What are Appraisal Rights for LLC Members?

LLC Members Appraisal Rights: What are they?

“Appraisal rights” are rights that minority members of an LLC have to be paid the fair market value of their ownership interest in certain circumstances. In essence, these rights give a member a legal right to be bought out of the company when major changes are made to the LLC.

Under Florida’s Revised Limited Liability Company Act, members may be able to exercise their appraisal rights in eight circumstances, called “appraisal events”:

• when the LLC merges with another LLC;
• when the LLC converts to another kind of entity (e.g., to a corporation) or reorganizes under the laws of another jurisdiction;
• when the LLC completes an interest exchange (e.g., an exchange of membership interests or shares with another entity), if the member’s membership interest is included in the exchange;
• when the LLC sells substantially all of its assets, unless the sale is court-ordered;
• when the LLC amends its organic rules (e.g., articles of organization or operating agreement) to reduce the member’s interest, if the LLC will have the right or obligation to repurchase that interest;
• when the LLC amends its organic rules to alter or abolish voting rights with respect to a member’s membership interest in the LLC;
• when the LLC amends its organic rules to abolish appraisal rights; and
• in any other circumstance where the LLC’s organic rules permit exercise of appraisal rights.

While the process is more complicated than the following description, in its basic form, the appraisal process works like this: if the majority of the members or the managers plan an appraisal event, the company must notify all other members that an appraisal event is planned prior to any vote taken to approve the event. If a minority member believes that he or she will exercise his or her appraisal rights (if the event is passed by a majority of the members), that minority member must notify the LLC that he or she will exercise his or her appraisal rights and demand payment, should the appraisal event be approved.

Importantly, at the time of the vote, a member intending to exercise appraisal rights must not vote in favor of the appraisal event. Voting in favor of the appraisal event automatically disqualifies a member from invoking the appraisal process.

If the event is approved, the LLC and the member then trade offers of money in exchange for the member’s shares. The LLC makes the first offer, and the member may accept or reject it. If the member rejects the offer, he or she must make a counter-offer. If that counter-offer is rejected, the parties can take the claim to court.

Note that appraisal rights may be limited or waived in the articles of organization and the operating agreement. Also, certain kinds of publicly-traded securities may not qualify for the appraisal process.

As always, if you have questions about whether to invoke your appraisal rights, give us a call and we will be happy to discuss it with you.