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: Rigidity in termination terms can trap parties in unfavorable relationships or create disputes on exit conditions.
Negotiation strategy
If you're the Company:
Ensure termination clauses provide flexibility to exit the agreement without excessive penalties. Negotiate for a reasonable notice period and clear exit obligations.
If you're the Members:
Seek to include a cure period for breaches to allow for remediation. Ensure that exit obligations are manageable and clearly defined.
Essential elements
1
Termination for Convenience
Allows ending with notice.
2
Termination for Cause
Ends on breach with cure period.
3
Exit Obligations
Return or destroy confidential info.
Action framework
ACCEPT
Propose edits if notice periods are too short or exit obligations are unclear.
EDIT
Reject if termination terms are overly restrictive or lack a cure period.
ADD
Add language for jurisdiction-specific requirements or additional exit obligations.
PRO TIP
Always ensure that termination clauses align with your business's operational needs and risk management strategies.
Example clauses
FAVORABLE
Preferred Termination for Convenience
"Either party may terminate this Agreement for convenience by providing the other party with thirty (30) days' written notice. Upon termination for convenience, neither party shall have any further obligations under this Agreement, except for obligations that expressly survive termination."
NEUTRAL
Standard Termination Notice
"Termination requires written notice delivered to the specified address."
UNFAVORABLE
Restrictive Termination Clause
"Termination is only allowed upon mutual agreement of both parties."
Fallbacks
High-Risk Projects
In high-risk projects, ensure termination clauses allow for quick exit to mitigate potential losses. Consider shorter notice periods and more stringent exit obligations.
Long-Term Contracts
For long-term contracts, include periodic review clauses to reassess termination terms and ensure they remain fair and relevant.
International Agreements
In international agreements, account for varying jurisdictional requirements and ensure compliance with local laws regarding termination and exit rights.
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