by Adam Goebel & Tom Rutledge
We see it again and again – business owners, desiring to save a few dollars (and to keep lawyers from complicating a deal), either draft an agreement themselves or rely upon a form they have downloaded from the internet. When the business owners ultimately have a dispute, those agreements do not provide any guidance and only generate further disputes, often because they were incomplete, were drafted for another circumstance, or were simply badly written.
The cost of quality legal services at the front end of any business transaction is money well spent. Counsel about the types of disputes that arise among business owners and ways to address those disputes can be invaluable. In addition, providing certainty about the rights and obligations of the parties allows them to plan. While no agreement can protect against every possible scenario, well written agreements that address the unique aspects of each arrangement will protect the value of your business and at least limit unwelcome surprises and potential litigation.
Following are a few cautions as to why documents drafted without the advice of counsel or downloaded from the internet are not a reliable basis on which to base your business relationships:
How Do You Know the Author Was Competent?
Most people do not know who drafted the form document. Moreover, anyone can post anything on the internet. Seldom will you know whether the author of the document had any experience (much less expertise) in the subject matter. The mere fact that it can be downloaded does not mean that the uploaded document was valuable. How do you know the author was competent? You won’t.
The fact that an attorney may have drafted the document is not a guaranty of quality. With the increased fragmentation of the law, often what may appear to be “run-of-the-mill” agreements are simply beyond the scope of what should be undertaken by the general practitioner. One of us was recently involved in a dispute arising out of an LLC operating agreement written by an attorney, but that attorney (apparently) did not have much experience with business law. The operating agreement cited a particular provision of the LLC Act. The problem with the citation was that the cited provision of the LLC act had been repealed nearly 2 years before the agreement was written.
How Do You Know Which Law Applied?
It may seem obvious, but different states have different laws concerning business organizations. Distinctions between state laws can have a significant impact upon a particular agreement. State laws governing corporations and LLCs often take different approaches to particular issues, such as fiduciary obligations. If the agreement was not drafted to account for these laws, then significant issues can arise. If you download an agreement over the internet, seldom, if ever, will you know whether the author was familiar with Kentucky law. Most often you won’t.
Is that Agreement Even Current?
Law changes. New statutes are adopted, new court cases are handed down. How long ago was that document posted to the internet? Even if written by a skilled attorney, a dated operating agreement cannot account for subsequent changes in the law. Kentucky adopted its LLC Act in 1994. Since then the LLC act was amended in 1998, 2007, 2010, 2011, 2012 and 2013. In several instances the law was significantly altered.
How will you know the document off of the internet accounts for the most current law? You won’t.
From Whose Perspective Was the Agreement Written?
Perspective matters in drafting agreements. For example, the supply agreement written for the benefit of the buyer looks very different than does the supply agreement written for the benefit of the seller. The buyer of widgets wants prices to be fixed and deliveries to be guaranteed. The seller of those same widgets wants the price to be adjusted for materials cost increases and a flexible delivery schedule to account for other customers and equipment outages.
In drafting a document that will govern your business relationship, each party will also have a perspective. What is the relationship between majority and minority? The manager and the members? What fiduciary obligations, if any, do the parties want to incorporate into their agreement? How will the parties be able to exit from the arrangement? How do the parties want to address disputes? All of these questions, and many more, are unique to each arrangement and do not lend themselves to forms.
How will you know if the document off of the internet reflects your desires and objectives? You won’t.
Does The Agreement Reflect Your Deal?
You have reached an agreement with your business partners on a deal, but do you have confidence that the form you have downloaded or borrowed accurately reflects what you have agreed to? Moreover, is everyone on the same page? It is not uncommon for the parties to overlook vague language in a downloaded form, or the complete absence of deal terms. One of the most important goals of an agreement is to document the arrangement in writing so that everyone knows their respective rights and obligations.
Does that agreement posted on the internet reflect your deal? Almost certainly not.
Each Business Arrangement Is Unique
No two deals are identical. Rather, different deals have different details and different focus. The relationship of the investors in a syndicated real estate venture is different than is the relationship of the owners of a CPA, accounting or medical practice. While each may require a buy/sell agreement, the particulars of that buy/sell agreement will be substantially different. For example, when an investor in the real estate venture should be able to require that his or her interest are liquidated will be different from when a professional should be able to withdraw and be bought out. Conversely, a professional practice (or a company holding a liquor license) needs the right to force out an owner in certain circumstances, a right that is likely not required in the real estate venture.
Further, the valuation of the interests in the two ventures will be significantly different. While both agreements may be properly identified as a “buy/sell”, they will be very different documents.
How do you know what fact pattern the drafter of the document you download from the internet had in mind? Typically you don’t.
Your business is likely your most valuable resource. Year in and year out it generates the funds that pay your mortgage, support your family, pay your children’s college tuition, and generates retirement funds. That resource needs to be protected. Most people would not select a surgeon on the basis of a cut-rate fee advertised on late night TV or the availability of a Groupon.
For the reasons set forth above, it is not advisable to rely upon internet sourced or form documents. Rather, documents drafted by your legal counsel for your particular deal to protect your particular interests are a worthwhile investment in protecting your investment in your business.