The Value of Operating Agreements

Small business owners have enough challenges considering taxes, regulations, laws, and other barriers to success. Having poorly thought out operating agreements doesn’t need to be on a list of challenges. The recent case of Hamer v. Southeast Resource Group, Inc., et al., highlights this issue.
John Hamer and Southeast Resource Group, Inc., were members (i.e. the owners) in a limited liability company called Action Financial Company, LLC. The owners had enough forethought to have a written operating agreement in place. Hamer and Southeast Resource Group, Inc., however, came to debate whether the terms of the operating agreement required that Hamer "must disclose and make available to [Action Financial Company, LLC]…" the new business opportunity that Hamer came across or whether the exception applied. The disclosure exception provided, "no such disclosure or offer shall be required with respect to business opportunities that are not within the scope and purpose of [Action]." Hamer said the exception applied, while Action and Southeast said the disclosure was mandatory.
Litigation followed and ultimately turned on the express word choice within the operating agreement. The court agreed with Hamer and found that the new business opportunity was not required to be disclosed or made available to Action as it was "not within the scope and purpose of [Action]."
An operating agreement is the LLC's controlling document and sets forth the "rules" for the members to follow. Although an operating agreement is not mandatory, it is good practice to have one in place. In this particular dispute, the written operating agreement provided a solid framework for the court to follow in resolving the dispute between the owners.
Hamer v. Southeast Resource Group, Inc., et al., Case No. M2015-00643-COA-R3-CV, March 3, 2016.