KEY MECHANISMS FOR COMPELLING A SALE OF A MEMBER’S INTEREST IN A LIMITED LIABILITY COMPANY
September 29, 2025
Limited liability companies (“LLCs”) offer their members significant flexibility when it comes to forming and exiting new ventures. A well-drafted operating agreement provides a clear roadmap for handling future contingencies. However, in many limited liability companies, members adopt a boilerplate operating agreement that doesn’t consider how individual members might exit the company or what types of interest transfers will be permitted in the future. To be truly useful, an operating agreement should include relatively detailed buy-sell provisions that require the members to buy or sell their membership interests upon the occurrence of certain triggering events. These events can include:
- Death or Disability: The remaining members are often required or have the option to purchase the interest of a deceased or permanently disabled member.
- Voluntary Withdrawal: A member wishing to exit the LLC may be required to first offer their interest to the other members.
- Involuntary Transfer: Events like bankruptcy, divorce, or a creditor’s claim can trigger a mandatory sale of the affected member’s interest back to the company or the other members.
- Breach of the Operating Agreement: A material breach of the agreement by a member may give the other members the right to buy out the breaching member’s interest.
Where the company’s membership includes minority members, the members holding the majority of interests may want to include drag-along rights in the operating agreement. These rights enable them to compel minority owners to sell their interests to a third-party buyer. Drag-along rights are a crucial tool for ensuring a smooth and complete exit for the majority owners, which makes a potential acquisition more attractive to buyers who want to purchase 100% of the company.
Additional key mechanisms that may indirectly lead to the sale of a member’s interest upon a triggering event are put rights, call rights, the right of first refusal (ROFR), and the right of first offer (ROFO). While they all 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:
Type of Right | Put Right | Call Right | Right of First Refusal (ROFR) | Right of First Offer (ROFO) |
Who Initiates? | The selling member | The LLC or other members | The selling member (by seeking a third-party offer) | The selling member (by expressing intent to sell) |
Triggering Event | Pre-defined events (e.g., death, disability, termination of employment) | Pre-defined events (e.g., departure, breach of agreement, death) | A member receiving a bona fide offer from a third party | A member’s desire to sell their interest |
Core Obligation | The LLC or other members are obligated to buy the interest. | The selling member is obligated to sell their interest. | The selling member must allow other members to match the third-party offer. | The selling member must first offer their interest to the other members. |
Pricing | Typically determined by a pre-agreed formula or valuation method. | Typically determined by a pre-agreed formula or valuation method. | Determined by the third-party offer. | Negotiated between the selling and existing members. |
Control Over Sale | The selling member has the power to compel a sale. | The LLC or other members have the power to compel a sale. | The selling member controls the initial search for a buyer, but the other members can preempt the sale. | The selling member controls the initiation but must approach existing members first. |
The choice between these rights depends on the specific goals and the company dynamics. For example, put and call rights will provide certainty and a pre-determined exit mechanism crucial for planning and stability in family businesses or companies where members are also employees. ROFR and ROFO rights, 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. A customized operating agreement will provide the most reliable and efficient way to establish mechanisms for compelling a sale of a membership interest. A boilerplate document, on the other hand, may force members to rely on statutory remedies, which may lead to protracted and expensive legal battles with uncertain outcomes.