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Retirement Can Cause A Member to Involuntarily Withdraw From an LLC

A provision in a limited liability company Operating Agreement stating that a member’s termination of employment shall be an involuntary withdrawal of a member may also include the situation where a member retires from the company.  Retirement can unknowingly cause a member to lose their membership rights, even if the person still holds the interests in the company.

The Court of Special Appeals of Maryland recently issued an opinion stating that an operating agreement which provides that an employee’s termination of employment causes an involuntary withdrawal of the member from the limited liability company includes the situation when a member voluntarily retires from employment.  The operating agreement at issue in the Thomas v. Bozick, et al. case provided that the end of employment, for any reason, was an involuntary withdrawal as a member.  This withdrawal was only as to the membership rights and not the membership interests themselves.  Nothing in the Operating Agreement required that the company purchase the interests of the withdrawn member and the agreement was silent on what happens to the member’s interest if the company chose not to purchase the interests.  In the Thomas case, the company chose not to purchase the plaintiff’s interests upon his retirement.  The plaintiff argued that when the company decided not to purchase his membership interests, they effectively caused plaintiff to retain all members rights he previously had in the company.

The court looked to Maryland’s Limited Liability Company Act (“Act”) to determine what the legal rights are when a person ceases to be a member, but the interests are not purchased by the company.  The Act states that the person shall become a mere assignee of an economic interest in the company.  Therefore, the person shall have only economic rights and no other rights provided to a member, including but not limited to participation in management and voting rights.   

The loss of membership rights can greatly affect the economic rights, as a mere interest holder no longer has a right to vote on changes on important company matters, no longer has a right to notice of or participation in company meetings, has no right to vote on the sale of assets or issuance of membership interests.   Members can avoid this situation by including additional provisions in the company’s operating agreement which deal with the retirement of a member.  There are a number of protections that can be added, including requiring that a members interests be purchased by the company upon retirement or that allowing a member to retain all membership rights upon retirement.   

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