Last year, the North Carolina Business Court resolved a conflict within North Carolina’s Limited Liability Company Act (“the Act”) regarding assignments of member interests and transfers of control. The issue arose in Blythe v. Bell, 11 CVS 933, wherein a member sought to assign all of his member interest to a non-member entity. There was no question that the economic interest flowed immediately to the assignee. Rather, the issue was whether the control rights (e.g., voting rights) associated with the member interest were retained by the assignor, conveyed to the non-member assignee, or left in an inoperative limbo, useless to both the assignor and the assignee.
Section 57C-5-06 of the Act provides that a member may withdraw only if allowed by the articles of organization or a written operating agreement. However, Section 57C-5-02 provides that, except as provided in the articles of organization or a written operating agreement, a member ceases to be a member upon assignment of all of its membership interest. Further, Section 57C-5-04(a) of the Act provides that an assignee may become a member by complying with the operating agreement (if there is one) or by the unanimous consent of the members. Moreover, an assignee that becomes a member has the control rights of a member, including voting rights, with respect to the interest assigned.
The member in the Blythe matter assigned all of his interest to the non-member assignee. Therefore, under the Act, he ceased to be a member (under Section 57C-5-02) but was also prevented from withdrawing as a member (pursuant to Section 57C-5-06). Furthermore, under to Section 57C-5-04(a), because the assignee was not a member of the limited liability company, the control rights could not be a part of the assigned member interest. This gave the remaining members of the limited liability company a greater (and disproportionate) degree of control because the assigned voting rights were effectively lost between a member who had relinquished them and an assignee that could not utilize them.
The Court ultimately held that, under the default provisions of the Act, the assignor does not cease being a member until the assignee is admitted pursuant to the provisions of Section 57C-5-04. Though the economic interest may be transferred, the control interest remains with the member until such time as the assignee becomes a member.
The best way to avoid this and other conflicts is to not have to rely upon the Act’s default provisions. A clear and comprehensive operating agreement can address a myriad of issues that are either overlooked or underserved by the Act’s default provisions. If you are interested in having an operating agreement drafted for your limited liability company, contact the Law Office of Terence J. Everitt at 919-561-1416 or submit an inquiry here.