issue here is whether federal law identifies the interests transferred as â€œsecuritiesâ€, for in order to succeed, Great Lakes must prove that misconduct involved buying or selling of a â€œsecurityâ€.Â Securities are stock interests, investment contracts, or any interest easily recognizable as a security. An â€œinvestment contractâ€ is identified by three factors, investment of money, in a common enterprise, with profits coming from the work of others. Regarding stock, there are five basic characteristics, the right to receive dividends dependent on an allotment of profits, negotiability, the ability to be promised or deposited, voting rights comparable to the number of shares owned and the ability to escalate in value. Transactions involving the sale of â€œstockâ€ are protected by the securities laws. While interests in NSC are similar to stock, having the attributes of stock, they are not stock. Securities laws exist to control investments, not business endeavors, therefore the court must decide if the sale of NSC can be categorized as an investment transaction (covered) or commercial (not covered).Â For the court to come to that conclusion, they must determine if the sale established an â€œinvestment contractâ€. As evidenced here, Great Lakes bought all of NSC without merging contributions with other investors, nor were the fortunes of Great Lakes linked to the sellers, causing it to lack horizontal and vertical commonality.Â It was not a common enterprise either, seeing as the sale did not involve the creation of NSC. Finally, the business’ profits did not come from the work of others, although LLC’s are permitted a limited liability and LLC members can be an active participant and still retain limited liability. LLC members may not be passive investors, it is dependent on the LLCs operating contract whether or not the interest will be safeguarded by securities laws. In this case, NSC members had no power to manage NSC’s business, however, the members had the capacity to remove any manager with or without cause and to dissolve the LLC. Great Lakes, having the authority to remove NSC managers, had the power to directly affect the earningsobtained by NSC, meaning, its profits did not come directly from the work of others. The motion to dismiss is granted.
Discussion. At present time there is no rule as to whether LLC interests are protected by the federal securities laws. Some have contended that the securities laws should apply to corporations and limited partnerships but not to general partnerships and LLCs, on the theory that the former would provide investors an obvious choice through their selection of organizational form.