Can My Operating Agreement BeUsed Against Me in a Dispute?

You probably signed the operating agreement years ago, during the optimistic early days of the business, when the relationship was good and everyone assumed disputes would be resolved like adults. You may have read it then. You probably haven't looked at it since. Somewhere in that document there is language your partners understand better than you do right now, and that gap in understanding is costing you.

It might be a buyout formula that produces an absurdly low number. It might be a buy-sell provision that gives your partners the right to purchase your interest at a pre-set price if certain events occur. It might be a drag-along clause. It might be a provision that voids your interest if you stop providing services to the company. Whatever it is, it's working against you in this dispute.

buy-sell provisions and how they actually work

Buy-sell agreements are supposed to provide an orderly exit mechanism. In practice, the person drafting the agreement — or the attorney representing the majority's interests — shapes the mechanics in ways that favor the controlling owners.

Shotgun provisions, where one partner names a price and the other must either buy at that price or sell at that price, sound symmetric but favor the partner with more cash and better information about what the business is worth. Mandatory appraisal provisions often specify the methodology, the type of appraiser, or the standard to be used, and those choices embed assumptions that can be unfavorable to a minority owner.

Wisconsin courts will generally enforce buy-sell provisions that were entered into voluntarily and are not unconscionable. But enforceability isn't automatic. Courts look at whether the agreement was properly adopted, whether it was amended without proper authorization, and whether its application in the current circumstances was contemplated when it was signed.

forfeiture clauses and what courts do with them

Some operating agreements include clauses that say if a member is terminated, resigns, or engages in specified conduct, their ownership interest is forfeited — reduced to zero or purchased at book value. These clauses are aggressive. They're also the provision your partners may be pointing to right now.

Wisconsin courts do not enforce all forfeiture clauses automatically. Courts look at whether the forfeiture is a reasonable protection for the business or a penalty designed to strip an owner of value improperly accumulated over years. Clauses that result in a windfall to the remaining members at the expense of the departing one face heightened scrutiny, particularly where the triggering event was the majority's own decision to terminate the minority owner's employment.

If your partners fired you and then claim your ownership interest is forfeited because you're no longer an employee, that circular logic — we fired you, so you forfeited your interest because you were fired — has been challenged successfully in Wisconsin courts.

dispute resolution clauses that favor the other side

Many operating agreements include mandatory arbitration clauses, mediation requirements, or venue provisions. These procedural requirements can matter enormously. If you're required to arbitrate, you're not going to court, and arbitration panels handle certain types of relief differently than judges do. If the agreement requires mediation first, that process can be used to delay and gather information while your financial position worsens.

Understanding what the agreement requires before you take any legal action is essential. Proceeding in a forum that the agreement prohibits can waive rights you didn't know you were giving up.

when the agreement itself can be attacked

Not every operating agreement is bulletproof. Agreements can be challenged on the grounds that they were fraudulently induced — that you were misled about what you were signing. They can be challenged if they were amended without the required member vote. Provisions that violate Wisconsin statutory minimums may be unenforceable regardless of what the document says.

Getting a full, careful read of the agreement by an attorney who regularly handles business divorces is the starting point. Not a general practice attorney who handles a little of everything. Someone who reads these documents constantly and knows where the traps are.