Today’s Guest Appearance by Kirk Haynes, Jr.

If you have formed a limited liability company (“LLC”), you likely have already considered many of the logistics of going into business – who the other members of the LLC will be, what are the control / consent rights for the members and/or managers of the LLC, how are the capital call provisions structured, in which instances can membership interests be diluted and so on.

However, have you considered the logistics of getting out of the business and what exit strategies will be available to you down the road? There are multiple reasons why you may want to exit (or require the other member(s) to exit) the LLC in the future. For instance, you and the other member(s) may find that you no longer share the same vision for the business, you and the other member(s) are at a deadlock, you and/or the other member(s) need to liquidate your or their LLC membership interest for economic reasons, or you and/or the other member(s) want to avoid a third party's gaining decision making power or economic interests in the LLC. Below are three of the top exit strategy provisions that we consider including in LLC agreements, to the extent appropriate for the parties:

• Put / Call Options. Put options give a member (the “Put Option Selling Member”) the right to require another member(s) or the LLC to purchase the Put Option Selling Member’s membership interest in the LLC at a specified time (e.g., X years after the Put Option Selling Member joined the LLC) or upon a specified event. The Put Option Selling Member is not required to exercise the put option, but it gives the Put Option Selling Member the ability to do so, should he/she/it desire to exit the LLC. On the other hand, Call Options give a member(s) or the LLC the right to buy the membership interest of a “Call Option Selling Member” in the LLC. The call option allows a member(s) or the LLC to force the Call Option Selling Member to sell his/her/its membership interest in the LLC to the applicable member(s) or LLC, should a member(s) or the LLC desire to force the Call Option Selling Member to exit the LLC. If you choose to include put / call options in your LLC agreement, you should consider what instances would trigger the options, what the process for determining the purchase price will be, and what the process for exercising the option will be.
• Buy / Sell. A buy / sell provision in an LLC agreement is commonly used as a process to resolve situations where members are no longer seeing eye to eye. The buy / sell provision allows a member (the “Initiating Member”) to make an offer to purchase the interest of another member (the “Deciding Member”) in the LLC. Typically, thereafter, the Deciding Member will have the option to (i) sell his/her/its membership interest at the offered price or (ii) purchase the Initiating Member’s membership interest in the LLC at the offered price. Thus, the Initiating Member does not know if it will be the selling member or the buying member. One advantage of this structure is it may encourage the Initiating Member to offer a fair price, as the Initiating Member has to be comfortable knowing it can be forced to buy, or sell, at this price. On the other hand, one disadvantage is that if a member has a significant financial disparity compared to another member, the less moneyed member may be forced to sell his/her/its interest at a price that he/she/it deems to be unfair solely because he/she/it is not in the position to finance a purchase of the other member’s interests. Given the uncertainty of the outcome of the buy / sell process, you should give consideration to whether a buy / sell provision should be included and what conditions must be met prior to initiating the process.
• Third Parties. There are a number of scenarios where an unexpected third party can obtain a member’s membership interest in an LLC. For instance, in certain situations, a bankruptcy court could claim a member’s membership interest if the member files for bankruptcy, a court could grant a creditor or a divorced partner of a member a claim in the member’s membership interest, or a deceased member’s membership interest could pass to a third party. LLC agreements can include provisions that allow a member or the LLC to purchase another member’s interest in the event that some of the above, or other, scenarios occur. These provisions allow members and the LLC to assure that such scenarios will not allow unintended third parties to obtain ownership (economic rights) or decision making rights (control rights) in the LLC. If you choose to include provisions addressing such scenarios, you should consider what the process will be for determining the purchase price, what the process will be for exercising the purchase and what will be the methodology for calculating the purchase price.