Posted almost 9 years ago

Transfer of LLC Member Interests

Normal 1503303361 Transfer Of Llc Member Interests

Transfer Restrictions on LLC Member Interests

LLC Statutes permit members to place restrictions and conditions on the transfer of membership units.

LLC Member Interests Permitted transfers

We will need to discuss whether or not you want to require approval of the membership before permitting a transfer of LLC Member Interests. Be mindful of not drafting an overreaching provision that places unreasonable restrictions on the transfer of member interests as they may be narrowly construed by the Courts. Transfers for the benefit of the member’s estate are typically permitted.

Sale of LLC Member Interests

When crafting language permitting the sale of a member’s interest, we need to consider issues such as:

The right of first refusal; perhaps coupled with a permissive deferred payment plan or some other form of structured payments over time;
Whether or not approval will be needed by the non- selling/non-transferring members before permitting the transfer;
If approval will be needed, will it be by simple majority? Super majority? Unanimous consent?
How will the membership interests be valued? Set value per unit? Appraisal prior to the transfer occurring to determine the “fair value?” An agreed upon method of calculation to arrive at the fair value of the member interest to be transferred?

Transfers to a Trust

If the Operating Agreement allows transfers to a trust, the practitioner should consider whether or not the member will be the designated trustee, and, if so, whether or not the trustee acquires an economic interest only. Moreover, if that member/Trustee dies, will the successor trustee continue to hold the same interests as the decedent? In other words, will the death of the member trustee be considered an “assignment” and what will be the effects of any such assignment?

Division of Interests

Membership interests contain at least two different parts:

Economic rights

A “transfer” of an interest is, in fact, a transfer of the economic interest attached to the units, whether voluntarily or involuntarily, (such as death, incapacity, bankruptcy, attachment by a creditor, etc.)
Economic interests include the right to be allocated, to the extent assigned, the income, gain, loss, deduction, credit, and other similar items associated with the interest. May also include the right to receive distributions.
The recipient of these rights is known as an “assignee” and does not have liability as a member by virtue of the assignment of the interest.
The assigning member does not cease being a member merely by assigning his economic rights in his membership interest.
Until the assignee becomes a member, the assignor member continues to be a member and have all the associated rights and powers not assigned. This does not, of course, apply if the assignment is triggered by the death of a member.
The assignee has no rights to vote or manage the LLC, but does typically have some limited rights with respect to obtaining reasonable information and to make reasonable inspections of the books and records of the LLC.
In order for the assignee to become a member with managerial and/or voting rights, the members must approve the same.
Assignment of the economic interest in member interests usually does not trigger the winding up of an LLC.

Managing/Voting Rights – Full rights of membership.

When considering transfers from and to existing members, we need to discuss whether or not it is intended that any such transfers will include managerial / voting rights. This is important where votes are proportionately related to each member’s percentage ownership in the LLC, (as opposed to a per capita voting basis). Owners who want to control the percentage ownership of the members in order to maintain the balance of power may want to restrict the transfer of voting rights to an existing member.

If you want to lessen the burden from a statutory unanimous consent requirement, you might consider a super-majority requirement with any dissenting votes required to set forth the basis for their dissent and that such reason is reasonable.

Conversely, if you wish to make the transfer requirements more onerous than a state’s statutory scheme that only requires a majority vote, you may want to consider raising the bar to a super- majority vote or even unanimous consent. Note that any requirement that the withdrawing member first offer to sell its interest to the LLC, those requirements must be reasonable to be enforced, also known as right of first refusal.

Deadlocks

To the extent possible, Operating Agreements should be written in such a way that deadlocks are avoided. However, if it cannot be avoided, one mechanism to employ to resolve a deadlock without resulting in the dissolution of the entity, is to build in a provision whereby one member buys the other deadlocked member(s) out of the LLC at a pre-determined or negotiated price.