Tag-Along Operating Agreement

If the evaluation procedures are ambiguous (or if the agreement remains silent on the matter), the parties must negotiate the assessment of the LLC`s interests at a time when they may have conflicting interests. This can lead to tedious and costly negotiations. Most LLC agreements have the rule that members cannot otherwise sell or transfer their LLC shares unless they are approved in advance (usually by the manager or a percentage of members) or are approved pursuant to another provision of the transfer section, para. B example a ROFR or a ROFO. Rofr requires a member who has received a good faith offer from third parties for the sale of his shares in LLC to first offer these shares to other members before closing the sale to the third party. In some agreements, the offer is also made to the LLC, which may be at the same time as the offer to members, or the company may have a right of preemption before other members can exercise their rights. The tag along and drag-along provisions can be particularly useful when it comes to separate enterprise agreements or purchase/sale agreements to limit the ability of members to transfer their shares in the company. In this context, the along and drag-along rights give investors the certainty that their investment has the potential for liquidity when the time comes to sell the business. Despite any authorized transfer or other provision of the LLC agreement, any transfer – or withdrawal – when the LLC is treated as a partnership for federal tax purposes in the United States, is generally prohibited from treating the LLC as a corporation for U.S. income tax purposes. The valuation of transferred LLC`s holdings is a critical element of any repurchase commission. It is important to establish a clear procedure for the valuation of transferred LLC units when the parties enter into the LLC agreement (or sale-for-sale agreement so separately) for the first time, since the interests of the parties are rather coordinated at that time.

In many cases, a potential buyer may not be interested in acquiring only part of the business.