KEY MECHANISMS FOR COMPELLING A SALE OF A MEMBERSHIP INTEREST IN A LIMITED LIABILITY COMPANY

Limited liability companies (“LLCs”) offer their members significant flexibility when it comes to forming and exiting new ventures. Often, members begin their relationship with a boilerplate operating agreement that doesn’t consider how individual members might exit the company or what types of interest transfers will be permitted.

Four key mechanisms govern how and when a member can sell or be compelled to sell their ownership stake in an LLC: put rights, call rights, the right of first refusal (ROFR), and the right of first offer (ROFO). While all these mechanisms relate to the transfer of membership interests, they differ significantly in their initiation, execution, and ultimate impact on the members and the company.

Here’s a comparison of key differences between these rights:

The choice between these rights depends on the specific goals and the company dynamics. For example, put and call rights provide certainty and a pre-determined exit mechanism, which can be crucial for planning and stability, especially in family businesses or companies where members are also employees. ROFR and ROFO, on the other hand, focus more on controlling who becomes a new member. A ROFR is generally more favorable to the non-selling members as it gives them the power to match a concrete offer. A ROFO is often seen as more favorable to the selling members as it allows them to gauge interest internally before potentially seeking a higher price in the open market.

A successful exit strategy hinges on having the right tool for the anticipated exit scenario. That’s why a customized operating agreement will benefit members far more than a generic, boilerplate document.