CONCORDIA PARTNERS, LLC v. Ward, Dist. Court, D. Maine 2013 - Google Scholar:
The typical LLC operating agreement contains a provision governing the terms of a member's withdrawal. The operating agreement often provides that the other members or the LLC itself have a right of first refusal. This means if Member X wants to sell his interest in the company, he must first offer it to the other members. They have a period of time in which to buy his interest or refuse to buy it.
The LLC at issue here was governed by the law of the State of Maine. Like most states, Maine allows the members to set the rules by drafting an operating agreement.
The court explains the terms of the agreement as follows:
"Under Section 8.3, before a member can transfer his or her interest in Concordia, the Transferring Member must notify the Managers of the company. In this regard, Section 8.3 provides:
If any Transferring Member, desires to transfer . . . all of any part of theLLC Units owned by the Transferring Member and such proposed transfer is not subject to the provisions set forth in Section 8.2 hereof [pertaining to Selling Members with a Bona Fide Offer], the Transferring Member shall first notify the Managers stating the nature of the Offered Interest to be transferred and the name of the person to whom the same is to be transferred and the manner of and reason for such transfer and the consideration (if any) to be received.
(Operating Agreement ¶ 8.3.) Providing notice triggers a period during which Concordia, as an "Optionee" under Section 8.1(e), has the option to purchase the member's interest for its Fair Value: "For a period of forty-five (45) days after determination of Fair Value in accordance with Section 8.1 above . . . the Optionee shall have the option to purchase the Offered Interest at its Fair Value upon the Deferred Payment Terms." (Id. ¶ 8.3.) The same Section then goes on to state:
If the Optionee (collectively) does not exercise the option to purchase the entire Offered Interest prior to the expiration of the Transfer Option Period, the Transferring Member may transfer the entire Offered Interest, provided the transfer occurs on the terms stated in the original notice received by the Managers to the person named therein and the transfer occurs within thirty (30) days following the expiration of the Transfer Option Period.
(Id.) Therefore, under Section 8.3, when a Transferring Member notifies Concordia of its desire to sell its membership units, Concordia as an "Optionee" has the right to purchase that member's interest in Concordia. However, nothing in Section 8.3 obligates Concordia to purchase a member's interest."
In this case the court dismissed a claim by the withdrawing member. That member sought to compel the LLC to purchase his interest. His claim failed because the Operating Agreement did not require the LLC to purchase the interest. The only requirement was that the member offer the interest to the LLC. There was no requirement to buy the interest.
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The typical LLC operating agreement contains a provision governing the terms of a member's withdrawal. The operating agreement often provides that the other members or the LLC itself have a right of first refusal. This means if Member X wants to sell his interest in the company, he must first offer it to the other members. They have a period of time in which to buy his interest or refuse to buy it.
The LLC at issue here was governed by the law of the State of Maine. Like most states, Maine allows the members to set the rules by drafting an operating agreement.
The court explains the terms of the agreement as follows:
"Under Section 8.3, before a member can transfer his or her interest in Concordia, the Transferring Member must notify the Managers of the company. In this regard, Section 8.3 provides:
If any Transferring Member, desires to transfer . . . all of any part of theLLC Units owned by the Transferring Member and such proposed transfer is not subject to the provisions set forth in Section 8.2 hereof [pertaining to Selling Members with a Bona Fide Offer], the Transferring Member shall first notify the Managers stating the nature of the Offered Interest to be transferred and the name of the person to whom the same is to be transferred and the manner of and reason for such transfer and the consideration (if any) to be received.
(Operating Agreement ¶ 8.3.) Providing notice triggers a period during which Concordia, as an "Optionee" under Section 8.1(e), has the option to purchase the member's interest for its Fair Value: "For a period of forty-five (45) days after determination of Fair Value in accordance with Section 8.1 above . . . the Optionee shall have the option to purchase the Offered Interest at its Fair Value upon the Deferred Payment Terms." (Id. ¶ 8.3.) The same Section then goes on to state:
If the Optionee (collectively) does not exercise the option to purchase the entire Offered Interest prior to the expiration of the Transfer Option Period, the Transferring Member may transfer the entire Offered Interest, provided the transfer occurs on the terms stated in the original notice received by the Managers to the person named therein and the transfer occurs within thirty (30) days following the expiration of the Transfer Option Period.
(Id.) Therefore, under Section 8.3, when a Transferring Member notifies Concordia of its desire to sell its membership units, Concordia as an "Optionee" has the right to purchase that member's interest in Concordia. However, nothing in Section 8.3 obligates Concordia to purchase a member's interest."
In this case the court dismissed a claim by the withdrawing member. That member sought to compel the LLC to purchase his interest. His claim failed because the Operating Agreement did not require the LLC to purchase the interest. The only requirement was that the member offer the interest to the LLC. There was no requirement to buy the interest.
Comment: this is a routine case. It illustrates the importance of the operating agreement and the importance of carefully drafting that agreement before you invest your money in the LLC.
Edward X. Clinton, Jr.
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