LLC’s Are Governed by an Operating Agreement
Video Transcribed: Tulsa Cannabis Business Attorney Isaiah Brydie coming at you with another video. And this video is going to be all about disputes between members in a limited liability company. So, what happens when let’s say you guys have a dispute as far as whether or not the business should go left or right, if there’s potentially been some fraud or a breach of someone’s powers, things like that what happens?
So as a general matter LLCs are governed by what’s called an operating agreement. In that operating agreement, you’ll have terms set out as far as how much someone’s ownership interest in the business is, what their percentage interest in the business is, meaning how much money or how much of a percentage of the profits of the business they are lawfully allowed to take, how much their voting strength is, the principal place of business on the operations, how member meetings go, all of those different types of things.
So, whenever disputes come up it’s very, very important that you always refer back to the operating agreement on a business. Sometimes there are limited liability companies that don’t have operating agreements. So then they move over into some of the default provisions of the Oklahoma Limited Liability Company Act.
And we’ll get into some of those briefly. But as a general matter, if there is an operating agreement on the business then we’re always wanting to look back to that operating agreement.
But however, there are some general terms that go outside of the scope of the operating agreement. One of those is going to be the fiduciary duties of the members to the operating agreement.
Now there is case law as far as whether or not fiduciary duties, which I’ll get into defining those in a second, are controlling on a business entity if they have been contracted out of that operating agreement.
As a general matter you should never give those away even if it’s for yourself but that’s an aside. Going into what your fiduciary duties are as a member of a business there are two general ones that are basic foundations of business law.
These are carried through to limited liability companies, corporations, almost everything. The first one is going to be your duty of loyalty, basically meaning that in any situation concerning the business you are putting the interests of the business first before your own interests and also before any other interests of any other businesses or any other people, it’s self-explanatory.
The second fiduciary duty is the duty of care. With that, that is basically saying that with your dealings with the business you are going to conduct yourself the same way that any reasonable prudent business person would in the same situation with the same information that you have at that present time. Those are really, really important factors on that duty of care.
So for example, this is an example where fiduciary duties might come into play. Let’s say that the business wanted to acquire a grow operation for example. And then there are three members on this limited liability company, each one of them has one vote as laid out in the operating agreement. And let’s say that one of those members owns this grill company that the other business wants to acquire.
In that situation, what you’re going to be looking at is that individual who is an interested party number one may or may not even be able to vote in that matter because he’s an interested party. Obviously it depends on what’s in the operating agreement but he may or may not or she may or may not be even able to vote because they’re an interested party.
The second thing is, is that even if they can’t vote that member still has to disclose if they are an interested party to the transaction. Because obviously they will be receiving compensation for selling their grower business to the acquiring business. So, there will also be that duty of disclosure.