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

This CLE course will address updates to operating and partnership agreements that corporate counsel may want to consider based on recent court decisions and state corporate statutory updates, including Delaware. The panel will address updates and issues related to drafting or revising governance documents to meet business needs in times of economic uncertainty, including making capital calls, removing members, or taking other actions to address issues arising out of the current evolving economic environment.

Economic fallout from the pandemic, the administrative trade and tariff wars, and generative AI's acceleration towards a potential "Great Job Replacement" has companies worried. 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, and taking other measures as needed to ensure viability.

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

A partner's or LLC member's failure to contribute necessary capital may be regarded as a breach of obligations, and the consequences for such a breach can be significant. 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 penalties. However, exercising these remedies generally requires strict compliance with the operating agreement, the applicable state's LLC act, and other applicable laws, such as the common law in 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 as necessary to allow the company or partnership to address economic uncertainty. As part of these considerations, counsel 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 and operating agreements that allow for flexibility when addressing current and future economic uncertainty.