A Profits Interest Does Not a Make Someone a Member of a LLC

Calling someone a “member” does not necessarily make them one. In Brothers v. Keypoint Intelligence, LLC, the Delaware Court of Chancery dismissed a books and records action by a former CEO who held a profits interest, finding he was never actually admitted as a member of the LLC and therefore lacked standing to inspect company records.

Key Takeaways

For Companies: Do not casually use terms like “member” or “membership interest” when what you mean is a profits interest or economic-only participation. Sloppy terminology invites costly litigation.

For Drafters: If you intend to grant only economic rights without full membership, say so explicitly. Update your operating agreement to clearly define profits interests as a distinct category, and specify that recipients are not admitted as members.

For Recipients: If you are offered a “profits interest,” do not assume you are becoming a member with governance and information rights. Clarify the scope of your rights in writing before signing.

Default Rules: Under Delaware’s LLC Act, an assignment of an LLC interest carries only economic rights unless the operating agreement or unanimous member consent provides otherwise.

Background

Mack Brothers joined Keypoint Intelligence, LLC (“KPI”) as CEO in 2019 and was promised participation in a “profits-incentive pool” representing up to 4% of the company’s equity. Throughout his employment, KPI loosely referred to Brothers as a “profits-interest member” and included him on its internal list of members. After his termination in 2021 and a successful arbitration over the vesting of his profits interest, Brothers demanded access to company books and records under 6 Del. C. § 18-305. KPI refused, and litigation ensued.

The Holding

The Court held that Brothers was not a member of KPI and therefore lacked standing to compel inspection. Three key findings drove this result:

1. A capitalization table is not a membership ledger. Brothers appeared on KPI’s internal “list of members,” but the Court found this list functioned merely as a capitalization table to track economic interests—not as proof of membership status conferring governance rights.

2. The employment offer was not a membership admission. KPI’s operating agreement required that new members be admitted upon “mutually agreed-upon terms and conditions.” The employment offer discussed only Brothers’s economic rights and his role as CEO—it never mentioned membership, voting rights, or management authority.

3. No capital contribution, no membership. The operating agreement required members to make capital contributions. Brothers made none, was never subject to capital calls, and understood he had no such obligation.

Applying the default rules of the Delaware LLC Act, the Court concluded that KPI’s transfer of a profits interest constituted an assignment of economic rights only—not a full membership transfer.