Closely held companies are like marriages but without the sex or kids to hold things together. And just like some marriages, closely held companies can fall apart. Sometimes these “business divorces” and the painful litigation they generate are inevitable. Business partners have different personalities, expectations regarding finances and strategies for interacting with the world and one another. Some business divorce litigation involving limited liability companies might be resolved more easily or avoided altogether with the operating agreement’s inclusion of thoughtfully drafted provisions that address the owners’ fiduciary and other duties.
Many transactional practitioners devote significant time to drafting and refining complex capitalization structures and distribution waterfalls in their operating agreements. In our experience, nearly all business divorce litigation arises from alleged breaches of fiduciary duties. In such cases, the operating agreements typically are either silent as to what fiduciary or other duties govern the relationships between the parties or give the topic short shrift. These shortcomings may be the result of the mistaken belief among many practitioners that fiduciary duties are neatly defined by statute or caselaw and need not be spelled out in the agreements themselves.
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