Choosing the Proper Business Organization: CLE Lecture

I will be lecturing at a Bridging the Gap CLE on Sunday October 2, 2011 at New York Law School on the types of business organizations, choosing the appropriate entity for your business, and drafting Operating Agreement/By Laws to meet the needs of the members/shareholders.   http://www.marinolegal.com/

Joint Venture: Have a Shotgun Clause (Buyout Provision)

You have been very fortunate and found a company that is willing to manufacture and distribute your product in a targeted market, and the other party is proposing you enter into a joint venture whereby both parties would share certain expenses and net income from the venture.  Potential joint venturers obviously enter into a venture with the best of intentions and as a result often fail to consider what happens if a dispute arises.  Therefore, it is very important you work with an attorney to draft a well drafted joint venture agreement that should include a "Shotgun Clause"  (buyout provision).

Under a typical Shotgun clause, one or both parties will have the right to buy out the other party based on expressly stated terms.  The clause should detail both:

          (A) The method of determining the value of the interests to be purchased:  for example, the price can be fixed in the JV Agreement or the value can be determined by an independent third party; and

          (B) The mechanism for exercising the buy out, including notice, payment terms and closing details.

Also, make sure that the JV agreement addresses indemnification with respect to liabilities arising in connection with the JV:  the former JV partner should not be liable for claims arising from events after the buy out, and may also want to try to avoid liabilities for claims from events prior to the buy out.  These are points that should be negotiated and then addressed in the JV Agreement.



 

Management of the LLC: Member or Manager?

As I have noted in previous posts, New York law allows the members of a limited liability company (LLC) a great deal of flexibility in drafting the Operating Agreement.  And, if you do not take advanatage of this flexibility, you may end up with an unfavorable management structure.  Under the New York Limited Liability Company Law sections 401 and 408, an LLC can either be member Managed or Manager Managed.  These are very different:

               1.  Member Managed:   In a Member Managed LLC, any member has the power to bind the LLC, open bank accounts, and make management decisions.  NYLLCL section 401.

               2.  Manager Managed:  The entity is managed by a manager appointed by the members.  NYLLCL section 408.

Unless you include a provision in the Operating Agreement, under New York law the LLC will be deemed to be member managed, giving each member the authority to bind the LLC.

Whatever, you prefer, make sure you consider the proper management strucure for your LLC, and include a provision in the Operating Agreement addressing this issue.  http://www.berkmanlawfirm.com/

Right of First Refusal: A Practical Pointer

A right of first refusal is an important provision that should be included in a variety of transactions/contracts -- for example, in By Laws/Operating Agreement, giving the corporation the right to buy the shares of a selling shareholder or giving a shareholder the right to buy shares offered by the corporation; or giving partners in a joint venture the right to buy assets the JV wants to sell.  An expereienced business lawyer will help you understand the importance of a properly drafted right of first refusal and the risks of failing to include well defined terms relating to the rights. See http://www.berkmanlawfirm.com/

The key to a properly drafted right of first refusal is detailing the process for exercising the right.  Make sure the right of first refusal addresses the following:

   1.  The party who has the right must be given written notice of the bona fide third party offer;
   2.  If you are the party that has the right, you want a reasonable time period to exercise the right;
   3.  If you are the selling party you want to limit the time frame for the party holding the right of first refusal to respond because if it is too long it could scare off potential third parties;
   4.  The mechanism for exercising the right should include a written exercise within a defined period following notice of the 3rd part offer, the exercise should be accompanied by a deposit amount, and there needs to be a time frame for the closing; and
   5.  If the 3rd party offer fails to close, you want the right to of first refusal to apply to any future offers.

Again, make sure the terms of any right of first refusal includes clear parameters for notice and exercise of the right.

Choosing the Proper Business Organization

I will be lecturing at a Bridging the Gap CLE on Staurday Setpember 17, 2011 from 2-4pm on the types of business organizations, choosing the appropriate entity for your business, and drafting Operating Agreement/By Laws to meet the needs of the members/shareholders.  See Marino Legal  http://marinolegal.com/

Penny Wise Pound Foolish: Have A Lawyer Draft Your LLC Documents (Part 4)

Can you have different classes of members in an Limited Liability Company under New York Law.  The short answer is YES.  The longer answer is still "Yes", but generally a form Operating Agreement will not provide a mechanism to create more than one class of members.  Again, this is why it is important to engage an experienced business attorney prior to formation of the LLC.  

Entrepreneurs should understand that an LLC is a very flexible business structure giving its members the opportunity to vary both management and financial rights through the Operating Agreement.  Often, potential partners fail to recognize that not all membership interests need to be created equally.  In fact, the Operating Agreement is the mechanism for formulating membership rights reflectling a member's contribution (monetary or otherwise) to the business.  For example, the Operating Agreement can include the creation of different classes of membership interests (like the by laws of a corporation) which vary not only the economic rights of a member but also limit or expand voting rights.  

The fact that New York allows substantial flexibility in drafting the Operating Agreement is important because:

• A new business can be established with partners whose interest in the LLC reflects not just monetary but other contributions (f.e., sweat equity); and
• As the business develops the LLC can use its equity interests to raise funds without automatically sacrificing management control (if the investor is willing to agree).

As always, don't be Penny Wise and Pound Foolish.  Consult an experienced business attorney prior to starting your business. 

Membership Interests, Operating Agreement; Operating Agreement; LLC

Penny Wise Pound Foolish: Have A Lawyer Draft Your LLC Documents (Part 3)

You copied an Operating Agreement you found online, signed it as is, and now you learned that your business partner, who owns 50% of the membership interests, needs money and assigned the interests to his friend, who you find intellectually and ethically challenged.  You grab a copy of the Operating Agreement, read the clause on assignment of membership interests, and find it allows any member to assign the total membership interests without consent of the other member.  Guess what, you now have a new partner.       

If the OA had been drafted by an experienced business lawyer, it would have included a provision requiring consent of and/or giving the non-selling partner a Right of First Refusal to purchase the membership interests on the same terms as offered to the third party. On the other hand, if you believed that not hiring a business lawyer was a good way to conserve resources, you now have a very undesirable business partner because of this Penny Wise Pound Foolish behavior.  

Penny Wise Pound Foolish: Have a Lawyer Draft Your LLC Documents (Part 2)

On many occasions I have seen new businesses seek to save money by either copying an LLC Operating Agreement they found on the Internet or purchasing one from a website that is happy to sell you a form (while reminding you it is not a substitute for legal advice).  Guess what:  you get what you pay for!  The Operating Agreement should be a product of the discussions among the founding LLC members and the drafting attorney, and not simply a form found online.  An Operating Agreement is a contract, and other than certain rights/obligations as may be mandatory by the governing state statute, the terms can be varied as agreed by the members (owners). 

Today's example:  How/Who will manage and control the operations of the LLC?  If you are not careful, you could find yourself at the mercy of a partner who unfortunately fails on his/her initial promise to contribute to the business (time, money, etc), but still has the same management rights as you.

         1.  How is the LLC Managed:  LLCs can be:

              a. Member Managed:  which means each member has the right to manage the operations of the LLC and make ordinary business decisions.  Any member can, for example, bind the LLC to a contract -- although extraordinary actions still will require member consent.  Under New York law, for example, Member Managed LLC is the default provision unless altered by the Operating Agreement.

             b.  Manager Managed:  means that the Manager is a person who is appointed in the Operating Agreement or in a separate consent agreed to by the members (and the person need not be a member of the LLC).  In a manager managed LLC, the appointed manager can bind the LLC,

open accounts, etc. and not any one member.

        2.  Who is the Manager?  The Operating Agreement should set forth who will be the manager (as well as how he/she can be removed).  If you are the member investing all the time and money, then you likely want to be the manager.  Regardless, make sure a decision as to who will be the manager is agreed upon, and then stated in the Operating Agreement.

If you have any questions regarding drafting an Operating Agreement, please feel free to contact me.