Today’s post is really a thank you to Judge Gale for delivering the Christmas gift I requested in last week’s post: a decision from the North Carolina Business Court on an open question of North Carolina’s corporate law to write about because I was tired of writing about Delaware law on this North Carolina blog.
The gift came in the decision in Blythe v. Bell, 2012 NCBC 60, decided Monday by the Business Court. The Blythe opinion is the first decision under North Carolina’s Limited Liability Company Act construing the effect of a transfer of an LLC interest by an LLC member.
What’s Included in a LLC Member’s Interest
The definition of a membership interest is in G.S. §57C-1-03. As Judge Gale observed, the statute recognizes the distinction between a member’s ‘economic interest’ (the right to receive distributions from the LLC) and the member’s ‘control interest’ (the right to vote or to participate in the management of the LLC). Op. ¶27.
Assigning an LLC Member’s Interest Doesn’t Make The Assignee A New Member Of The LLC
It’s worth a look at the statutes, which you can read by clicking on the links, as they were too long to quote. As Judge Gale observed, Section 57C-5-02 makes it clear by its wording that "an assignment in and of itself does not entitle the assignee to become a member or to exercise a
member’s rights if he is not already a member. " Op. ¶33.
If there is an assignment of an LLC interest to someone who is not already a member of the LLC, then Section 57C-5-04(a)(2) requires the unanimous consent of the other members before the assignee can become a member.
What Happens To The Control Interest When There’s An Attempted Assignment To A Non-Member?
The issue of the control interest’s assignability was the nub of the Blythe case. One of the Defendants, Joseph, had assigned his membership interest in an LLC to HBI, which was not a member of the LLC. Plaintiff said this meant that neither Joseph nor the assignee had a right to vote the 30% interest.
The effect of this argument, if accepted, was that the Plaintiff’s control interest went from 40% to 57% (based on 40% of the 70% remaining with Joseph’s 30% out of the equation). That turned a minority member into the controlling majority member.
Judge Gale rejected that argument focusing on the LLC Act as a whole. He said that the control rights continued to reside with the assigning member until the assignee was admitted as a new member per the terms of Section 57C-5-04. In particular, he relied on G.S. §57C-5-06, which prohibits a member from voluntarily withdrawing from the LLC without an express agreement from the other members allowing the withdrawal. Accepting Plaintiff’s argument would have allowed a member to withdraw via assignment which Judge Gale found to be contrary to the Act.
The effect of this ruling was that Joseph had transferred his economic interest, but he remained a member of the LLC with voting rights unless and until until his assignee was admitted as a member by unanimous consent.
It’s worth noting that the same result would have been reached under the terms of the Revised Uniform Limited Liability Company Act, Section 502(g).
There’s A Difference If The Assignment Is To An Existing LLC Member
Here’s another part of the ground-breaking LLC news from Blythe: Judge Gale held that he "interprets the Act to allow members, absent a contrary agreement, to transfer both their economic and control membership interests to existing members without unanimous member consent." Op. ¶44.
How Do You Avoid This Type Of Problem?
Is there a way to avoid this type of wrangling over assignments of LLC interests? Of course. The default provisions of the LLC Act control "unless otherwise provided in the articles of organization or the operating agreement of a North Carolina LLC." Op. ¶24. The LLC in Blythe had no operating agreement. If there had been one, the assignment provisions of the LLC Act might have been varied.