An Operating Agreement governs internal management and ownership rights of a limited liability company. This playbook highlights voting procedures, capital contributions, and dissolution mechanics.
Why This Matters: Non-compliance can lead to fines, sanctions, and reputational damage, impacting the transaction and long-term viability.
Negotiation strategy
If you're the Company:
Ensure that compliance clauses are comprehensive and cover all necessary legal and industry standards. Negotiate for strong audit rights to verify compliance.
If you're the Members:
Focus on limiting the scope of compliance obligations to what is reasonable and achievable. Seek to include provisions that allow for notification and remedy of non-compliance issues.
Essential elements
1
Compliance with Laws
Adherence to all applicable laws.
2
Audit Rights
Rights to verify compliance.
3
Notification of Non-Compliance
Obligation to notify of non-compliance.
Action framework
ACCEPT
Propose edits when compliance obligations are too broad or lack clarity.
EDIT
Reject clauses that do not include audit rights or indemnification provisions.
ADD
Add clauses for industry-specific compliance and detailed audit rights.
PRO TIP
Always ensure compliance clauses are tailored to the specific industry and transaction context.
Example clauses
FAVORABLE
Preferred Compliance Clause
"The Parties shall at all times comply with all applicable federal, state, and local laws, regulations, and ordinances in the performance of their obligations under this Agreement."
NEUTRAL
Audit Rights
"Each Party grants the other Party the right to conduct audits, at reasonable times and upon reasonable notice, to verify compliance with the terms of this Agreement."
UNFAVORABLE
Unfavorable Compliance Clause
"Clauses lacking audit rights or indemnification provisions require approval."
Fallbacks
High-Risk Projects
In high-risk projects, ensure compliance clauses are more stringent and include frequent audits to mitigate potential risks.
International Transactions
For international transactions, include compliance with international laws and standards, and consider local legal advice.
Technology Agreements
In technology agreements, ensure compliance with data protection and cybersecurity regulations is explicitly covered.
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