¶ 2901
Overview
Scope of the chapter. This chapter examines how an interest in a limited liability company passes from one person to another and what the recipient acquires. It covers the nature of the interest that a member holds; the default rules of the Delaware Limited Liability Company Act, the uniform acts and the statutes of other states on assignment; the restrictions that operating agreements place on transfer and the consequences of a transfer made in breach of them; the rights of a transferee who is not admitted as a member; the admission of transferees and other new members; pledges and security interests; transfers that occur by operation of law on death, incapacity, divorce, bankruptcy and transfer into trust; and the federal tax consequences of a transfer. It closes with drafting guidance and a checklist. Buy-sell agreements, rights of first refusal and drag-along and tag-along rights are treated in chapter 30. Dissociation and withdrawal are treated in chapter 31. The charging order, which gives a creditor of a member a lien on the member's economic rights, is treated in chapter 27 and is discussed here only where it bears on transfer.
The organizing principle. LLC statutes divide a member's position into two parts. The first is the right to share in profits and losses and to receive distributions. The second is the bundle of rights that belong to a member as a participant in the venture: the right to vote, to manage or to choose those who manage, to obtain information and to sue in certain capacities. The statutes treat the first as property that a member may assign, unless the operating agreement provides otherwise. They treat the second as personal to the member, so that an assignee acquires it only if the other members, or the operating agreement, admit the assignee as a member. The comment to the 2013 revision of the uniform act calls this the "pick your partner" principle and describes it as "[o]ne of the most fundamental characteristics of LLC law." Rev. Unif. Ltd. Liab. Co. Act § 502 cmt. (2013). The Court of Chancery has explained the default in the same terms: "it is far more tolerable to have to suffer a new passive co-investor one did not choose than to endure a new co-manager without consent." Milford Power Co. v. PDC Milford Power, LLC, 866 A.2d 738, 760 (Del. Ch. 2004).
Why the subject matters. Transfer questions arise in every stage of an LLC's life. At formation, the members decide whether interests may be sold, to whom and on what terms. During operation, members die, divorce, borrow against their interests, move them into trusts and sell them. At the end, the identity of the persons entitled to distributions in winding up depends on whether earlier transfers were valid. A transfer made without the required consent may be void, voidable or effective only to pass economic rights, and the answer may determine who controls the company, who may inspect its records and who receives its distributions. The Delaware Supreme Court has twice held that a transfer made in breach of an operating agreement that declares such transfers void is incurably void and cannot be saved by equitable defenses. CompoSecure, L.L.C. v. CardUX, LLC, 206 A.3d 807, 816–17 (Del. 2018); Holifield v. XRI Inv. Holdings LLC, 304 A.3d 896 (Del. 2023). The General Assembly added § 18-106(e) in 2021 to permit the ratification of void acts and broadened it in 2025. The interaction of those decisions and amendments is examined at ¶ 2940.
Terminology. The statutes use different words for the same things. The Delaware act speaks of a "limited liability company interest," which it defines as "a member's share of the profits and losses of a limited liability company and a member's right to receive distributions of the limited liability company's assets," and of an "assignee." Del. Code Ann. tit. 6, § 18-101(10). The uniform act speaks of a "transferable interest" and a "transferee." Rev. Unif. Ltd. Liab. Co. Act § 102(24)–(25) (2013). The 1996 uniform act used "distributional interest." The Texas code speaks of a "membership interest" and an "assignee." Tex. Bus. Orgs. Code Ann. § 101.108. This chapter uses "transfer" and "transferee" in a general sense and the statutory terms when discussing a particular statute. In practice, operating agreements often use "Units" or "Membership Interest" to describe the whole of a member's position, economic and governance rights together, and then provide that a "Transfer" of Units carries only the economic rights unless the transferee is admitted. A drafter who does not define these terms with care invites the dispute that the Virginia Supreme Court decided in Ott v. Monroe, 282 Va. 403, 719 S.E.2d 309 (2011), discussed at ¶ 2910.03.