What is a Membership Transfer Agreement?
A Membership Transfer Agreement is a legal document used by associations, clubs, limited liability companies (LLCs), corporations and other organizations to lay out the process for transferring membership interests. The transfer agreement is typically a contract between the person transferring their membership interest (the transferor) and the recipient of the interest (the transferee) and is the document that legally transfers the membership interest from the transferor to the transferee upon the transferee meeting any contractual clauses required of them. Articles of organization , bylaws or other governing documents may also play a role in the transfer of a membership interest. Membership interests are typically defined based on the rules and regulations set forth in the organization’s governing documents. The purpose of a Membership Transfer Agreement is to give both transferees and transferors peace of mind in knowing that the membership interest in question has been legally transferred. Failure to use a Membership Transfer Agreement may lead to disputes as to whether or not the transfer was appropriate and whether the transferor is still a member of the organization.
Essential Elements of a Membership Transfer Agreement
A membership transfer agreement is a vital tool in the buy-sell process. This kind of agreement should clearly describe the membership interest being transferred, the terms under which transfer is being effectuated and any restrictions that may apply to the transfer. In addition to the transfer restrictions, the agreement should spell out the purchase price or formula (if applicable) based on its method of calculation and the payment terms. If applicable, the agreement should also identify rights that must be exercised at closing, such as approval of transfer by other members, waivers of notice requirements and transfer conditions specific to membership interests, such as the waiver of preemptive rights. In a membership transfer agreement, the following key components should be considered:
Parties
Buyer and Seller
Membership Interest
Name of LLC, name of entity issuing membership interest, name of transferring member, membership interest to be transferred, distribution percentage, voting percentage (if applicable), effective date of transfer
Transfer Terms
Price or price formula, payment terms, any conditions that must be satisfied prior to transfer (i.e. lender approval or due diligence)
Discretionary Transfer Conditions
Put provisions, call provisions, first right of refusal agreement, drag along rights, successor member obligations, rights of first offer or offer of sale
Restrictive Covenant
Covenants not to compete, confidentiality, non-solicitation
Conditions to Transfer
Consents of lender(s), consent of other members (if applicable) and other restrictions
Representations
Warranties regarding business/transaction, disclosures about LLC, buyer/Seller
Necessary Agreements
Employment agreements, consulting agreements, buy/sell agreements, option agreements
Closing Requirements
All data required for closing, including certified resolutions or amended operating agreement
Formation of Transfer Committee (if applicable)
Transfer of funds
Legal Requirements and Factors to Consider
Legal considerations for state requirements and bylaws of the organization that affect the membership transfer agreement
When drafting a membership transfer agreement, it is important to keep in mind any legal requirements or restrictions that may apply to the transfer of membership interests. Not for profit organizations may have specific requirements or restrictions imposed by state law and/or their organizational bylaws in terms of how they can deal with their membership interests or members. For example, many not for profit organizations are subject to state laws that require membership transfers to be approved by the board of directors. In addition, there may be prohibitions or restrictions on the transfer of membership interests to or among members of conflicting classes, or to persons who are not qualified to hold membership interests.
In certain cases, a membership interest may become subject to a right of first refusal in favor of the other members of the organization. Applicable bylaws may set out the terms of this right of first refusal and include procedures that must be followed by the person holding a membership interest who wishes to sell or otherwise transfer the membership interest. In addition, it is recommended that the parties obtain specific advice with respect to the application of such requirements under their applicable state laws.
The Process of Creating a Membership Transfer Agreement
When preparing a membership transfer it is important for the management company to request that the selling member agree to indemnify the entity, management company and members from any liability which may arise as a result of the transferring member’s actions. A buyer of a membership interest should generally be required to sign an agreement to assume the obligations of the transferring member as well. With regard to payment of the purchase price for the membership interest, the selling member and the purchaser should agree upon a method of payment (in full or based on an agreed schedule) and whether the sale will be subject to any conditions. A buyer of a membership is typically required to assume a proportionate share of any indebtedness, which may have been incurred by the transferring member and to agree to hold the corporation or LLC harmless from any claims or liabilities which may be asserted against the transferor with respect to the membership interest. That obligation is distinct from the indemnification obligation which the transferor has as described above, but depending on the facts and circumstances, one obligation may be sufficient.
Purchase and sale agreement terms are frequently negotiated. To insure that the agreement covers all the terms of the transaction, it is important that both the purchaser and seller be represented by legal counsel and that the parties use counsel familiar with association purchases and sales.
Pitfalls to Avoid When Preparing Membership Transfer Agreements
Membership transfers can often present a range of challenges for both clubs and their members. One common friction point is when a member attempts to sell their membership to an individual who is not already a member of the club; in such instances, whether the prospective buyer is a current member at another branch of the same club, a current member at a different club, or a non-member entirely, the seller generally must obtain the consent of the club. Clubs may have legitimate concerns regarding the prospective buyer’s potential economic resources or their intent to comply with all club rules. Therefore, in transferring a membership, the club should preserve its right to reasonably vet the prospective member to ensure they meet all club standards.
Another challenge may arise if the member’s agreement has expired or if the seller disregards other requirements required to transfer the membership to a buyer. It is important to remember that any transfer of the membership must be made in accordance with the standard rules of membership transfer set forth in the membership agreement. Accordingly, if the transfer conditions of the membership agreement are not strictly followed, the club may have a valid reason to prevent the transfer to the named buyer.
Even if all conditions of the membership agreement are met, the membership transfer may be denied if the proposed buyer does not meet the club’s standards or if the membership transfer restrictions preclude the transfer to an ineligible buyer . For example, the transfer of a "junior" or "family" membership to an individual other than an eligible child or spouse of the current member, or to an individual who is of an ineligible age may be grounds for denying the transfer. Alternatively, if the membership is in name only, the member’s spouse may be entitled to use the membership, but the sale of that membership would not be considered valid.
When a transfer is denied, the club should be sure to fully explain the decision to the transferring member and the buyer. The rationale for the denial, as well as specifics regarding the member’s compliance with club policies and rules and the expiration of their agreement, should be communicated to both parties. Transparency in the decision-making process will make it easier for the transferring member to understand the club’s position, and hopefully will remove any perceived obstacles to an alternative transfer arrangement.
Typically, negotiation of the membership transfer provisions itself does not present any hurdles for the club as the terms are generally non-negotiable. However, if the club is willing to discuss possible alternatives and exceptions to its standard rules, it should be aware of the potential risks associated with doing so. In addition, the club should review the enrollment documents to ensure that the terms of any proposed agreement fall under the scope of the membership transfer provisions of the original agreement.
Resolving Disputed Membership Transfers with the Help of Mediation
Settling disputes pursuant to transfer agreements can be very time consuming and costly arrangements which are not always (or ever) in the best interest of unitholders or other members in the corporation or association. In these circumstances, mediation can play a helpful role in settling disputes. Mediation is a flexible process in which an impartial third party, or mediator, assists the parties in settling a dispute. It is a confidential process and the mediator cannot disclose information introduced in mediation without the consent of the party introducing the information, unless there are mitigating circumstances. Unlike arbitration or court processes, mediation does not promote an adversarial role by the parties. If anything, the process encourages parties to work together for a mutually beneficial solution. Mediation sessions are scheduled and all parties must consent to the process. The mediation process will typically involve parties meeting with the mediator in separate rooms. The mediator will move between rooms speaking to each party in order to help identify concerns and issues that need to be settled. Once the mediator has sufficient information, the parties will meet together with an agenda developed by the mediator. The mediator will assist the parties in coming up with possible options for the settlement of the dispute. If nothing else, the meeting will usually at least define the issues and attempt to clarify the positions of the disputing parties. If settlement negotiations are fruitful the mediator will draft a settlement document, collaboratively formulated by the parties, which is signed by the parties in the presence of the mediator as the final stage of the mediation process. Careful consideration should be given to inserting a mediation process into any membership transfer agreement. By recognizing that the transfer of membership interests can give rise to disputes, parties can address those concerns in advance and include a detailed provision for a system of dispute resolution that is efficient and cost effective.
Real-Life Examples of Membership Transfer Agreements
In a complex field like membership transfers in the not-for-profit sector, real-world examples help clarify and illustrate the nuances in the process. One such case is the transfer agreement that United Way of Chester County successfully negotiated to help Merriman Hill Community Center acquire its autonomy after several decades as a program under the central office. Through thorough due diligence and careful planning, Merriman Hill was able to identify continuity of service as a top priority, and the legal team was able to craft a transfer agreement that protected that goal.
Sometimes, however, transfers go awry. A Boston housing group lost its nonprofit designation after its merger into another organization. Because the group’s bylaws didn’t have sufficient provisions for a transfer of assets, the Board of Directors could not be convinced that it would be ethical—and legally permitted—to transfer the assets of the now-defunct group to the new organization. The Board tried to retain its status by operating as a fiscal agent for the new organization, and the IRS took even greater exception to this arrangement than it had to the transfer of assets, and stripped the group of its nonprofit designation. The moral of this case is that it is critical to draft the transfer agreement from the very beginning so as to consider issues that could arise later in the transfer process.
How to Prepare for Future Trends in Membership Transfers
As associations incorporate more technology into their membership transfer process, technology will play a larger role in how associations communicate membership transfers to other associations and work with one another to share data regarding terminating members.
Companies are already developing technology solutions for handling membership transfers between associations. So expect the next several years to see more complex programs that allow members to the opt into participating in a data exchange with other associations. These "data exchange" products will give associations an automated platform to share limited information about terminating members with other association who are in the "data exchange , " and to notify and/or gain consent from those terminating members who want to opt out of sharing their information with other associations.
Another area that will likely see change is the space where members interact. Already, some membership associations have examined whether the actual "space" in which they interact with their members is working for those members – i.e., which space(s) do members find to be efficient? Which ones do members prefer? Pages on a web site? Apps? Social media? Email? Other spaces or platforms?
