When preparing notes for a lecture on the practice of law in 1850, Abraham Lincoln left posterity another eternal piece of wisdom: “Leave nothing for tomorrow, which can be done today.” While Lincoln’s advice rings true 150 years later for all attorneys, it is good advice—especially for business planning.
As seen in the last six months, the unpredictability of COVID-19 has caused myriad issues for businesses across the country and around the world. Construction companies are no exception. Government ordered “shutdowns” have halted all facets of the typical workday including transportation, production and daily commerce. Construction projects in New York were some of the first properties subjected to the dead stop whistle that was blown throughout the city and state.
These varying issues placed stress on construction businesses large and small and caused tension in the upper echelons of management. When tensions rise and ideas begin to clash about how to manage these problems, a proper infrastructure is necessary to address disagreements among managers, as well as other difficulties that would otherwise go unnoticed in times of comparative prosperity. Enter the shareholder/operating agreement.
Many construction businesses operate as S-Corporations and LLCs. These business structures provide various benefits to founders of the companies, whether shareholders of closely held corporations or members of LLCs. While there are benefits that come with utilizing these business structures, one point reins true for both: a governing document must be in place to address any issues that arise within the company.
Attorneys are often shocked when they hear a company does not have an operating or shareholder agreement or at least one that goes beyond memorializing the formation of the company. These documents provide a blueprint for companies in both flush and uncertain times. The absence of these documents cause a legal fallout that can leave a devasting wake of destructive litigation, where company decisions are left to a judge and the Court’s interpretation of state statutes in place of provisions agreed upon by the company’s founders. In the wake of COVID-19, an arduous legal battle could lead a company already at its breaking point to total ruin.
A governing document is essential to handle three situations.
Business interruption causes serious stress throughout a small business. It causes employees to worry about losing their jobs and forces employers to make decisions to preserve the company. operating and shareholder agreements provide managers and officers certain decision-making rules and requirements to ensure a form of continuity in their actions that cannot be challenged as arbitrary or discriminatory. Failing to have one in place leaves the business open to legal issues ranging from employment lawsuits to derivative actions of minority shareholders. Moreover, it is always helpful to analyze these documents on a yearly basis to make any necessary legal adjustments. Indeed, the CDC has provided the following guidelines for businesses interested in amending their already existing governing agreements to address specific issues caused by COVID-19:
Departure and Dissolution
The unfortunate reality of COVID-19 is that many small businesses have such a steep loss in revenue that they are forced to shut down, or at the very least, have to terminate employees or manage their departure. A viable and updated shareholder/operating agreement provides businesses with an orderly process for these possibilities. Terminated employees with member or shareholder rights in an LLC or corporation possess certain legal rights related to their interest in the company.
The governing agreement should provide an orderly buyout of the employee’s interest in the company including defining the triggering event for the buyout, the window of time to complete the purchase, and a designated formula or accounting approach to value the member’s or shareholder’s interest. Failing to define these facets of a buyout in writing open the door for legal causes of action including oppression and other allegations that could force the company into unwanted legal battles. It is better to address these issues now before the next big slowdown in revenue.
After the last six months, it has become clearer than ever how precious life is and how quickly it can be taken away. The loss of a member or shareholder in a small business due to an untimely death creates challenges like those of a termination or departure. How will the estate be paid out? Is there a triggering mechanism outlined in the governing agreement? Will the estate have voting rights? How will the estate’s interest in the company be valuated—either pursuant to the governing agreement or standard accounting practices? These questions should be answered in the agreement before they are asked in a courtroom.
Even in these harrowing times, remember that there is no better time than the present. As demonstrated here, governing policies give support to struggling companies. If there isn’t one in place, there should be now. If it was drafted hastily at the company’s inception, ask a professional to look over it and tighten up the loose ends. The small amount of money invested in a proper governing agreement can save a company exponential of that amount down the road.
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