Wednesday, August 10, 2016

Tennessee Law and an Assignment of an LLC Membership Interest

I am not an attorney, but recently, as a result of some of my work on business valuations, I was interested in distinguishing a member of an LLC from an assignee member of an LLC, I came across the Tennessee law(s) that address(es) assigning one's interest in an LLC and the restrictions that might apply.

Why is this important from a valuation standpoint?  Well, the presence of/or absence of various benefits and restrictions can have a significant monetary impact on the value of an interest in an operating entity.

As it turns out, Tennessee Code Section § 48-218-102 (2015) states that an LLC member may assign the member's full membership interest only by assigning all of the member's governance rights coupled with an assignment to the same assignee of all the member's financial rights. That's a significant provision written into our law here since some states, for example, do not provide for this restriction and allow a member to transfer his or her financial rights without a transfer of his or her governing rights or vice versa.

The law under this code section goes on to state that any other assignment of any governance rights is effective only if all the members, other than the member seeking to make the assignment, approve the assignment by unanimous consent or if the articles or operating agreement so permit, if the assignment is approved in accordance with § 48-232-102. The consent of a member may be evidenced in any manner specified in the articles or operating agreement, but in the absence of such specification, (this) consent shall be evidenced by a written instrument, dated and signed by the member.

More importantly (and again, this is not necessarily true in other states), when an assignment of governance rights becomes effective under the statute, the assignee becomes a member, if not already a member. And with that stipulation, the assignor, the guy or gal who made the assignment, ceases to be a member, to the extent assigned, and the rights, powers, restrictions and liabilities, of a member under the articles (and any operating agreement) become the rights, restrictions and liabilities of the assignee member.  Again, this is not necessarily true in other states.

In effect, as a member, the assignee becomes liable for any obligations of the assignor under the code (§48-232-101) existing at the time of transfer, except to the extent that, at the time the assignee becomes a member, a liability might have been unknown to the assignee, and could not have been ascertained from the records maintained by the LLC.

Finally, unless otherwise provided in the articles of the LLC or in its operating agreement, a pledge of, or granting of a security interest, lien or other encumbrance in or against, any or all of the membership interest of a member is not an assignment under this statute and shall not cause the member to cease to be a member or to cease to have the power to exercise any rights or powers of a member.

So when in doubt, and you are contemplating transferring or assigning all or a part of your interest in an LLC to someone else, check with your legal advisor first.  You may not want to take the plunge. 

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