An Amendment Too Far?: Limits on the Ability of Less Than All Members to Amend the Operating Agreement
FSU Business Review, Volume 16, June 1, 2017
46 Pages Posted: 7 Jul 2017
Date Written: June 1, 2017
Just as persons have the capacity to enter into contracts and to have those agreements enforced, they likewise have the capacity to amend those agreements into which they have already entered. In the case of the typical bilateral agreement, amendment will require the consent of both parties thereto. In a business venture in which there may be many owners, there is still sometimes seen the requirement that all of the participants therein approve any amendment to the operative agreement. While obtaining unanimous consent may at times be difficult, unanimous consent most clearly eliminates possible disputes as to the efficacy of the amendment and its effectiveness to bind non-consenting parties.
Partnership law consistently provides a default rule that amendment of the partnership agreement requires the unanimous consent of the partners; but the partnership agreement may alter this threshold to the effect that unanimous approval is not required. Under the law of limited partnerships, the default rule is again all of the partners (general and limited) must approve an amendment, but that threshold may be altered in the partnership agreement. The law of LLCs is not so consistent. While there is a significant number of jurisdictions that provide a default rule of unanimous approval of the members to amend the operating agreement, another set of jurisdictions allow for amendment by a mere majority or some other threshold of the members. Alternatively, by permitting a merger to proceed with the approval of less than all members, it is possible to bind persons to an operating agreement to which they have not consented.
If less than a majority of the parties to the contract, be it a partnership or operating agreement, is there (i) a limit to the extent such amendments may be effective to alter the fundamental contract of the parties, or (ii) a limit to the extent to which such amendments may be binding on those who do not consent?
This article will begin with a largely chronological review of cases that have assessed the enforceability of non-unanimous amendments. From there it will address the development of dissenters’ rights in corporations and the limited development of the same mechanism in LLCs, considering the viability of either as a means of militating the effect of non-unanimous amendments. The third and last component of this article will consider and largely reject various theories including fiduciary obligations and the implied covenant of good faith and fair dealing as limitations on the scope of amendments that may be adopted by less than all participants in the venture.
Suggested Citation: Suggested Citation