As highlighted in the limited liability company section of our law firm’s website, of critical importance for any member (i.e., a business owner holding an LLC interest in a limited liability company) is the right to transfer his, her or its LLC interest (also termed membership interest) to another member, the LLC or to a third party. Whether a member has the right to transfer an LLC membership interest to another member, the LLC or a third party will be determined by the limited liability company agreement (also known as the operating agreement) or by the default provisions of the South Carolina LLC statute (the South Carolina Uniform Limited Liability Company Act of 1996) if the LLC’s operating agreement is silent on this issue.
As a preliminary note, an operating agreement is the primary LLC agreement which sets forth the rules regarding relations among the members, managers, and how the internal affairs of the limited liability company shall be managed. In other words, the operating agreement is the legal business contract that governs the relationships among the members and the affairs of the limited liability company. The South Carolina LLC act allows the members of the LLC to give maximum effect to the principle of freed of contract and to the enforceability of operating agreements.
Except for those mandatory provisions that cannot be waived by the LLC operating agreement, the majority of all of South Carolina’s LLC statutory provisions may be modified and superseded by provisions set forth in the LLC operating agreement. As a result, most operating agreements provide for the transferability of an LLC interest (which includes both economic and non-economic membership rights in the LLC) but also incorporate certain restrictions on transfer. For example, the operating agreement may provide that the LLC and/or other members have the right of first offer and the right of first refusal to purchase the LLC interest before such member may transfer his, her or its LLC membership interest to a third party. The following are sample provisions in which our business lawyers in Charleston often use when developing operating agreements:
Right of First Offer. No member (an “offering member”) shall offer all or any part of the offering member’s membership rights to any third party unless the offering member first makes a written offer of these rights (in accordance with the operating agreement appraisal provisions) simultaneously to the LLC and to the other members.
Right of First Refusal. If any third party makes a bona fide offer in writing on reasonable terms to purchase all or any part of the membership rights of a member ( the “offeree-member), then before accepting the offer, the offeree-member shall offer the same rights on the same terms simultaneously to the LLC and to the other members.
South Carolina Default Statutory LLC Provisions
The South Carolina LLC Act provides default rules concerning a member’s right to transfer the LLC membership interest. Default limited liability company provisions are rules set forth in the South Carolina limited liability company statute that become effective if the LLC’s operating agreement (or articles of organization) do not address the specific LLC or member issue that requires resolution. The following post will address situations in connection with the transfer of an LLC membership interest where an LLC does not have a properly drafted, executed operating agreement that would in most cases override certain default rules set forth in the LLC statute.
Transfer of Membership Interests in an LLC – South Carolina LLC Act Default Rules
Under the default rules, a member has the right to transfer only the distributional interest (also termed the economic rights). As defined in the LLC Act, a distributional interest (or economic rights) in a limited liability company is personal property and may be transferred in whole or in part – Section 33-44-501. A transfer of a distributional interest (or economic rights) does not entity the transferee to become or to exercise any non-economic rights (such as voting rights, rights to receive notice of, to attend and to participate in meetings, rights with respect to LLC information, fiduciary rights and dispute resolution rights) – Section 33-44-502. A transfer entitles the transferee to receive, to the extent transferred, only the distributions to which the transferor would be entitled. A transferee of a distributional interest may become a member of a limited liability company if and to the extent that the transferor gives the transferee the right in accordance with the authority described in the operating agreement or all other members consent – Section 33-44-503.
Although pursuant to the South Carolina LLC Act a transferee may only receive economic rights unless admitted as a member to the LLC, this would not necessarily prevent the transferring member to provide the third party with certain non-economic rights via a proxy to vote on certain LLC matters – which is authorized by the LLC Act. However, there are certain provisions in the LLC Act that the members may exercise to prevent the above situation from occurring.
Additionally, it should also be noted that pursuant to the LLC Act if a member transfers all of his, her or its distributional interest to the LLC, another member or a third party such transferring member is automatically dissociated from the LLC – Section 33-44-601(3).
Legal Status of Transferees Not Admitted As Members
Under the default rules of the South Carolina LLC statute, the transferee (i.e., the person who receives the distributional interest or economic rights) acquires the following rights: