Virginia business and transactional attorneys have been discussing the impact and wisdom of the recent Supreme Court of Opinion, Ott v. Monroe (http://www.courts.state.va.us/opinions/opnscvwp/1101278.pdf), which held that the control interest in a limited liability company is not transferrable (including upon a member’s death) without the consent of the other members of the company. A Control interest in a limited liability company refers to that portion of an ownership interest in the company that gives the holder the right to vote and/or participate in the management of the company, as opposed to an economic interest in a limited liability company including the right to be allocated profits/losses and receive distributions from the company. I believe that this is the right result (see relevant code provisions here, here and here), and as a policy matter it is the outcome that most members of limited liability companies would desire. Although members typically want the ability to transfer their economic interest in a limited liability company to their heirs or other successors, the other members typically would not want to be in the position of becoming business partners with those successors without their consent, and that policy is reflected in the Virginia Code.

The rule that control interests cannot be transferred without the consent of the other members can be superseded by the Articles of Organization or Operating Agreement of the company, but it must be done with specific language. I believe that what was most interesting about the decision in Ott. v. Moore is not that control interests cannot generally be transferred (which is pretty clear law in Virginia), it is the analysis of what constitutes specific language needed to supersede this general rule. The operating agreement at issue in Ott. v. Moore contained, among other provisions, that “any Member . . . may transfer all or any portion of the Member’s Interest at any time to … [o]ther Members [or] [t]he spouse, children or other descendants of any Member.” (emphasis added). The court held that neither this nor any other provision of the operating agreement specifically permitted the transfer of control interests without the consent of the other members.

If members wish to have the ability to transfer control interests together with their economic interests (whether by death or otherwise) without the consent of the other members, they need to make sure the company’s Articles of Organization or Operating Agreement (and I would always recommend these sorts of provisions be covered in the Operating Agreement) clearly allows it. References to “control interests”, “voting rights”, “participation in management and affairs” or like phrases should be included in the provisions allowing transfers of ownership interests. Also recommended are provisions that specifically address how assignees of membership interests may be admitted as members of the company, especially if admission does not require the consent of the other members.