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Case Study: Membership Interest Buyout Dispute

April 15, 2020

A client (we’ll call him “Rob”) recently came to see me about trying to maximize the purchase price for his membership interest in a closely-held limited liability company (the “Company”). Rob’s fellow members “asked” him to step aside from the business (i.e., the other members pushed Rob out). Rob wanted to avoid member/shareholder litigation but thought (correctly as it turned out) that his fellow members were going to trigger a repurchase provision of the Company’s LLC (or Operating) Agreement. Rob wanted to know how to get the best price for his membership interest if the members triggered the buy-back provision.

For those who don’t know, a limited liability company, or LLC, is a business entity created via statute in each state. While corporations have been around for over a century, LLCs came about more recently. As a result of their recent creation, and due to the lack of applicable law on their governance, the governance (i.e., management) of LLCs is primarily through contractual agreement between the members of an LLC (an LLC has “members” while a corporation has “shareholders”). This contractual agreement of the members is called an LLC Agreement or Operating Agreement, depending on the state in which the LLC was created.

Unfortunately for Rob, there isn’t much a lawyer can do to change what is already written down in the Company’s LLC Agreement. We could threaten litigation over the members pushing out Rob, we could challenge the method of calculating the purchase price, and we could make arguments that the LLC Agreement was ambiguous (i.e., unclear) and, therefore, some different value from the amount proposed by the members was applicable. But, ultimately, our arguments for value are limited by the value already agreed upon by the members in the LLC Agreement.

The lesson here? Talk to an expert on business formation and creation before starting your company or LLC. You need an exit plan that will work for you before it’s time for the exit. Once you reach the exit point, it may be too late.