Creative Ways to Contractually Minimize the Chances of Shareholder Dispute Litigation
When two new clients recently came in to have an Operating Agreement prepared for their newly created LLC, they indicated that they had read my website. Since I had experience in litigating shareholder disputes, they wanted to know how to make a “bulletproof” Operating Agreement, so that there would never be litigation if they disagreed over an issue.
We spent a considerable amount of time trying to come up with a dispute resolution mechanism, but they could not agree on a third party to decide any significant disputes if they ever had one. The only person they both trusted was a minister, but they did not want him making business decisions on their behalf.
After going several rounds trying to figure out how to contract against every possible contingency, they finally realized that what I told them in the first meeting we had was correct – you can’t possibly guard against, and contract around, every single contingency. The best you can do is limit the odds of such litigation by making the agreement as fair to everyone as possible.
We came up with the idea of creating spheres of expertise for both of them and ensuring that the other was comfortable ceding control over such area. For example, at the end of their negotiation, one of them had the final word on all matters relating to sales and marketing, while the other had final say on personnel, staffing and salary issues. They also agreed that, if they could not agree on something truly major – like whether they should construct a new facility instead of leasing, or whether to expand the company – the business partnership likely would not work in the long run if a solution were forced upon them from the outside.
The compromise reached was, if one of them wanted to undertake a major change (like expansion) and the other did not, the one who wanted to take action had the right to buy out the other at fair market value.
As a shareholder dispute litigator, I found it truly refreshing that these two business owners found a way to contractually limit, as much as possible, the risk of costly litigation in the future. By taking the time to really think through these issues at the outset, and spending just a few thousand dollars in legal fees, they went a long way toward ensuring that they would not some day have to spend hundreds of thousands of dollars on shareholder dispute litigation.
If everyone thought through these issues as carefully as these clients at the outset, shareholder dispute litigators would be all but out of business.