Importance of Reviewing your Operating Agreement: Certain Practical Considerations in Light of the Coronavirus (COVID-19) Pandemic
April 7, 2020
In these uncertain times, companies need to make quick decisions to address numerous operational concerns that they are facing in light of the coronavirus (COVID-19) pandemic. As companies make these decisions, it would be prudent for the managers, members and officers of limited liability companies to review the terms of their company’s Operating Agreement to ensure that their actions comply with the terms thereof. If they do not, then they potentially risk encountering disputes and delays that could hinder effective and efficient decision making. Such actions might be arguably legally ineffective, exposing both the companies and managers and officers to potential liability, or simply risk disputes and delays that could hinder effective and efficient decision making.
While this is not intended to be an all-inclusive list of all the provisions in an Operating Agreement that the pandemic may implicate, these bullet points highlight certain common provisions that should be closely reviewed. Other entities, such as corporations, may have certain similar and/or additional provisions that should be reviewed under their governing documents.
- Capital Calls: What is the process for making a capital call (e.g., who has the authority to make a capital call, how much notice must be provided, what information must be included in the notice, etc.)? How quickly do the members have to make their additional capital contributions? Are there instances in which contributions can instead be made by way of a loan? What is the consequence to a member if he/she/it decides not to make an additional capital contribution? For example, if the consequence is that the non-contributing member is diluted, does the Operating Agreement specify the formula for calculating the amount of that dilution?
- Voting Rights: Whose consent is required to take certain fundamental actions, such as approving a loan amendment? What are the threshold levels for consent (e.g., a majority of the members and/or managers? a "supermajority"? unanimous consent?)? Are there any bifurcated consent requirements (e.g., member consent is required for the incurrence of indebtedness equal to or in excess of a specified dollar threshold, but the managers can approve the incurrence of indebtedness below that threshold without seeking the members’ consent)?
- Existing Agreements: Are there other agreements that need to be reviewed to ensure that the desired actions do not create a breach or default under any of those agreements? What other contracts should be closely reviewed in light of the circumstances that company is facing, such as leases and loan agreements? Are there any personal guarantees in place and, if so, in what instances may they be triggered?
- Buy-Sell Provisions: Does a member have the right to require that the company and/or other members buy him/her/it out under certain circumstances? If so, what is the process for such buy out and how is the purchase price determined?
- Dissolution; Other Options: If dissolution is the desired path, whose consent is required to approve a dissolution? What do the company’s assets and liabilities consist of? Does the company have any creditors? If the company is contemplating dissolution due to cash flow concerns, for example, are there other avenues it may want to explore instead (e.g., potentially: filing for bankruptcy, seeking concessions on rental payments, renegotiating loan terms with its lenders, applying for small business or other loans, reviewing insurance policies, etc.)?
Our firm can assist you with analyzing the foregoing provisions and the impact thereon on you and your company, and can also provide you with insight and assistance on a host of other issues that may arise during the COVID-19 pandemic. For more information, please contact: Lindsay R. Kaplan at (212) 554-7880 or firstname.lastname@example.org and Jeffrey M. Davis at (212) 554-7837 or email@example.com.