Documents Set Switches that Change the Impact of Legal Rules

What you do with legal documents between my review and signing matters.  Think of the law as a system of rules and legal documents as switches that turn these rules on or off as needed.   If the default setting works for you, then the legal document may be silent on an issue because we don’t need to change that switch setting.

Imagine, for example, that you are setting up a limited liability company with two other people (or “members” in the parlance of LLCs).  At signing, one of these people, Joe Smith, asks to sign the operating agreement (let’s call it the “OA”) as “Joe Smith, LLC, by Joe Smith, its member.” You figure this is a small change and you can simply mark-up the documents and sign.

Bad idea, I’m afraid.  The OA has transfer restrictions that will work fine for most members.  But if one of the members is itself a legal entity, then it is likely that the transfer restrictions won’t work as drafted.  Instead, the operating agreement of Joe Smith, LLC can transfer control from Joe to another person, blowing right by the OA’s transfer restrictions.

By the way, it’s not a big deal to fix the problem.  It’s just that you need me to be in the loop to spot the issue and address it so that you don’t have an unpleasant and costly surprise some time down the line.

I invite your comments to this blog post and look forward to posting another missive in the near future.

John A. Myer is a corporate and securities lawyer with Myer Law PLLC in Seattle, Washington.   This posting does not constitute legal advice.