Springing Members are a tool that a structured finance Lender can use to reduce the risk that a Borrower will dissolve under state law. Under most state laws, an LLC that does not have at least one member will dissolve. The risks of a state law dissolution proceeding are similar to those of a bankruptcy, and typically involve the liquidation of the LLC’s assets and the distribution of proceeds in accordance with the LLC Agreement.
Borrowers in structured finance transactions are often single member LLCs. To reduce the risk that the Borrower will be dissolved under state law if the LLC ceases to have a member, Lenders should require the Borrower to have two “Springing Members.”
A Springing Member is a person or entity that signs the Borrower’s LLC Agreement for the limited purpose of springing into place as a “Special Member” of the Borrower in the event that the Borrower’s existing member ceases to be a member for any reason. This mechanism ensures that the Borrower is not dissolved under state law for lack of a member.
How it Works
Here's how the process works:
The Special Members automatically cease to be members of the Borrower upon the admission of a substitute member of the Borrower.