Dissociation is the withdrawal of a member from an LLC. It can be either voluntary or involuntary. The operating agreement can vary or eliminate the manner in which a member can dissociate. See generally, Iowa Code 489.110 (2009). What the operating agreement cannot do is eliminate the power of a member to dissociate, rightfully or wrongfully. Iowa Code 489.601(1)(2009).
The Act lists 14 events that trigger dissociation of a person as a member of the LLC. See 489.602(2009). Rather than repeat the law, in summary, a person is dissociated from the LLC (1) by express will to withdraw, (2) an event stated in the operating agreement occurs, (3) the person is expelled pursuant to the terms of the operating agreement, (4) the person is expelled by the unanimous consent of the other members because (a) the LLC cannot lawfully carry on its business with the person as a member or (b) the person transferred all of the person's transferable interest (other than for security purposes or due to a charging order), or (c) the person is a dissolved corporation, LLC or partnership, (5) the status of the person materially changes or its transferable interest is distributed. Please see 489.602 for the complete, complex list.
A member's dissociation is wrongful if (1) it is in breach of an express provision of the operating agreement or (2) it occurs prior to termination of the LLC and is due to withdrawal by express will, expulsion by judicial order, the member in a member-manager LLC becomes a debtor in bankruptcy or willful dissolution or termination of the member other than a trust or estate.
When a person is dissociated as a member the person no longer has the right to participate in management of the LLC, if the LLC is member-manager the person's fiduciary duties as a member end going forward, and, with a couple of exceptions, the person becomes a transferee.
As will be seen in a future post, transferees who do not become members have few rights other than to receive distributions. They have no role in the management of the LLC, no right to information under 489.410, and no right to bring a derivative action. One right granted to transferees in the Iowa Act not found in the RULLCA is the right of a transferee to seek judicial dissolution if the managers or those members in control of the LLC have acted illegally, fraudulently or oppressively. See Iowa Code 489.701(1).
To avoid being a mere transferee, it might behoove a transferee who does not expect to become a member to have the transferring member keep 1% of the transferable interest and then exercise its governance rights in a manner that protects the transferee.
The Iowa Act diverges from the RULLCA by adding 489.604. This section permits dissociation by a member (if the operating agreement does not cover the topic or waive applicability of 489.604) if an amendment to the certificate of organization or operating agreement adversely affects the member's transferable interest any of six ways described in 489.604 (e.g. alters or abolishes right to distributions, right to vote, etc.)