Wednesday, November 9, 2011

Member Blocking Sale of an LLC interest

Q. I own 65% of an LLC and want to sell. Other member agreed but is now making certain demands or he will block the sale. Can he do that even if I own the majority ownership interest in the LLC? Scott, Oregon
A. To my knowledge, one LLC member cannot block the sale of a limited liability company interest by another member unless such authority is granted in a buy-sell agreement between the members (or language of the operating agreement). However, we must make a distinction between blocking the sale of a limited liability company interest and blocking the buyer from becoming a member. These are not synonymous concepts. The Oregon Limited Liability Company Act states the following regarding admission of new members:
Section 63.245 Admission of members. * * *
(2) After the filing of the limited liability company’s initial articles of organization, a person may be admitted as a member of the limited liability company upon compliance with the articles of organization or any operating agreement, or, if neither the articles of organization nor any operating agreement so provide:
(a) In the case of a person acquiring a membership interest directly from the limited liability company, upon the consent of a majority of the members;
(b) In the case of an assignee of a limited liability company membership interest not governed by paragraph (c) of this section, upon the consent of a majority of the members other than the assignor; or
(c) In the case of an assignee of a membership interest in a limited liability company in which, immediately following the assignment, the limited liability company otherwise would have no members, simultaneously with and upon the assignment of the membership interest.
Emphasis Added. Your situation, based on the above facts, is covered by Section 63.245 in my view. That means that although you can sell your LLC interest to a 3rd party, that individual does become an LLC member unless and until a majority of the remaining members votes in favor of admitting the buyer as a member. If you have an operating agreement and it addresses how a new member is admitted to the LLC, then the terms of the operating agreement override Section 63.245.

When the owner of an LLC members interest transfers the interest to a third party who for whatever reason does not become a member, the transferee becomes the holder of an economic interest in the LLC. I didn't see a statute expressly addressing the rights of a holder of an economic interest in an Oregon LLC so I won't comment further. Perhaps your operating agreement addresses the issue. Normally, an economic interest holder is allocated all income and losses (and receives all property distributions) that otherwise would have gone to the member from who the LLC ownership interest was acquired.

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