Breach of Shareholder / Operating / Partnership Agreement

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If you’re not the sole proprietor of your business, chances are you have others involved in its operations. Whether you’re managing a small family-owned business or a large corporation, the future of your business greatly depends on having a well-thought-out plan in place should unforeseen circumstances arise.

This plan should cover crucial aspects such as management structure and authority, daily operations, contingencies for the death or disability of partners or co-owners, and procedures for retirement transitions. These considerations are critical for ensuring the continuity and stability of your business.

You’ve likely already given these matters some thought, understanding the importance of legal agreements and had a shareholder, operating, and partnership agreement drafted for your business. These documents play a critical role in protecting business owners’ interests and ensuring your business runs smoothly.

Unfortunately, there are times in which the business will not run smoothly, and you and your partner will need to turn to your legal agreement in order to see the provisions in which govern the business in the event of a dispute, foul play or an unexpected life event such as death or disability of a partner.

Although terms such as shareholder, operating and partnership agreement are often used interchangeably, it’s important for Florida business owners to understand the nuanced differences among them. More specifically, how to read and interpret them in the event of a breach of the agreement or certain circumstances arise in which call for the enforcement of an operating, shareholder or partnership agreement.

First, we start off each section explaining some of the nuances of each type of agreement and what to do in the event your partner breaches your agreement.

Shareholder Agreement

A shareholder agreement is essentially a contract that outlines how a company should be operated. This document can address several important issues, including a shareholder’s obligations, conflict of interest rules, how to transfer shares and rights, and dispute resolution methods regarding the management of the business and its finances, capital, assets, and shares.

When there is a dispute between two more business partners, a carefully drafted Shareholders’ Agreement can provide for the valuation of the company and manage issues regarding sales, transfers, and other dispute resolution deadlocks.

Who is Included in a Florida Shareholder Agreement?

A Florida shareholder agreement involves all shareholders within a business. Shareholders are individuals who own stock in an organization, although not all shareholders hold an equal stake.

  • Majority shareholders have over 50% of the business’s stock and often include those in leadership positions, such as the CEO or the family of the founder.
  • Minority shareholders own less than 50% of the stock.

The majority of stockholders fall into the category of minority shareholders. With over 53% of Americans owning some form of stock in a company, they constitute the majority of shareholders.

When someone purchases stock in a business, they acquire a portion of ownership in that company. However, the average stockholder usually lacks sufficient stock to exert significant influence or make corporate claims unless they hold a majority share. This often leads to minority shareholder oppression.

What Does a Shareholder Agreement Cover?

A shareholder agreement comprehensively addresses aspects of the company and stocks that directly impact shareholders. These agreements often delineate stock pricing, shareholder rights, quantity, and ownership eligibility. Moreover, they outline the responsibilities of stockholders and establish legal protocols for stock management.

It’s important to recognize that regulations and conditions for shareholder agreements vary among states and countries. In Florida, specific guidelines are outlined in Florida Statute § 607.0732, which governs the effectiveness and parameters of shareholder agreements within corporations.

Breach of Shareholder Agreement

A breach of a shareholder agreement occurs when one or more parties fail to follow its terms and conditions. This agreement, a legal document, outlines the rights and responsibilities of shareholders within a company, covering aspects like voting rights, share transfers, and operational management.

Breaches can take various forms, including:

  • Breach of fiduciary duty: Shareholders, directors, and officers have a duty to act in the company’s best interests. Violating this duty, such as through self-serving actions or misuse of company resources, can breach the shareholder agreement and lead to legal action.
  • Ownership and control disputes: Shareholder agreements often define ownership and control parameters. Disputes may arise over interpreting these clauses or when one shareholder tries to exert undue influence over company affairs.
  • Non-compete or non-disclosure breaches: Provisions restricting shareholders from competing with the company or disclosing confidential information are common. Breaching these clauses can trigger a breach of the agreement.
  • Dividend payment failures: If a shareholder fails to meet dividend payment obligations outlined in the agreement, it constitutes a breach.
  • Unauthorized share transfers: Shareholder agreements typically require consent for share transfers. Unauthorized transfers can breach the agreement terms.

It is important for all shareholders to carefully review the terms of their shareholder agreement and work closely with legal counsel should they believe there has been a breach.

Operating Agreement

An operating agreement serves a similar function to a shareholder agreement but is designed specifically for LLCs, where members replace shareholders. It appoints managers, outlines procedures for unforeseen events like member disabilities or deaths, and establishes protocols for member buyouts. Much like shareholder agreements, the provisions within an operating agreement are diverse and adaptable.

While Florida law doesn’t mandate an LLC to have an operating agreement, legal professionals often stress its importance for an LLC’s long-term success. A well-crafted operating agreement sets forth the rights and responsibilities of each owner. It also governs how the LLC itself will be operated day-to-day.

What is Included in a Florida Operating Agreement?

Under Florida Statutes §605.0106, an operating agreement for LLCs is legally binding, even without explicit consent from the company. Members entering an LLC are automatically bound by the operating agreement’s terms, regardless of their signature. Initial members can proactively agree to terms that govern the LLC upon its formation.

Managers and transferees are also subject to the terms of the operating agreement, regardless of explicit consent. Even in single-member LLCs, the operating agreement remains enforceable. While exceptions exist under specific circumstances, operating agreements generally aren’t subject to the statute of fraud. They may also grant rights to individuals not directly involved in the agreement. Written agreements or records can establish membership or transfer rights without explicit signatures, provided certain conditions are met.
H3: Breach of Operating Agreement
Breaches of operating agreements can lead to legal disputes among members. These breaches might involve violations like transferring ownership interests without proper authorization or failing to adhere to agreed-upon voting procedures. They could also include improper distribution of profits or disregarding management protocols outlined in the agreement.

These breaches may involve violations of specific provisions outlined in the agreement. Here are some scenarios where breaches may occur and lead to litigation:

  1. Transfer of Ownership Interests: The operating agreement typically contains provisions regarding the transfer of ownership interests in the LLC. Breaching these provisions could involve transferring ownership interests without proper authorization or in violation of agreed-upon restrictions. For example, if the agreement stipulates that members must obtain approval from other members before transferring their interests, a breach occurs if a member disregards this requirement.
  2. Member Voting Requirements: Operating agreements often establish procedures for decision-making within the LLC, including voting requirements for significant actions or changes. Breaching these provisions may involve disregarding voting requirements or manipulating the voting process to gain an unfair advantage. For instance, if the operating agreement specifies that certain decisions require a unanimous vote of all members, a breach occurs if a member proceeds with the decision without obtaining unanimous consent.
  3. Distribution of Profits and Losses: The operating agreement typically governs how profits and losses are allocated among LLC members. Breaching these provisions could involve improper distribution of profits or failure to adhere to agreed-upon allocation methods. For example, if the agreement stipulates that profits should be distributed equally among members, but one member receives a disproportionate share, it constitutes a breach.
  4. Management and Decision-Making: Operating agreements often delineate the management structure of the LLC and the authority granted to members or managers. Breaching these provisions may involve acting beyond the scope of authorized powers or disregarding management protocols established in the agreement.

In the event of a breach of the operating agreement, aggrieved LLC members may pursue legal action to enforce their rights and seek remedies such as damages, injunctions, or specific performance.

Partnership Agreement

Similar to shareholder and operating agreements, partnership agreements govern the daily operations of the organization and establish protocols for resolving disputes and handling unforeseen circumstances. They also clarify the partnership structure, determining whether it operates as a general partnership with equal rights and liabilities among partners or as a limited partnership, where only general partners bear liability and limited partners are passive investors without managerial input.

What Should Be Included in a Florida Partnership Agreement?

When managing a partnership, having a detailed partnership agreement is crucial. Without one, default statutes like the Florida Revised Uniform Partnership Act may fill in gaps in unexpected ways. Therefore, it’s essential to have a comprehensive partnership agreement covering daily operations and potential contingencies. Key clauses to include are:

  • Allocation of Profits and Losses: Specify how profits and losses are divided among partners, considering differences in contributions.
  • Authority: Clarify each partner’s authority to bind the partnership, preventing unintended liabilities.
  • Contingencies: Address scenarios like the death of a partner to ensure the partnership is prepared for unforeseen events.
  • Dissolution: Define events that could trigger the dissolution of the partnership, providing clarity and preventing disputes.
  • Duration: Decide whether the partnership will have a fixed term or be perpetual, impacting its potential dissolution.
  • Percentage of Ownership: Disclose each partner’s ownership percentage, considering contributions of both labor and capital.
  • Decision-making: Establish decision-making processes, including voting rights and thresholds for passing decisions.
  • Resolving Disputes: Include procedures for resolving disputes or deadlocks, ensuring smooth operations even in challenging situations.

Breach of Partnership Agreement

Typically, the best course of action for addressing a breach of a partnership agreement is to refer to the agreement itself for guidance. If the agreement stipulates mediation or arbitration for resolving disputes, it’s wise to consult with legal counsel about pursuing these avenues.

However, the agreement may allow you to take legal action against the breaching partner to recover any losses incurred. It might also specify whether seeking liquidated damages is an option and, if so, the applicable amount.

In the absence of clear directives in the partnership agreement regarding dispute resolution, you can explore various options with the assistance of a business attorney:

  • Remove the partner from the partnership.
  • Initiate a lawsuit against the partner for the breach.
  • Pursue liquidated damages from the partner.
  • Engage in negotiations for a settlement.

These options may not be mutually exclusive. For instance, it may be possible to expel the partner from the business while simultaneously pursuing legal action. Depending on the agreement’s terms, you may also be eligible to claim liquidated damages to cover actual or anticipated losses as part of the litigation process.

Protecting Your Business and Relationships with The Campbell Law Group

As a business owner in Florida, experiencing a breach of agreement can lead to various repercussions and complexities. When agreements are violated, it can disrupt the normal functioning of your business and strain relationships with those involved. These situations often involve complex legal matters that require careful navigation to protect your interests. Moreover, breaches of agreement can be emotionally challenging, particularly when they involve individuals with whom you have longstanding relationships or close connections. Such situations may evoke feelings of disappointment, frustration, and even betrayal.

In such challenging times, seeking assistance from a reputable law firm specializing in business and corporate law becomes crucial. A seasoned legal team, like The Campbell Law Group, can provide invaluable support and guidance. They can help you understand your rights, assess your options, and develop a strategic approach to address the breach effectively.

Their experience in handling business disputes and breaches of agreement allows them to navigate the complexities of the legal process efficiently. Whether it involves negotiation, mediation, arbitration, or litigation, having experienced legal counsel by your side can significantly increase your chances of achieving a favorable outcome.

By partnering with a trusted law firm like The Campbell Law Group, you can mitigate the negative impact of a breach of agreement on your business and work towards resolving the situation with confidence and clarity.

Frequently Asked Questions

What are the potential consequences of a breach of these agreements?

The potential consequences of a breach of these agreements can include legal disputes, financial losses, damage to business relationships, loss of trust among partners or shareholders, and reputational harm to the business – which is why it is so important you sign with a dedicated and reliable law firm.

How can I identify if there has been a breach of agreement?

You can identify a breach of the agreement by reviewing the terms outlined in the shareholder, operating, or partnership agreement and comparing them with the actions or behaviors of the parties involved. Look for any violations or failures to meet obligations as specified in the agreement. If you notice any discrepancies, contact a qualified legal firm immediately.

What are my options if I suspect a breach of agreement has occurred?

If you suspect a breach of agreement has occurred, your options may include attempting to resolve the issue through negotiation or mediation, seeking legal advice to understand your rights and options, initiating legal proceedings to enforce the terms of the agreement, or pursuing alternative dispute resolution methods such as arbitration.

How can I enforce the terms of a shareholder, operating, or partnership agreement in Florida?

To enforce the terms of a shareholder, operating, or partnership agreement in Florida, you may need to file a lawsuit in court, seek injunctive relief to stop ongoing breaches, or pursue alternative dispute resolution methods like arbitration or mediation as specified in the agreement.

How can I protect my rights and interests in the event of a breach?

You can protect your rights and interests in the event of a breach by documenting the breach and gathering evidence to support your claim, seeking legal advice to understand your rights and options, and taking prompt action to address the breach in accordance with the terms of the agreement.

What role does mediation or arbitration play in resolving breach of agreement disputes?

Mediation or arbitration can play a crucial role in resolving breach of agreement disputes by providing a less adversarial and more cost-effective alternative to litigation. These methods allow parties to negotiate a resolution with the help of a neutral third-party mediator or arbitrator.

Can I seek damages for losses incurred due to a breach of agreement?

You can seek damages for losses incurred due to a breach of agreement, including compensatory damages to cover financial losses, punitive damages to punish the breaching party for wrongful conduct, and possibly attorney’s fees and court costs if provided for in the agreement or under applicable law.

What steps should I take to prevent future breaches of shareholder, operating, or partnership agreements?

To prevent breaches of shareholder, operating, or partnership agreements in the future, you should ensure that the agreements are clearly drafted, reviewed by legal professionals, and understood by all parties involved. Regular communication, adherence to the terms of the agreement, and proactive management of potential conflicts can also help prevent breaches from occurring.


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