2022 Updates to Operating Agreements and Partnership Provisions: Capital Calls, Dilution, Removal, Breaches

Description

With the COVID-19 pandemic and economic uncertainties arising therefrom, many partnerships and LLCs have taken steps to improve or protect their financial position and to continue operating by making capital calls, diluting or removing members, or other measures.

Properly drafted partnership agreements and operating agreements will set out the obligations to fund business ventures, including the responsibility to contribute additional capital when needed. These governance documents also typically describe the consequences of failing to do so.

A partner's or LLC member's failure to contribute necessary capital may be regarded as a breach of obligations. There can be significant consequences for committing such a breach. For instance, in the case of an LLC, a repeated failure of a member to comply with financial obligations under an operating agreement may be grounds for removal or dilution where an operating agreement provides for such specified penalties or consequences. However, the exercise of any such remedies generally requires strictly complying with the operating agreement, the applicable state LLC act, and other applicable laws, such as the common law of the state of formation.

Counsel should consider whether updates should be made to their clients’ governance documents to provide flexibility to raise capital and take other actions to allow a company or partnership to address economic uncertainty, including to respond appropriately to members or partners who breach their obligations under such governance documents. As part of this consideration, counsel for partnerships and LLCs should consider the scenarios that could exist in various situations, including the history between the parties, the nature of the business, and prior contributions made by each party.

Listen as our expert panel discusses potential changes to partnership agreements and operating agreements that may provide flexibility for businesses when addressing economic uncertainty. The panel will address these and other factors on how LLCs and partnerships can best minimize the impact of the COVID-19 crisis on the governance and fund raising of such LLCs and partnerships.