Limited liability companies are a popular entity choice for budding and serial entrepreneurs alike because of the merging of partnership flexibility with the protection of the corporate veil. Members, or owners of the LLC, are able to craft an organizational structure that better achieves their strategic goals related to management and finances. But what if you’re a member without enough voting power to protect your interests and need an exit strategy that appropriately values your investment of time and capital?
The Florida Revised Limited Liability Company Act (“RLLCA”) has got your back…mostly. Read on to learn about the member appraisal rights protected by the RLLCA and red flags to look for in your company’s Articles of Organization or Operating Agreement.
Appraisal Rights under the RLLCA
Section 605.1006 (see graphic) of the RLLCA provides for appraisal rights where members have to be paid the fair market value in exchange for their ownership interest upon the occurrence of certain “appraisal events”. In essence, these rights give a member a legal right to be bought out of the company when major changes are made to the company without their consent.
The RLLCA also allows the company to change, restrict, or remove appraisal rights with the approval of each member; additionally, if the said appraisal rights are to be restricted or removed, the terms of such change must be detailed in the LLC’s Articles of Organization or Operating Agreement. Additional limitations apply if you are a member of an open-end management investment company registered with the SEC or if your membership interest is a covered security under s. 18(b)(1)(A-B) of the Securities Act of 1933, as amended, which are detailed in Section 605.1006(4).
The Do’s and Do Not’s
If a proposed “appraisal event” is to be voted on at a meeting of the members, the company must notify all members of their appraisal rights, if applicable, and if members will have appraisal rights, a copy of Sections 605.1006 and 605.1072 must be provided to each non-consenting and non-voting member with the notice of the appraisal event, at least 10 days before the appraisal event becomes effective. Additional financial information about the company may also be required in the notice depending on the type of appraisal event. If a member wishes to exercise their appraisal rights, that member must notify the LLC that he, she, or it will exercise appraisal rights and demand payment, should the appraisal event be approved.
The member seeking appraisal rights must deliver to the other members, Manager, or an officer of the company, as appropriate, notice of the intent to demand payment if the proposed appraisal event is approved. If a member desires to exercise their appraisal rights, that member must vote against the appraisal event.
If the appraisal event is ultimately approved, the company and the member who has exercised appraisal rights, then negotiate terms for the exchange of money for the member’s membership interests. The LLC makes the first offer, in the form of an appraisal notice which must be delivered to the member demanding appraisal rights no later than 10 days after the appraisal event becomes effective, and the member may accept or reject it. If the member rejects the offer, the member must make a counter-offer. If that counter-offer is then rejected, the parties can take the claim to court.
How to Wave Goodbye to Appraisal Rights
Appraisal rights in Florida may be limited or waived through the addition of specific language in the company’s Articles of Organization or Operating Agreement. If you are considering membership in an LLC, or are in the process of drafting or amending your company’s operating agreement, it is essential that you fully understand the implications of any language precluding appraisal rights, and any intentional waivers need to comply with the RLLCA to be enforceable.
An example of Waiver of Appraisal Rights in a Florida Operating Agreement is as follows:
NO APPRAISAL RIGHTS. Each Member hereby expressly agrees and acknowledges that this Agreement eliminates any appraisal rights and rights to obtain payment of the fair value of a Member’s Membership Units (collectively, the “Appraisal Rights”) provided in Section 605.1006 of the Act or otherwise in any one or more of the events described in Section 605.1006(1) of the Act (the “Triggering Events”), and that Appraisal Rights shall not be available to such Member with respect to any and all Triggering Events that may occur during the term of this Agreement. Each Member hereby further expressly authorizes the elimination of such Appraisal Rights hereunder and further agrees and acknowledges and this Section 7.4 constitutes an express waiver of all Appraisal Rights with respect to such Member that has been approved by such Member for purposes of Section 605.1006(2) of the Act.
Whether you are a prospective member looking to understand the implications of joining an LLC or signing an operating agreement, a company looking to draft or amend an operating agreement, or a member looking to understand what rights you have in the face of an appraisal event, an experienced business attorney can help you understand your rights and obligations under Florida law and protect your investment.
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