Businesses are started every day through a variety of legal mechanisms --sometimes lawyers assist the owners in creating the business entity, and other times the owners do it themselves. In Florida, there are currently more than 1.4 million active limited liability companies (LLCs) registered with the Department of State, making it by far the predominate form of business entity. (1) Most of these LLCs are believed to be closely held --meaning they have relatively few owners and are not publicly traded. (2)
As could be expected, once initiated such businesses do not prove everlasting. The causes for owners' conflicts are numerous--often resulting in intractable disagreements over the control and direction of the company. Such conflicts are commonly referred to as "business divorces." Similar to a marital divorce, collectively owned property must either be divided or possibly kept intact to maintain its highest value. There are different paths to reach final resolution, which ranges from presuit negotiated settlements to formal court-imposed remedies under Florida's Revised Limited Liability Company Act (Florida's LLC statute). (3)
The Rationale for LLCs
Publicly traded corporations were designed to have their ownership interests easily and freely traded through an open market platform, such as the New York Stock Exchange. Over time, they have become heavily regulated by the Securities Act of 1933, Securities Exchange Act of 1934, and the Sarbanes-Oxley Act of 2002, which were enacted to protect the public from misleading statements, material omissions, and improper accounting concerning these companies.
The advent of LLCs came much later in time. Florida first legislatively authorized LLCs in 1982. (4) At that time, LLCs were created to provide tax benefits like a partnership and limited liability like a corporation. (5) However, as also explained by the Florida Supreme Court, LLCs are characterized by restrictions and limitations on "the transfer of ownership rights" and "the transfer of management rights." (6) It is these restrictions regarding ownership and management that make closely held LLCs desirable to own while at the same time making their business divorces more challenging. (7)
Does an Operating Agreement Exist?
Analysis of a business divorce begins with determining whether the owners (members) (8) have an operating agreement governing their relationship or will rely, by default, on the provisions of Florida's LLC statute. Importantly, a writing is not required to find that the owners have an operating agreement. As defined by Florida's LLC statute, an "operating agreement," whether specifically referred to as an operating agreement or not, may be "oral, implied, in a record, or in any combination thereof." (9) That said, companies choosing to have an operating agreement normally do so through a formal written document titled, "Operating Agreement," which is executed by the members and contains a provision stating that it can only be modified in writing. This prevents a potentially fact-intensive threshold controversy--whether an oral or implied operating agreement exists or whether a previously written operating agreement has been orally or impliedly modified.
* Absence of an Operating Agreement--Florida's LLC statute does not require an LLC to have an operating agreement of any type--written, oral, or implied. (10) Similar to couples marrying without a prenuptial agreement or people dying without a will, LLCs without an operating agreement will be governed solely by the default operating rules and procedures as set out in Florida's LLC statute. Businesses that often lack an operating agreement include those owned by family members or the more modern versions of closely held businesses--such as college roommates starting a tech company from their dorm room or their parents' garage. Indeed, the nature of the relationship between the owners or the lack of funds for professional legal advice may lead to the absence of an operating agreement. Like other types of divorces, the owners in closely held businesses sometimes fail to plan at the beginning of the relationship for what happens at its end.
* Operating Agreement Exists--Florida's LLC statute clearly contemplates that the members of LLCs may enter into an operating agreement to govern the terms of their legal relationship. (11) Some companies have standard boilerplate operating agreements downloaded from the internet. Others have industry-specific, lawyer-drawn or highly negotiated operating agreements. Regardless, an operating agreement brings the force of contract law to bear in determining the owners' relationship. (12) There are exceptions to this freedom to contract. There are rights and duties, as will be discussed, that are so fundamental that Florida's LLC statute prohibits them from being waived or modified by an operating agreement. (13) Operating agreements typically include specific provisions governing issues of ownership, control, transfer of interests, and valuation. Indeed, it is the ability to customize such provisions to particular types of businesses, owners, and circumstances that makes the operating agreement such a useful tool.
Operating and Financial Records
Distrust is frequently a factor in a business divorce. As an initial step toward resolution, owners will want to assure themselves that they have accurate information about the company's operations and finances. The cliche "knowledge is power" rings true here and is recognized in Florida's LLC statute, which mandates that members are entitled to certain operations and financial information and that such entitlement cannot be waived through the terms of an operating agreement. (14)
This includes the absolute right, without the need to show relevance or materiality, to basic company information, including the company's list of members, incorporation documents, then-effective operating agreements, the three most recent years of tax returns, the three most recent years of financial statements and records reflecting the amount of cash and agreed value of property or other benefits contributed and agreed to be contributed by each member. (15) These represent core documents to which all members in all circumstances are entitled.
Additionally, members are entitled by Florida's LLC statute to an even broader scope of information regarding the company's activities, affairs, and financial condition to the extent such information is "material to the member's rights and duties" (16) or "reasonably related to the member's interest." (17) What company information may be material or related varies depending on the dispute and circumstances in each case. Sometimes members can easily identify the specific information that is material or related--other times members are so far removed from the company's management that they have difficulty knowing where to begin. The company's financial and accounting records are most always a good place to start--especially where issues of either mismanagement or valuation of a member's interest are involved.
The company's financial and accounting information is probably entered, kept, and organized through an accounting software program. It is often wise for a member or a member's attorney to hire an accountant to assist in formulating specific requests, obtaining the information in usable form, and reviewing and analyzing the information ultimately provided. Without the proper accounting software and understanding of its full functionality, a member's ability to obtain and analyze the company's financial and accounting information can be substantially hindered. An expert accountant consulted in the beginning of the process can save a member significant time and money in the long run.
If the company refuses to allow a member access to material and related information, Florida's LLC statute accords them the right to compel access through court intervention. (18) If the court orders access, the court "shall" also order the company to pay the costs, including reasonable attorneys' fees incurred by the member to obtain the order. (19) A court may...
