Business agreements have an interesting life cycle.

They often receive considerable attention when a company is formed, a new owner joins, an important employee is hired, a lease is signed or a significant customer relationship begins.

Then the documents go into a file.

Meanwhile, the business keeps changing.

Revenue grows. Responsibilities shift. New employees gain access to sensitive information. An owner takes on a different role. A company adds locations, products, customers or vendors. Business partners who once made every decision together may no longer be involved in the same way.

The agreement, however, may still describe the business as it existed several years ago.

That may not cause an immediate problem. The weakness often becomes apparent when something changes: an owner wants to leave, a key employee resigns, a customer challenges a contractual obligation or business partners disagree about an important decision.

At that point, the question is no longer simply "Do we have an agreement?"

The better question may be: "Does the agreement we have actually address the business and relationship we have today?"

For Ohio business owners, periodically reviewing several key agreements can help identify unanswered questions before those questions become part of a larger dispute.

1. Operating Agreements and Shareholder Agreements

For a closely held business, the documents governing the relationship among owners can be some of the most important documents the company has.

For an Ohio LLC, the operating agreement can govern the relationships among members and between the members and the LLC. When the operating agreement does not address a particular matter involving those relationships, Ohio's Revised Limited Liability Company Act may govern instead.

That makes the operating agreement much more than a formation document.

Depending on the company's structure and circumstances, governing agreements may address questions such as:

• Who has authority to make particular decisions?
• Which decisions require approval from more than one owner?
• How are profits and distributions handled?
• What responsibilities does each owner have?
• What happens when additional capital is needed?
• Can another owner be added?
• What happens if owners reach a deadlock?
• How can an ownership interest be transferred?
• What happens if an owner stops working in the business?

Those questions can seem theoretical when owners are aligned. They become much less theoretical when they are not.

Ohio law gives significant importance to an LLC's operating agreement. The state's LLC statute expressly emphasizes freedom of contract and the enforceability of operating agreements.

When should you review it? A review may be appropriate after a significant change in ownership, management responsibilities, capitalization or the company's operations.

It can also be worth asking: "If the owners had a major disagreement tomorrow, would the agreement provide a useful framework for what happens next?"

If no one knows the answer without pulling the agreement out of a drawer, that may itself be a reason to review it.

2. Buy-Sell Agreements

What happens if an owner wants out?

The question sounds straightforward until you start answering it.

Can the owner sell an interest to anyone? Do the other owners or the company have a right to purchase it? How is the business or ownership interest valued? Does the purchase happen immediately or over time?

And an owner's departure is only one scenario. Businesses may also need to consider what happens following events such as death, disability or another circumstance that changes an owner's ability or desire to remain involved.

A well-considered buy-sell arrangement can establish a process while the owners are still able to discuss those questions cooperatively.

This is particularly important because transferring an economic interest and transferring the rights associated with ownership are not necessarily the same thing.

For example, under Ohio's LLC statute, assignment of a membership interest does not by itself entitle the assignee to participate in management or access company records. The statute also allows operating agreements to contain provisions addressing assignments and ownership interests.

That is one reason businesses should avoid assuming everyone knows what "selling my share" means.

A useful review may consider:

• Triggering events: What circumstances activate the agreement?
• Valuation: How will the interest be valued, and is the method still practical for the business today?
• Funding and payment: Who purchases the interest and how is the purchase price paid?
• Transfer restrictions: To whom can an owner transfer an interest, and under what conditions?
• Continuity: What happens to the departing owner's responsibilities and decision-making authority?

An agreement drafted when a company was worth substantially less, had fewer owners or operated very differently may deserve another look.

3. Employment and Confidentiality Agreements

A key employee's resignation can reveal weaknesses that were easy to overlook while that person was still working for the company.

Consider what some employees may have accumulated access to over several years: customer information, pricing, internal processes, vendor relationships, business plans, cloud storage, financial information, passwords and other company information.

Businesses should understand what agreements apply to employees and whether those agreements reflect the employee's current position and access.

That may include confidentiality provisions, intellectual-property provisions, employment agreements and other documents appropriate to the particular relationship.

But the document is only part of the picture.

Businesses should also consider their actual practices. Who has access to sensitive information? Is access limited appropriately? What company property has been provided? Is there a consistent process for changing access and recovering property when employment ends?

Those questions become especially important when a key employee leaves unexpectedly.

That is the subject we'll examine later in this series: how businesses can prepare for employee departures before the resignation arrives.

4. Customer and Vendor Contracts

Some of a company's most consequential agreements may also be the ones employees interact with every day.

Customer and vendor contracts can govern issues such as payment terms, pricing, delivery obligations, performance standards, warranties, renewal periods, termination rights, confidentiality, indemnification and procedures for resolving disagreements.

The challenge is that the commercial relationship may evolve while the contract stays the same.

Perhaps the customer now purchases substantially more than when the relationship began. A vendor may have become critical to operations. Pricing practices may have changed. Services may have expanded beyond the original scope. Employees may even be operating according to an informal process that differs from the written agreement.

That disconnect deserves attention.

A contract review should not only ask what the agreement says. It should also ask whether the company's current business practices still match it.

This is especially important with agreements that renew automatically. A contract can continue for years without anyone stopping to consider whether its provisions still fit the relationship.

5. Commercial Leases and Other Long-Term Agreements

A commercial lease is easy to think of as a real-estate document.

For the business occupying the property, however, it is also a significant long-term business commitment.

Over the life of a lease, circumstances can change considerably.

The company may grow or contract. Space requirements may change. Ownership may change. The business may want to relocate, expand, assign the lease or alter the property.

Understanding the existing agreement before one of those events occurs can help the business evaluate its options.

Depending on the agreement and circumstances, relevant provisions may address renewal, rent increases, maintenance obligations, improvements, insurance, assignment or subleasing, defaults and termination.

The same principle applies to other long-term business agreements.

The longer an agreement remains in place, the more opportunity there is for the business to change around it.

Don't Wait for a Dispute to Find Out What the Agreement Says

There is an important distinction between having agreements and maintaining them.

A document can exist and still leave important questions unanswered. It can also contain provisions that made sense when it was signed but no longer reflect how the business operates.

That does not mean every agreement needs to be rewritten every year.

It does mean businesses may benefit from treating important agreements as part of ongoing business planning rather than documents that are signed once and forgotten.

A periodic review might begin with five questions:

1. Has the business materially changed since this agreement was signed?
2. Have the people, ownership or responsibilities changed?
3. Does the agreement match how the parties actually operate today?
4. Does it address what happens when the relationship changes or ends?
5. Do the people responsible for running the business understand what the agreement requires?

The goal is not to predict every disagreement a business might encounter. It is to identify important questions while there is still time to address them deliberately.

If Your Business Partner Wanted Out Tomorrow, Would You Know What Happens?

That is one practical way to test your business's governing documents.

Could you determine whether the owner may sell an interest? Whether the company or other owners have purchase rights? How the interest would be valued? How the purchase price would be paid? And what happens to the departing owner's responsibilities?

Ohio's LLC statute gives operating agreements substantial importance and allows them to address significant aspects of the relationship among the company and its members. It also provides rules that may apply when an agreement does not address a matter.

Finding the answers after an ownership dispute begins is very different from discussing those questions while the owners are still working together.

That is why the best time to review the agreements protecting a business may be before anyone needs to rely on them.

Review Your Business Agreements Before They Are Put to the Test

Businesses change. The agreements governing them should be reviewed as circumstances change as well.

Roderick Linton Belfance LLP advises businesses on matters involving business formation and governance, contracts, ownership issues, transactions and business disputes.

If your company's agreements have not been reviewed since they were signed, or your business has changed significantly since then, consider having the documents reviewed in light of the business you operate today.

Roderick Linton Belfance LLP
Akron, Ohio
330-434-3000
RLBLLP.com

Ohio Law References

Ohio Revised Code Chapter 1706 - Ohio Revised Limited Liability Company Act

Ohio Revised Code § 1706.06 - Operating agreement; freedom of contract

Ohio Revised Code § 1706.341 - Assignment of membership interest

This article is provided for general informational purposes and is not legal advice. The application of Ohio law depends on the particular facts and circumstances involved.